UPDATE 2-Volatility stays high during expiration week

(New throughout)

By Doris Frankel

CHICAGO, Sept 18 (Reuters) - The Chicago Board Options Exchange Volatility Index .VIX ended lower on Thursday as U.S. stocks rallied in a choppy session, reflecting concerns over the credit crisis that has shaken financial markets all week.

The VIX, often referred to as Wall Street's favorite measure of investor fear, stood at 33.10, down 8.61 percent after posting a new session high of 42.16, its highest level since early October 2002.

Wall Street staged a late rally on news of a government plan to resolve the credit crisis. Earlier, stocks had fallen despite a coordinated push by central banks to pump billions of dollars into world markets.

The VIX tracks near-term anticipated stock market volatility conveyed by option prices for the Standard & Poor's 500 index .SPX. It typically rises when the S&P benchmark falls, as has been witnessed during this week's market turmoil.

Trade on Thursday was also volatile, reflecting uncertainty about the health of the financial system.

"Although this is a very impressive rally, the market is still not out of the woods by any stretch of the imagination," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group. "You are still seeing heavy put buying in SPX 1,100 and 1,150 puts in October, November and December contracts."

The S&P benchmark closed up 4.33 percent at 1,206.51 after falling to a four-year low of 1,133.50.

Stocks rallied on news that U.S. Treasury Secretary Henry Paulson had spoken with congressional lawmakers about a plan to deal with bad debt similar to the creation of the Resolution Trust Corporation in 1989 that resolved the U.S. savings and loan crisis. But sustaining any advance may be difficult until investors see how the proposal will work, one trader said.

"We need more details about the plan in order to allay investors concerns over the credit crisis in the median and longer term," said Herb Kurlan, chief executive of vTrader Pro, an online trading firm.

Adding to the heavy volume and volatility throughout the week has been the quarterly expiration of September equity options and futures contracts, a convergence known as "quadruple witching."

The two-day event that started on Thursday could stir up volatile trading on Friday as investors finish rolling their positions.

"The heavy volume tied to the expiration could exacerbate volatility even more and possibly create some unexpected intraday swings higher and lower later today and Friday," said Frederic Ruffy, options strategist at website WhatsTrading.com. (Editing by Leslie Adler)