Strong earnings forecasts from FedEx and Texas Instruments, a firmer dollar, and lower oil and gold prices lent additional support. But continued worries about the financial sector limited gains for the blue chips.

The Dow Jones industrial average (INDU) gained 0.3%. The Nasdaq composite (COMP) rose 0.9% and the Standard & Poor's 500 (SPX) index advanced 0.6%.

Stocks slumped Tuesday, with the Dow sinking 280 points, as speculation about Lehman's ability to raise capital and AIG's mortgage-related losses sparked worries about another Bear Stearns - the bank that the government had to rescue in March.

Lehman sought to manage those fears Wednesday, announcing its third-quarter results early and addressing the liquidity issues.

The news seemed to give a boost to a variety of stocks, with investors finding some reassurance in the announcement. However, the stock market was also being lifted by technical factors, with investors scooping up recently beaten-down shares, said Robert Loest, portfolio manager at Integrity Funds.

The news coming out of Lehman was "better than nothing, but not enough," Loest said.

"You have institutions like Lehman announcing a writedown or a restructuring and people think they're getting a handle on the balance sheet, but they're not," he said. "These solutions are near-term pieces of hope that aren't going to solve long-term problems."

Lehman Brothers: Lehman reported a nearly $4 billion fiscal third-quarter loss, its biggest quarterly loss since it went public in 1994. The company also said it will spin off part of its commercial real estate assets and slash its dividend. Additionally, Lehman plans to sell a 55% stake in its investment management division, which includes profitable money manager Neuberger Berman.

Wall Street had been betting on Lehman selling all or part of the investment division for weeks. However, investors became nervous Tuesday when reports said Lehman's talks with the state-run Korea Development Bank had dried up, with no partnership announced. That sent Lehman shares down 45%.

Lehman calmed some of those fears Wednesday when it said it was in advanced talks with a number of potential partners.

"I think there's relief that they are at least addressing the issues and that there are potential buyers out there," said Joe Arnold, wealth manager at Dawson Wealth Management.

Lehman (LEH, Fortune 500) shares were choppy on the news, ending lower after rising nearly 10% in the morning and almost 30% in pre-market trading.

But other firms that made bad mortgage bets and are potentially in need of capital saw their shares pummeled. They included Washington Mutual (WM, Fortune 500) and Wachovia (WB, Fortune 500). (Full story)

In addition, Arnold said stock investors were continuing to respond to the government bailout of troubled mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), announced Sunday.

"You look at the buyout of Fannie and Freddie and that has actually sent mortgage rates lower already, which is positive," he said.

(However, the lower rates don't necessarily make getting a loan any easier.)

On the downside, regional banks and insurers continued to struggle in the wake of the government takeover of the two mortgage giants.

Company news. FedEx (FDX, Fortune 500) offered some encouraging news late Tuesday, saying it expects higher fiscal first-quarter earnings of $1.23 per share versus current expectations for a profit of 95 cents, largely because of lower commodity costs. FexEx is often seen as a proxy for the economy. Shares gained 3.7% Wednesday.

Texas Instruments (TXN, Fortune 500) shares inched higher after the chipmaker narrowed its earnings and sales forecast to a range that meets or beats analysts' forecasts. The announcement was part of its scheduled mid-quarter update late Tuesday.

Research in Motion (RIMM) shares jumped after it introduced a flip phone version of its popular Blackberry Pearl phone.

The Pentagon said it's delaying its decision on a $35 billion Air Force refueling tanker contest until the next administration takes office. Northrop Grumman was initially awarded the deal, which Boeing contested as unfair. The government agreed, initially reopening bidding, before deciding to end the current contest and have the decision made by the next administration.

Northrop (NOC, Fortune 500) and Boeing (BA, Fortune 500) shares both declined. (Full story)

In other news, ImClone (IMCL) said it has received a $70-per-share buyout offer from a large pharmaceutical company, topping an earlier offer of $60 per share from Bristol-Myers Squibb (BMY, Fortune 500). Bristol already owns a 20% share in the company. ImClone stock gained 6.7%.

Among other movers, a variety of airlines, railroads and truckers bounced on the lower oil prices, lifting the Dow Jones Transportation (DJTA) average up by 2.5%.

Market breadth was positive. On the New York Stock Exchange, winners beat losers on volume of 1.55 billion shares. On the Nasdaq, advancers topped decliners four to three on volume of 2.32 billion shares.

Fuel prices: Oil prices as the government indicated weaker demand for gasoline, even as supplies of crude and gas dipped more than expected last week.

U.S. light crude oil for October delivery fell 68 cents to settle at $102.58 a barrel on the New York Mercantile Exchange, the lowest close since April 1.

