Federal Reserve Chairman Ben Bernanke signaled a willingness to consider an early cut in the benchmark interest rate to quell market unrest, a key U.S. lawmaker said on Tuesday after meeting with the Fed chief, sending Wall Street higher.
However, the U.S. Treasury Secretary cautioned it would take time for the credit crisis to play out.
U.S. stocks rose after Sen. Christopher Dodd, who chairs the Senate Finance Committee, said Bernanke was absolutely willing to use all available tools to ease a credit squeeze that has limited companies' ability to raise funding.
Finance chiefs from Japan and Germany also tried to reassure investors that they were watching the situation.
Capital markets remained tight and many investors were calling on the Fed for a cut in its benchmark interest rate, policymakers' main monetary tool.
Nervous investors piled into short-dated Treasury notes and bonds, a traditional sanctuary from volatile markets, driving prices higher for a ninth straight session.
Portfolios are in hyper-risk-averse mode, said Joseph Di Censo, fixed-income strategist at Lehman Brothers in New York.
The Fed has already stepped in with billions of dollars in temporary reserves in recent days, plus Friday's surprise half-point cut in the discount rate on direct loans to banks,
The Dow Jones Industrial Average edged up 0.2 percent in afternoon trade, erasing earlier losses, on renewed hopes for an interest rate cut and falling oil prices. Britain's FTSE 100 Index and Germany's Dax closed slightly higher.
Treasury Secretary Henry Paulson, who attended the meeting with Dodd and Bernanke, warned investors that financial markets would improve only after a necessary period of adjustment.
We've had some bad lending practices, he told CNBC Television. There's not going to be a quick solution to some of the issues in the credit markets. But ... we will work through these issues because we have an economy that's strong.
In Japan, Finance Minister Koji Omi told a news conference there were no plans for an emergency meeting of the Group of Seven industrialized nations following sharp gyrations in global markets.
SUBPRIME PAIN SPREADS
In Europe, the chief executive of Germany's WestLB bank, Alexander Stuhlmann, said big problems in the U.S. subprime mortgage market were making it difficult for German banks to get credit lines from their foreign partners.
Stuhlmann told reporters that German banks were in a not uncritical situation overall. WestLB has more than 1.2 billion euros ($1.6 billion) in overall exposure to the U.S. subprime sector -- those loans extended to people with weak credit histories.
Capital One Financial Corp, best known for its U.S. credit card business, said it will cut 1,900 jobs and shut down a wholesale mortgage unit it acquired less than a year ago.
German Finance Minister Peer Steinbrueck insisted Europe's economy was sustaining little damage. I have no reason to doubt that we can effectively manage the effects of the U.S. mortgage crisis in Europe, he said.
Paulson was more equivocal, saying market turmoil would take a toll although the global economy remained strong. Economic growth will be less than it ordinarily would have been, he said.
U.S. Treasury debt climbed again on Tuesday, extending the previous session's huge rally, pushing yields lower and suggesting that the Fed's steps so far have done little to settle capital market nerves.
The behavior in bills is one of the key pronouncements by the market that despite the Fed's liquidity provisions, discount rate moves, and move to easing bias, that calm is a commodity in short supply, said David Ader, U.S. government bond strategist with RBS Greenwich Capital in Greenwich, Connecticut.
On Monday, yields for three-month Treasury bills recorded their biggest one-day drop since the 1987 stock market crash,
Central banks remained watchful, however, as the European Central Bank injected more money into markets than expected after commercial banks showed strong demand for funds while credit worries make them unwilling to lend to each other.
The ECB lent a total of 275 billion euros ($371.1 billion) to banks for a week, 46 billion more than it estimated they needed for routine weekly financing.
The Bank of England said it lent 314 million pounds ($624 million) through its standing facility in the previous session, the first time it has been tapped in more than a month.