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By TIM PARADIS, AP Business Writer 34 minutes ago

NEW YORK - Wall Street fluctuated in a wide range Tuesday after the Federal Reserve left interest rates unchanged, sending a signal to the markets that the economy is not in dire straits.

In a statement accompanying its decision, the Fed noted the growing strains in the financial markets a day after the Dow Jones industrials plunged 504 points in reaction to continuing turmoil in the financial sector. The Fed also noted the ongoing weakening of the labor market. But it also sought to give some reassurance by saying it expected its policy moves to foster moderate economic growth over time.

The Fed has cut its target federal funds rate by 3.25 percentage points to its current level of 2 percent over the past year. Many on Wall Street expected the Fed to keep rates steady but there was some hope that the central bank would try to calm uneasy financial markets with a rate cut.

Still, the fact that the Fed didn't lower rates was a sign that it doesn't believe the economy needs that type of stimulus. It reiterated that it believed its moves to inject more liquidity into the banking system to help struggling financial institutions would help them, and in turn the economy overall.

With the Fed's decision out of the way, Wall Street was still focused on troubled insurer American International Group Inc., the latest in a string of companies investors are worried could be undone by a shortage of cash.

"This was the right thing to do," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. "I just don't think the Fed should be responding to the financial market crisis at this stage."

He contends other moves, like broadening the type of collateral the Fed accepts from banks and adding money to the banking system are more effective at addressing credit troubles.

In late afternoon trading, the Dow rose 169.92, or 1.56 percent, to 11,087.43, after falling about 100 points soon after the Fed announcement. Earlier, the Dow rose as much as 105 points and fell as much as 175 in fractious trading; on Monday, the Dow suffered its largest drop since the September 2001 terror attacks.

Broader stock indicators advanced. The Standard & Poor's 500 index rose 11.27, or 0.94 percent, to 1,203.97, and the Nasdaq composite index rose 15.28, or 0.70 percent, to 2,195.19.

Bond prices fell sharply as investors turned away from the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.49 percent from 3.41 percent late Monday.

Light, sweet crude fell $3.70 to $92.01 on the New York Mercantile Exchange as investors placed bets that slowing economic growth will crimp demand. The dollar was mixed against other major currencies, while gold prices fell.

Worries about AIG's well-being intensified Monday and early Tuesday after several ratings agencies downgraded the company. Lower ratings can add to the amount of money the already cash-strapped company has to set aside. Investors fear that a failure by the world's largest insurer would touch off a wave of financial turmoil.

But reports said the government is at least discussing extending a financial lifeline to the company gave a big boost to AIG. The stock fell 4 cents, or 0.84 percent, to $4.72 after being down nearly 75 percent early in the session.

Markets around the world were still reeling from the bankruptcy filing of Lehman Brothers Holdings Inc. and the quickly assembled weekend sale of Merrill Lynch & Co. to Bank of America Corp. Investors worry that tectonic shifts in the power structure of Wall Street signal that the financial sector's trouble with imperiled credit are far from over.

A partial recovery in shares of AIG and several other financial companies helped the sector show signs of life. JPMorgan Chase & Co. rose $2.11, or 5.7 percent, to $39.11, while Wells Fargo & Co. rose $3.37, or 11 percent, to $34.37.

Steven Goldman, chief market strategist at Weeden & Co., said investors are starting to examine even troubled sectors like banks to pluck out those that have managed to sidestep the worst of the credit troubles.

"There are some silver linings in a dire picture," he said, referring to some of the gainers.

Names that investors often rely on as safe bets in a weak economy also rose. Wal-Mart Stores Inc. rose 91 cents to $62.54, while McDonald's Corp. rose 49 cents to $64.21.

The market showed little reaction to the first drop in the Labor Department's Consumer Price Index in nearly two years. The CPI fell 0.1 percent last month, while the index excluding food and energy costs edged up a mild 0.2 percent. Both figures were in line with analyst expectations.

In corporate news, Goldman Sachs Group Inc., the largest of the two big independent investment banks on Wall Street, posted its sharpest decline in earnings since becoming a public company in 1999. The company said quarterly earnings fell 70 percent from a year earlier and that it saw a marked decrease in client activity. The profit results were better than Wall Street had been expecting, though revenue fell short. The stock fell $4.87, or 3.6 percent, to $130.63.

Morgan Stanley, Goldman's smaller rival, fell $5.02, or 16 percent, to $27.17.

Dell Inc. warned that it sees a further softening in global demand in the current quarter. The computer manufacturer fell $2.01, or 11 percent, to $15.98.

Hewlett-Packard Co. announced plans Monday to cut 24,600 jobs, or about 8 percent of its work force, over the next three years as it works through its acquisition of technology-services company Electronic Data Systems Corp. HP shares were little changed early Tuesday. HP rose $3.35, or 7.4 percent, to $48.68.

The Russell 2000 index of smaller companies rose 10.60, or 1.54 percent, to 700.36.

Overseas, markets in Asia fell sharply Tuesday after being closed Monday. Japan's Nikkei stock average fell 4.95 percent. Hong Kong's Hang Seng index lost 5.44 percent.

In Europe, Britain's FTSE 100 fell 3.43 percent, Germany's DAX index lost 1.63 percent, and France's CAC-40 fell 1.96 percent.