Gas prices rose overnight, breaking a nine-day losing streak, according to a national survey of credit-card activity.

Other markets: In global trade, European and Asian markets ended lower.

In the bond market, Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.63% from 3.57% late Tuesday. Prices and yields move in opposite directions.

The dollar rallied versus the euro and yen.

COMEX gold for December delivery fell $29.50 to $762.50 an ounce. 

Late Tuesday Lehman Brothers said it will unveil "key strategic initiatives" for the firm, along with its expected third-quarter earnings Wednesday morning before the market opens.

Insurers and regional banks slumped in the aftermath of the government rescue of Fannie Mae and Freddie Mac. Meanwhile, falling oil prices added to worries about the slowing global economy and also dragged on oil stocks.

The Dow Jones industrial average (INDU) lost 280 points, or 2.4%, the Nasdaq composite (COMP) lost 2.6% and the Standard & Poor's 500 (SPX) index lost 3.4%.

Small caps were hit too, with the Russell 2000 (RUT) falling 3.5%.

In part, the day's decline was in reaction to the previous day's huge rally, when the Dow jumped 290 points after the government bailout of Fannie and Freddie.

While the initial reaction showed investors were relieved, Tuesday's reaction indicated investors are now sifting through the fine print, said Darin Pope, chief investment officer at United Advisors of Secaucus, N.J.

He said Tuesday's market response was a bit of a reality check.

"It's the day after, and yes, the ability of the consumer to get a mortgage is better," he said. "But the economy is still struggling, the consumer is still strapped and we still have more work to do on the housing and credit market mess."

A weak reading on pending home sales in July demonstrated the persistent problems in the housing market, while the battering of AIG and Lehman Brothers reminded investors that the credit crisis is far from over.

Meanwhile, regional banks and insurers tumbled in the wake of the government takeover of the two mortgage giants. (Full story).

In other news, Standard & Poor's said late Tuesday that Fannie and Freddie will be removed from the Standard & Poor's 500 index after the close of trade Wednesday. The news is likely to send the stocks lower tomorrow as managers of index funds need to dump the stocks and buy their replacements.

Also after the close, FedEx (FDX, Fortune 500) lifted its fiscal first-quarter earnings forecast, saying it now expects to earn $1.23 per share versus current expectations for a profit of 95 cents. Shares gained 5% after the close.

Financials get hit: Lehman Brothers (LEH, Fortune 500) skidded 45% on worries that its going to have a hard time raising capital now that talks with the state-run Korea Development Bank have reportedly ended. KDB was thought to be considering buying as much as a 25% stake in the troubled bank.

In response to the stock decline, ratings agency Standard & Poor's put Lehman's debt on CreditWatch Negative, meaning it could cut the company's ratings within months.

Lehman says it will release details about its third quarter Wednesday. The company is expected to post a loss of between $2 billion and $4 billion.

The stock has been sliding of late, as investors worry about the brokerage's ability to raise capital, and whether it can sell some or all of its operations. Lehman has also been struggling in the shadow of Bear Stearns, which the government had to rescue earlier this year, and in the wake of Fannie and Freddie.

Lehman is a different situation than Bear Stearns in that it has more value, said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. He said that, at Bear Stearns, the bad loans ultimately engulfed their other assets. But although the circumstances are different, the concerns are similar.

Additionally, Nyheim said Lehman is suffering in the wake of Fannie and Freddie because while the government intervention helped the mortgage giants' bonds, the stocks have been tumbling. There may be a similar bet about Lehman, he said.

"The thought is if the Fed comes in and takes action, Lehman bonds might be OK, like Fannie and Freddie, but Lehman equity-holders are going to get hit," Nyheim said.

Among other financial stocks falling, Washington Mutual (WM, Fortune 500) lost 20%, AIG (AIG, Fortune 500) lost 20%, Wachovia (WB, Fortune 500) lost 14.5% and Merrill Lynch (MER, Fortune 500) lost 10%. Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500) both lost 7%, while Morgan Stanley (MS, Fortune 500) and Bank of America (BAC, Fortune 500) each lost over 6%. Dow components American Express (AXP, Fortune 500) and JP Morgan Chase (JPM, Fortune 500) each lost 5%.

The broad Philadelphia Bank sector index dropped 6% and the Amex Securities Broker/Dealer index tumbled nearly 10%.

Economic reports: Pending home sales fell 3.2% in July after rising in June, according to a report from the National Association of Realtors released Tuesday. The report is a forward-looking indicator of the housing market, tracking contracts signed during the month. (Full story).

Wholesale inventories rose 1.4% in July, according to a government report released Tuesday. That topped forecasts for an increase of 0.7%, according to a consensus of economists surveyed by Briefing.com. June wholesale inventories rose a revised 0.9%.

