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NEW YORK (Reuters) - U.S. stocks rose on Tuesday after a report said the Federal Reserve may provide battered insurer AIG a loan, capping a wild day in which investors dumped risky assets like equities, oil and emerging market assets and piled into safe-haven government debt.
Fears that American International Group Inc might file for bankruptcy rocked global markets that already were shaken by this week's sale of Merrill Lynch & Co to Bank of America Corp and Lehman Brothers' bankruptcy filing.
Bloomberg, citing a person familiar with negotiations, reported that the Fed was mulling a loan package for AIG.
U.S. stocks rallied and the dollar rose to a session high against the yen on the AIG loan speculation, while U.S. government debt prices turned lower following the Fed's afternoon decision to hold interest rates unchanged.
"There is some confidence coming back into the market about AIG and hopefully we've seen the worst of it," said Giri Cherukuri, head trader at OakBrook Investments LLC. "There's news of help for AIG and news of Lehman selling one of its units, which the financials are reacting very positively to."
The Dow Jones industrial average closed up 141.51 points, or 1.30 percent, at 11,059.02. The Standard & Poor's 500 Index gained 20.90 points, or 1.75 percent, at 1,213.60. The Nasdaq Composite Index added 27.99 points, or 1.28 percent, at 2,207.90.
The S&P financial index gained 6.2 percent, and the KBW Banks index rose 7.3 percent.
Financials continued to rally after the closing bell. Morgan Stanley shares rose more than 7 percent after reporting stronger-than-expected quarterly results.
AIG shares, under heavy pressure for days, hit a low of $1.25 early in the session, but then pared the worst of its losses. It ended down 21.2 percent at $3.75.
At one time, AIG was the world's largest insurer based on market value.
Oil prices dropped another 5 percent to a seven-month low, for the steepest two-day slide in crude since 2004, while gold ended lower in volatile trade, pressured by jittery investors who sold to cover losses in other markets.
Platinum plummeted 9.2 percent as panicked investors liquidated futures positions in a search for cash. Emerging markets suffered big sell-offs, with Russian shares tumbling in the biggest one-day fall in a decade. Trading was suspended for an hour, and the MICEX index ended the day down 17.75 percent.
"People are getting out of commodities and getting into safer havens, like bonds," said Andy Lebow, a broker at MF Global in New York.
After posting gains for much of the day, however, U.S. Treasury prices fell as U.S. share prices turned high late in the day.
The benchmark 10-year U.S. Treasury note fell 37/32 to yield 3.54 percent. The 30-year U.S. Treasury bond fell 44/32 to yield at 4.12 percent.
European shares fell to their lowest close since May 2005 amid early investor jitters AIG's fate and as commodity stocks tracked sharply lower metal and oil prices.
The FTSEurofirst 300 index of top European companies closed 2.5 percent lower at 1,091.50 points, after a 3.6 percent tumble on Monday. It is down about 28 percent so far this year.
"Europe is just a residual on what is going on in the U.S. All eyes are on AIG and whether they can drum up the money tonight to keep them from going bankrupt," said Philip Lawlor, chief portfolio strategist at Nomura.
The dollar rose against major currencies, with the U.S. Dollar Index up 0.82 percent at 79.127. Against the yen, the dollar fell 1.71 percent at 106.32.
The euro fell 0.82 percent at $1.4147.
Analysts said that despite much of the bad news originating in the United States, the dollar benefited from the widespread financial jitters as investors, particularly those from the United States, became increasingly keen to send money back home for safety.
"I expect the dollar's upswing to continue. The major driver behind this is a massive repatriation of foreign-based U.S. investments including those from foreign funds," said Adam Fazio, a senior currency strategist, at CIBC World Markets in New York.
Oil fell. U.S. crude for October settled down $4.56 at $91.15 a barrel, adding to losses of more than $5 on Monday. Prices have dropped about 10 percent in two days, the biggest slide since December 2, 2004.
Brent crude fell $5.02 to $89.22 a barrel.
December gold settled down $6.50 at $780.50 an ounce in New York.
Asian shares plunged overnight, hit by a wave of selling in the financial sector. Tokyo's Nikkei share average slumped 4.95 percent to its lowest level in three years. Japan's top three lenders plunged, with No. 2 Mizuho Financial Group and No. 3 Sumitomo Mitsui Financial Group losing about 10 percent, their worst daily percentage drops in nearly five years. the Japanese market had been closed on Monday for a holiday.
MSCI's index of Asia-Pacific stocks outside Japan fell 4.8 percent to the lowest level since August 2006. It is now down 44 percent from a peak last October.
Reporting by Steven C. Johnson, Ellis Mnyandu and Richard Leong in New York and Matthew Robinson and Agnieszka Flak in London; Writing by Herbert Lash; Editing by Leslie Adler