Stocks edged lower on Tuesday as investors paused the day after a huge bounce to gauge if the government's latest plans to shore up the economy will be enough to sustain the recent rally.

But stocks came off their lows and bank stocks erased much of their earlier losses after Federal Reserve Chairman Ben Bernanke said investors who participate in the new plan, which is intended to free banks of toxic assets, will not be retroactively penalized.

This relieved concerns that were being raised as lawmakers sought to tax bonuses that were paid to AIG executives while the company was being rescued by the government.

As some of the anger about that from last week diminishes and the chance of them being punitive toward people who took money diminishes it's only going to positive for the sentiment of the financials, said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

S&P financial shares <.GSPF > edged lower by 0.53 percent. Bank of America rose 1.5 percent to $7.9 while Goldman Sachs climbed 2.3 percent $114.5.

A drag from energy prices also contributed to the downside as oil prices softened after Monday's surge. Exxon Mobil was among the Dow's biggest drags, down 1 percent at $69.8. Front month crude fell 1.4 percent to $53 per barrel.

The Dow Jones industrial average <.DJI> inched higher by 1.83 points, or 0.02 percent, to 7,777.69. The Standard & Poor's 500 Index <.SPX> edged lower by 1.98 points, or 0.24 percent, to 820.94. The Nasdaq Composite Index <.IXIC> fell 15.79 points, or 1.01 percent, to 1,539.98.

(Editing by Chizu Nomiyama)