Meanwhile, federal officials warned Tuesday that the budget deficit will be substantially higher this year, rising $246 billion to $407 billion, reflecting the tax rebates and an increase in spending. (Full story).

Fannie and Freddie: The Bush administration said Sunday that it was taking control of the two companies in an attempt to help stabilize the battered housing market and bring down mortgage rates.

The plan included putting the companies under a government conservatorship, and replacing both chief executives. Additionally, the Treasury Department will put up to $100 billion in each company to keep them afloat, in exchange for senior preferred stock. (Full story)

The two government-sponsored firms own or back about half the mortgage debt in the country and have lost billions in the housing market collapse. The plan should lower mortgage rates by lowering Fannie and Freddie's borrowing costs.

There's a certain level of risk that's been taken out of the market as a result of this plan, said Tom Sowanick, chief investment officer at Clearbrook Financial, but that doesn't mean it can stabilize the housing market.

"It mitigates some of the pressure on housing, but it can't create demand," said Douglas Peta, market strategist at J. & W. Seligman. "Regulators have led would-be home buyers to water, but they can't make them drink."

(Why the bailout is not a quick fix for the economy)

What is more likely is that the plan means that "Wall Street will, at least for a while, be on good behavior," Sowanick said.

Companies will need to create structured products that will work, and there will be new regulation that will help better protect the investor, he said. "The way companies manage risk is going to be on the front burner for quite some time."

Fannie Mae (FNM, Fortune 500) shares rallied 35% Tuesday after plunging in the previous session, while Freddie Mac (FRE, Fortune 500) managed to gain 8.6% after sliding in the morning.

Company news: Apple (AAPL, Fortune 500) on Tuesday announced a new version of iTunes and new models of its iPods. But shares tumbled on the announcement. (Full story).

Dell (DELL, Fortune 500) founder Michael Dell bought $100 million of Dell shares last week, it was announced after the close of trade Monday. Shares of the PC-maker ended lower, giving up morning gains.

McDonald's (MCD, Fortune 500) said August sales at its stores open a year or more rose 8.5% in the month, topping forecasts. Shares gained 1.6%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost seven to one on volume of 1.69 billion shares. On the Nasdaq, decliners topped advancers by over four to one as 2.64 billion shares changed hands.

Fuel prices: Oil prices closed at a 5-month low Tuesday on bets that OPEC, meeting in Vienna, will hold production levels steady despite the recent price slide.

Also impacting oil prices: signs that Hurricane Ike is weakening and is less likely to cause severe damage to oil facilities in the Gulf of Mexico, which accounts for about 25% of U.S. oil production. (Full story).

U.S. light crude oil for October delivery slid $3.08 to settle at $103.26 a barrel on the New York Mercantile Exchange, the lowest close since April 1.

Prices have fallen more than $40 a barrel from a record high of $147.20 in July, on bets that a sluggish global economy is cutting into demand.

Gas prices declined for a ninth straight day, according to a national survey of credit-card activity.

Other markets: In the bond market, Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.59% from 3.67% late Monday. Prices and yields move in opposite directions.

The dollar slumped versus the yen and was barely lower versus the euro.

COMEX gold for December delivery fell $10.50 to $792 an ounce. 

The Dow Jones industrial average (INDU) added 290 points or 2.6%. The broader Standard & Poor's 500 (SPX) index added 1.8%, paring its morning gains. The Nasdaq composite (COMP) added 0.6%, after climbing in the morning and then falling in the afternoon.

Stocks surged in the morning, with the Dow up 350 points, as investors welcomed the bailout news. But questions about what the bailout will really mean for the housing market knocked the wind out of the rally in the afternoon.

However, investors redoubled their efforts in the last hour of trade, pushing stocks higher through the close.

"This is positive news, but it's not the panacea for the whole real estate crisis," said Steven Goldman, market strategist at Weeden & Co.

Goldman said the general feeling was that the government is providing an environment in which mortgage rates or spreads can decline, as borrowing costs drop. This environment should be helpful for people who want to refinance or get into the mortgage market.

While all of this is reassuring to investors, it doesn't wipe out the broader concerns about the economy, he said. Meanwhile, there was still worrisome corporate news in play. Worries about Lehman Brothers' well being and the threat of a United bankruptcy dragged on those stocks. Weakness in Oracle, Google and other large techs put a limit on the Nasdaq's gains.

Jon Burnham, portfolio manager at Burnham Securities, said that while the federal move was necessary, it doesn't mean the housing and credit crises are over.

"This was something the government clearly had to do and it should stabilize the housing market over the next six to nine months by lowering mortgage rates," he said. "But I don't see that this changes the overall environment that dramatically."

