* Wall Street turns higher on report of AIG loan package
* Dollar gains as investors seek U.S. currency's safety
* Government debt rises amid widespread safe-haven bids
* Oil drops 5 pct in steepest two-day slide since 2004
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Sept 16 (Reuters) - U.S. stocks rose on Tuesday
after a report said the Federal Reserve may provide battered
insurer AIG <AIG.N> 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 <MER.N> to Bank of
America Corp <BAC.N> 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 <.SPX> 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 <.GSPF> 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 <PLV8> 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 <US10YT=RR> fell
37/32 to yield 3.54 percent. The 30-year U.S. Treasury bond
<US30YT=RR> 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 <.DXY> up 0.82 percent at 79.127. Against the yen,
the dollar <JPY=> fell 1.71 percent at 106.32.
The euro <EUR=> 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 <CLc1> 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 Dec. 2, 2004.
Brent crude <LCOc1> fell $5.02 to $89.22 a barrel.
December gold <GCZ8> 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 <8411.T> and
No. 3 Sumitomo Mitsui Financial Group <8316.T> 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)
