New York - Major US stock indices were recovering Tuesday after turmoil in the financial sector on Monday led to the worst day on Wall Street since the September 2001 terrorist attacks.

The Dow Jones Industrial Average was up 40 points early Tuesday afternoon, despite opening the trading day down about 150 points. The Dow plunged more than 500 points, or 4.4 per cent, on Monday.

The broader Standard & Poor's 500 was down as much as 1.8 per cent in early trading, but was posting a 0.5-per-cent gain by the late morning, after plunging 4.7 per cent Monday.

Financial shares were in disarray after Lehman Brothers Holdings Inc declared the largest bankruptcy in US history on Monday, while Bank of America Corp acquired brokerage firm Merrill Lynch & Co for 50 billion dollars.

The Federal Reserve Board could lower interest rates at a scheduled meeting Tuesday afternoon. In a bid to keep financial firms afloat, the Fed injected 50 billion dollars of reserves into the banking system early Tuesday.

The US central bank had already added 70 billion dollars in temporary loans to banks on Monday through its existing lending facilities - the largest one-day injection since September 2001.

All eyes on Tuesday were on American International Group Inc (AIG), the largest US insurer, which has been frantically searching for an emergency capital injection of as much as 75 billion dollars in a bid to stave off insolvency.

AIG's credit ratings were downgraded by S&P and Moody's Investors Service on Tuesday. The company was in ongoing talks with private lenders and the Federal Reserve, which has so far refused to offer temporary financing that could give AIG time to sell off assets.

US financial broadcaster CNBC reported the Fed may have reversed course and will provide the bridge loan after pressure from US policy makers. The Fed had been encouraging a private solution, but that had reportedly become untenable.

AIG's share price was trading down more than 40 per cent in the afternoon, after plunging 60 per cent on Monday.

Also Tuesday, the largest US investment bank Goldman Sachs Group Inc reported third-quarter profits dropped 70 per cent to 845 million dollars, but stressed the company remained "well-positioned" and was doing better than its competitors.