(Why the bailout is not a quick fix for the economy.)

Burnham said that the runup on the Dow probably reflected short covering and program trading. Short covering refers to the process by which investors who have sold stocks short to take advantage of a falling market have to buy them back because they think the tide could be turning.

One longer-term positive of the takeover news is that it should help reassure investors who have been loathe to put money to work in the stock market, said Jim Dunigan, chief investment officer at PNC Advisors.

"One of the challenges we've been facing is that there was no appetite for risk," Dunigan said. "With equity fund outflows, we were seeing that many in this bear market had fled to the sidelines. This will improve the appetite for risk."

After the close of trade, it was revealed that Dell (DELL, Fortune 500) founder Michael Dell bought $100 million of Dell shares last week, sending the stock 1% higher in extended-hours trading.

Fannie and Freddie: The Bush administration said Sunday that it was taking control of the mortgage backers in an attempt to help stabilize the battered housing market and bring down mortgage rates.

Treasury Secretary Henry Paulson said the companies were being put under a government conservatorship and both chief executives were being replaced. The Treasury Department will put up to $100 billion in each company over time to keep them afloat, in exchange for senior preferred stock.

Both the common and preferred shares of the companies plummeted.

The two government-sponsored firms own or back about half the mortgage debt in the country and have lost billions in the housing market collapse. The plan should lower mortgage rates by lowering Fannie and Freddie's borrowing costs.

But analysts are split as to how much the plan will be able to help the battered housing market and sluggish economy. (Full story)

While the announcement has a psychological impact, it is not the ultimate solution to what ails the housing and credit markets, said William Rutherford, president at Rutherford Investment Management.

"If banks are going to continue to be tight in their lending policies and if we don't get a stabilization in housing prices, I don't think we can turn the economy and the housing market around," he said.

Additionally, he said, investors are still contending with cash-strapped local and regional banks, not to mention the global economic slowdown.

Financial shares: A variety of financial shares rallied on the Fannie and Freddie news, including Dow components Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

But some financial stocks tumbled, including Lehman Brothers (LEH, Fortune 500), which plunged 12.7% on ongoing worries about its financial health. Meanwhile, shares of Washington Mutual (WM, Fortune 500) were volatile following news that its CEO has been ousted.

What's significant is that all the banks and brokerages don't seem to be moving in unison any longer, said Weeden's Goldman.

He said that some are mired in toxic waste and won't be able to survive, but others have a mix of the good and the bad. "I think we're at a point (with the sector) where the haves are starting to recover and the have nots are languishing," said Goldman.

Fuel prices: Oil prices churned, ending a bit higher as Hurricane Ike headed toward the Gulf of Mexico and other tropical storms continued to pose threats. Additionally, investors were keeping an eye on the OPEC meeting in Vienna this week, amid bets that the cartel could cut production levels due to the recent slide in prices.

Prices have fallen more than $40 a barrel from a record high of $147.20 in July, on bets that a sluggish global economy is cutting into demand.

U.S. light crude oil for October delivery settled up 11 cents a barrel at $106.34 a barrel on the New York Mercantile Exchange, after ending the previous session at a five-month low.

Gas prices declined for an eighth straight day, according to a national survey of credit-card activity.

Company news: Altria Group (MO, Fortune 500) said it would buy UST (UST), the maker of tobacco dip products such as Copenhagen and Skoal, for about $10 billion, confirming speculation.

UAL denied talk that a bankruptcy filing was imminent for its United Airlines, blaming speculation on an erroneously republished news article from 2002. Shares of the air carrier's parent company had been halted by the Nasdaq after the stock plunged 27% on the talk. UAL (UAUA, Fortune 500) shares slumped 11% once trading resumed. (Full story).

Nvidia (NVDA) shares slipped 4% after UBS downgraded the graphic chipmaker to "sell" from "neutral," Briefing.com reported.

RF Micro Devices (RFMD) fell 10.6% after Citigroup downgraded the chipmaker to "hold" from "buy" after Nokia (NOK), its largest customer, warned it would experience a market share loss in the third quarter.

Other tech losers included Oracle (ORCL, Fortune 500), Google (GOOG, Fortune 500) and Apple (AAPL, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners beat losers five to three on volume of 1.64 billion shares. On the Nasdaq, advancers beat decliners by almost three to two on volume of 2.61 billion shares.

Other markets: In global trade, European and Asian markets rallied.

In the bond market, Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.67% from 3.72% late Friday. Prices and yields move in opposite directions.

The dollar gained versus the euro and fell versus the yen.

COMEX gold for December delivery fell 30 cents to $802.50 an ounce, erasing morning gains.