Financials tumbled, with Legg Mason Inc. and Morgan Stanley both taking a double-digit dive.
After jumping more than 300 points, the Dow Jones Industrial Average was recently up 57.74 points to 8,233.51.
Twenty of the blue-chip index's 30 components advanced, led by Boeing Corp. , up 4.5%, after the company reached a tentative pact with its machinists.
Also offering strong support, General Motors Corp. gained 4.4 % after The Wall Street Journal reported the Department of Energy is working to arrange $5 billion in loans to the auto maker, which would help GM merge with Chrysler.
J.P. Morgan Chase was the Dow's greatest laggard, down 3%.
The S&P 500 climbed 1.55 points to 850.47, with telecommunication services, materials and information technology fronting gains among the index's 10 industry groups.
Financials, energy and consumer discretionary were the hardest-hit sectors.
The technology-laden Nasdaq Composite rose 5.36 points to 1,511.26.
Stocks pared initial gains after the Conference Board released its consumer confidence index for October, with the gauge dropping to a record low of 38 from 61.4 in September. .
"These figures will reinforce the negative tone on Wall Street, although they can hardly be viewed as a shock and a game changer given all that has happened of late," said Tony Crescenzi, bond market strategist at Miller Tabak & Co.
Ahead of the open Tuesday, stock futures had remained solidly higher after S&P/Case Shiller index of 20 cities showed a 1% decline in home prices in August from July, and a record 16.6% from year-ago month. .
Short-term borrowing costs continued to fall, but at a slow pace, with the three-month London interbank offered rate, or Libor, for dollar loans down to 3.465% from 3.5075 on Monday.
The Fed's interest-rate setting committee begins deliberations Tuesday afternoon at the start of its two-day meeting, with expectations for a half-point cut to bring the fed funds rate to 1%, which would be its lowest level since June 2004. .
The U.S. central bank rarely makes announcements on the first day of its meetings, but after this month's global coordinated rate cut, traders are on alert for an early move.
European Central Bank Jean-Claude Trichet said on Monday that another Europe rate cut was "possible" and Bank of England Gov. Mervyn King recently acknowledged for the first time that the U.K. was likely in recession.
In an unexpected move, Iceland on Tuesday hiked its interest rates by 6 percentage points to 18% in a massive policy reversal.
Crude-oil futures fell 15 cents to $63.07 a barrel. .
The dollar saw a recovery vs. the Japanese yen, up 2.1% to 95.19 yen. .
On the earnings front, appliance maker Whirlpool Corp. cut its 2008 forecast and announced it was cutting 5,000 jobs.
U.S. Steel Corp. topped most expectations with its quarterly profit report, but also cautioned fourth-quarter earnings would fall as demand weakens.
Honda Motor Co. Ltd. reported a 41% profit drop for the second quarter and the Japanese automaker cut its annual profit view. .
Overseas, most Asian markets clawed through early volatility to end higher.
In Europe, shares also pulled higher as investors shopped for bargains. .
On Monday, a bout of late-session selling sent U.S. stocks lower, with the Dow Jones Industrial Average falling 203 points, or 2.4%, to 8,175.77, its lowest close since April 1, 2003, with the blue-chip index down 24.65% so far for October.
By Kate Gibson