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Stocks Pare Losses as Banks Turn Higher

Stocks pared losses to turn mostly flat, as banks recovered some of the ground they lost amid the credit panic.

Major indexes eased after initially taking a sharp downturn. Both investment banks and their commerical counterparts turned broadly positive, despite continued concerns over American International Group and a disappointing earnings report from Goldman Sachs.

But Lehman Brothers shares actually regained some of their value despite the firm's bankruptcy filing, on news that the bank is in talks for a deal to sell parts of the company to Barclays, the UK bank said in a statement on Tuesday

while Merrill Lynch continued to benefit over enthusiasm over its purchase by Bank of America, which led Dow gainers.

Also, Wells Fargo asserted its position as one of the large bankers that did not have some the level of credit exposure as its competitors.

More problems at American International Group and Goldman Sachs were preventing the indexes from finding higher ground.

Goldman reported earnings before the bell that fell 70 percentfrom the previous year to $1.18 a share, compared to $6.13 a year earlier. The earnings beat expectations of $1.71, but continued concerns over the industry sent Goldman shares sharply lower.

AIG shares tumbled as much as 45 percent as worries grew that the nation's leading insurer would be unable to secure fresh capital after a new round of downgrades. The company's shares opened 2008 trading at nearly $60.

The market again looked unlikely to take much solace in plummeting oil prices. US light, sweet crude shaved more than $4 more off its price and was nearing $91 a barrel as trading continued, but stocks took little notice.

Investors are also anxiously waiting to see whether the Federal Reserve will cut short-term interest rates in response to financial woes, with the market pricing in a 67 percent chance of a quarter-point cut, based on closing prices for fed funds futures contracts on the Chicago Board of Trade. Overnight that jumped to 88 percent, according to Reuters.

The damage off the start was widespread, with virtually anything connected to credit taking a beating.

Bank Uncertainty Lingers

Questions continued over Washington Mutual's viability, while commercial giant Wachovia got pounded and capital concerns continued to dog investment banker UBS.

AIG was able to secure a $20 billion lifeline from the state of New York but this fell short of its request for $40 billion from the Federal Reserve, according to press reports.

Moody's and Standard & Poor's ratings agencies downgraded the insurer's ratings after the market closed on Monday. S&P cut its AIG rating to 'A-' from 'AA-', while Moody's downgraded AIG's senior unsecured debt rating to A2 from Aa3.

Investors will also be on the lookout for big writedowns, although Goldman has repeatedly denied it would incur them.

AIG and General Electric led Dow losers, as investors continued to be concerned over the credit liabilities the CNBC.com parent has from its financing arms.

There were more worries outside the financial sector.

Computer marker Dell saw its shares lose after it warned of softening global demand for technology.

Shares at business media giant Thomson Reuters also were likely to come under pressure following a downgrade from Lehman. Early trade indicated a loss of 2 percent.

And retailer Best Buy fell sharply after the company reported third-quarter sales slumping 19 percent as higher spending on growth initiatives offset sales gains.