U.S. stocks continue to fall on Tuesday

Investors feared that without a financial lifeline, AIG's survival might come into question as the effect of capital constraints take their toll.

Shares of AIG, a Dow component, plunged 50 percent to $2.38 on the New York Stock Exchange, but shares of other major financial services companies eked out gains, helping the broader market to pare losses after the open.

Analysts said investors were betting that the Federal Reserve might slash interest rates to help stabilize global markets. A rate cut would ease borrowing costs.

"Chances for a rate cut have increased. Commodity prices are coming down, and some of the inflationary pressures are starting to wane," said Cleveland Rueckert, market analyst at Birinyi Associates Inc in Stamford, Connecticut.

"If the Fed cuts here, at least it shows to the public that they are still paying attention and still have some tools left in their toolbox to mitigate some of the problems."

The Dow Jones industrial average shed 5.21 points, or 0.05 percent, to 10,906.03. The Standard & Poor's 500 Index declined 4.87 points, or 0.41 percent, to 1,187.83. The Nasdaq Composite Index  fell 5.68 points, or 0.26 percent, to 2,174.23.

Comments from computer maker Dell Inc that it was seeing further softening in global demand for technology further soured the tone after Monday -- Wall Street's worst day since markets reopened after the Sept. 11, 2001 attacks.

Dell shares slid more than 10 percent to $16.18, making the stock one of the top drags on Nasdaq. Elsewhere in the financial sector, Goldman Sachs fell to 2 1/2-year lows, down more than 9 percent at $122.40 after the investment bank posted a 70 percent slide in third-quarter profit.

Worries about AIG were also accentuated by concerns that the U.S. government would refuse to provide a financial lifeline as it did in the case of Lehman Brothers Holdings. The 158-year-old Wall Street icon subsequently filed for bankruptcy.

"A lot is riding on AIG. They got hung up in the real estate debacle," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. "The longer we go without a tentative deal to inject capital into AIG, the worse things will get."

Unease about financial services companies drove investors into the relative safety of government debt as global equity markets sold off. The Fed's decision on interest rates is expected around 2:15 p.m. (1815 GMT).

Before the Fed decision, Bank of America rose 2.8 percent to $27.29 on the NYSE, two days after the No. 2 U.S. bank agreed to buy Merrill Lynch. Wells Fargo , the fifth-largest U.S. bank, climbed 9.4 percent to $33.90 after RBC, a brokerage, raised its price target on the stock.