In Washington, congressional leaders scrambled to come up with changes to the $700 billion bailout package, which would buy bad debt off the books of staggering banks, in hopes of passing some version of it later this week.
The idea drawing the biggest support: Raise the amount of bank deposits insured by the federal government, now $100,000 per account, to $250,000, as a way to reassure Americans anxious about their savings.
Both leading presidential candidates endorsed the idea - and so did the agency that runs the program. Federal Deposit Insurance Corp. chairman Sheila Bair asked Congress for temporary authority to raise the limit by an unspecified amount.
Still, it remained unclear exactly when or how Congress would act, and Wall Street was watching nervously.
"If it doesn't pass, then look out below," said Jason Weisberg, a New York Stock Exchange trader for Seaport Securities. "It could get ugly."
The Dow recovered about two-thirds of its record 778-point drop from Monday, but the action in stocks was almost a sideshow against the growing alarm about the credit market, relied on by companies large and small to pay for everyday expenses, from basic supplies to employee salaries.
The benchmark rate that banks charge to lend each other money rose sharply, making it more expensive for everyone to borrow.
Credit card debt and many mortgages are tied to the rate, too, so everyday Americans will feel the pinch.
"There's too much fear in the market," said Kim Rupert, managing director of global fixed income analysis at Action Economics. "Everybody is hoarding their cash."
President Bush, applying more pressure before a likely vote in Congress on Thursday, emerged from the White House early Tuesday to say the damage to the economy would be "painful and lasting" if Congress failed to act.
At the close, the Dow was up 485.21, or 4.68 percent, to 10,850.66. It had fallen almost 7 percent on Monday to its lowest close in nearly three years - though the drop was far shy of the 20-plus-percent drops of the 1987 stock market crash and the Great Depression.
Broader stock indicators also bounced higher. The Standard & Poor's 500 index rose more than 5 percent for the day, and the Nasdaq composite index was up almost 5 percent.
It was another day of remarkable volatility on Wall Street.
Since the night of Sept. 14, when word spread that investment house Lehman Brothers would be forced into bankruptcy, all but one of the 12 trading days has ended with the Dow up or down by more than 100 points.
For the month of September, 15 of the 21 trading days saw triple-digit swings in the Dow. The blue chip index ended the month down about 695 points.
And as the third quarter came to a close, no one appeared to have a definitive answer to the question plaguing the American financial system - how to unlock the crucial credit market.
The benchmark London Interbank Offered Rate for three-month dollar loans rose to 4.05 percent on Tuesday from 3.88 percent a day before. For loans in euros, the rate rose to 5.27 percent, from 5.22 percent.
The translation: It's becoming even harder to borrow money.
In one example, when AT&T tried to raise short-term cash last week by selling corporate debt known as commercial paper, it couldn't find anyone willing to lend longer than just overnight, CEO Randall Stephenson said.
On Main Street, people trying to buy, say, washing machines have had a tougher time securing financing. Small business have struggled to buy new supplies, and some haven't made their payrolls.
"It feeds into itself," said John Castellani, president of Business Roundtable, an association of CEOs of U.S. companies that employ more than 10 million people. "It just continues to spiral down."
For decades, large companies have borrowed money by selling short- and long-term bonds in the credit markets. They took loans from outside investors and promised to pay it back with interest after a certain amount of time.
But the underlying trust in those loans has been slammed by the downfall of big names like Lehman Brothers and insurer American International Group Inc. Banks, funds and other investors don't really know who is invested in what.
On Tuesday, the yield on the three-month Treasury bill rose to 0.89 percent from 0.14 percent late Monday. The yield had fallen as investors clamored for the relative safety of government debt.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.83 percent from 3.58 percent. The dollar rose against other major currencies and gold prices moved higher.
The bailout package failed in the House on Monday in a surprise vote. On Tuesday, Republican House aides said the proposal to boost the Federal Deposit Insurance Corp. limit might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings.
Another possible change to the bill would modify accounting rules that require banks to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years. Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided.
The congressional package was also center-stage on the campaign trail.
Republican Sen. John McCain said "Americans are frightened right now" and added that political leaders must give them an immediate solution and a longer-term approach to the problem. He suggested calling the package a "rescue" rather than a "bailout."
Democratic Sen. Barack Obama issued a statement saying that significantly increasing federal deposit insurance would help small businesses and make the U.S. banking system more secure as well as restore public confidence.
On Wall Street, many traders likely will proceed cautiously while they gauge prospects for resurrecting the bailout effort, which was backed by leaders of both parties.
"I'm not getting the sense that investors are going to be jumping in with both feet until there is some kind of resolution on the plan," said James Maguire, an NYSE floor trader with Christopher J. Forbes. "If there's a no vote, we're going to see a lower overall drift in stocks. It will be a slow bleed."
