Banks served as an unlikely ally to help Wall Street fought its way back from a precipitous opening drop.
Volatility promised to cause violent swings as the market battled to break a seven-day losing streak. The Dow briefly dipped below 8,000 as traders dumped some of Wall Street's most venerable names in a rush from risk, but about one-third of the bluechip index went positive after the first half-hour of trade.
"The market right now is deeply, desperately trying to find value, and until it finds that area we're not going to stabilize or contract or try to find that horizontal-type trading," Ben Lichtenstein, president of Traders Audio, told CNBC. "We're in a vertical market right now."
But most of the big banking stocks turned positive in early trade, with Wachovia and Bank of America leading the charge.
Wells Fargo emerged trimuphant in its scrum against Citigroup to buy Wachovia. Wells Fargo will pay about $11.38 billion for Wachovia after Citi backed away.
Meanwhile, Dow component General Electric's earnings report were another bright spot in early trading.
CNBC.com-parent GE reported a third-quarter profit of 45 cents a share, in line with market expectations, and also reported a profit for its financial services unit.
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On the downside, battered insurer American International Group and retailer Home Depot were among the big losers.
Monetary easing and massive U.S. bank borrowing from the Federal Reserve did little to calm the panic in credit marketsat the epicenter of the global financial crisis. Moody's warned it might cut the long-term debt ratings of Morgan Stanley and Goldman Sachs, which would increase their cost of borrowing. The government could consider nationalizing the two investment banks if things get worse, as they are too big to be allowed to fail, Hugh Hendry, Partner and CIO at Eclectica, told CNBC.
Analysts debated the role the government needs to play to guide the market out of the worst Dow points selloff in history, with those in favor of further involvement wanting more done to heal the credit markets.
"You're not going to fix the stock markets until you fix the credit markets," investor Wilbur Ross said on CNBC. "So I hope that the government comes out with some broad-based things, be it some combination of insuring interbank lending and/or putting a limit on insured deposits all the way up."
In further banking tumult, British bank Barclays fell after it said it would considering dipping into the UK's government recapitalization facility.
Meanwhile, Macy's shares fell after the retail chain lowered its outlook over fears about weakening consumers.
Government 'Freak Show' Inadequate
Congress, which last week passed a $700 billion bank rescue plan, hasn't been focusing on the proper strategies, Ross added.