Stocks closed with modest gains after rallying earlier on a drop in oil prices, but investors continued to worry about financial shares.
Major indexes pared their gains as traders made bets over whether Lehman Brothers could find a buyer after it said it was selling its investment division and was well-capitalized.
"Speculative vapors are causing it to blow one way or the other," said Christopher Mayer, analyst and managing editor at the Capital & Crisis newsletter. "They're hoping for a takeout, hoping for a bailout."
Falling energy prices were a principal driver in trading as investors saw the bearish trend as positive for corporate bottom lines and consumer confidence.
"You continue to see oil trade lower an I think that really removes from consideration the fear of inflation that had been the focal point of a lot of people," Zane Brown, fixed income strategist at Lord Abbett, told CNBC. "It also implies profitability for many companies going forward."
At the same time, banks overall were getting pounded, though they at least were off their lows.
Washington Mutual shares added to the misery, hitting a two-decade low after Standard & Poor's cut its outlook for the bank to "negative" from "stable." The company's credit default swaps hit record highs following the move.
The plunge of the WaMu stock, to as low as $2.30 during the day, set off speculation on whether the company would survive.
"The future for WaMu is very bleak. They probably face failure without some sort of capital infusion," Mayer said.
Meanwhile, Lehman said it lost $5.92 a share and was going to sell a majority of its investment management division and is cutting its quarterly dividend to 5 cents a share, a move that will save $450 million.