The Dow Jones Industrial Average was recently ahead 27.9 points at 13,260.3, despite 16 of its 30 components trading lower, with Walt Disney Co. fronting the blue-chip's decline, its stock off 2.1%.
Technology shares were among the Dow's gainers, with International Business Machine Corp. up 1.8% and Intel Corp. ahead 1.2%.
The S&P 500 climbed 3.28 points to 1,458.26, while the Nasdaq Composite gained 9.16 point to 2,605.19.
Up and down during the session, the equities market had pulled decidedly lower after S&P revised its outlook on Ambac Financial Group and MBIA , said Peter Boockvar, equity strategist at Miller Tabak.
"Everyone is giving different interpretations about the Fed auction, but I think it's much ado about nothing -- a whooping 10 basis points below the discount rate I don't think eases much of anything," said Boockvar.
Volume on the New York Stock Exchange neared 935 million, and declining stocks outran those advancing 3 to 1. On the Nasdaq, nearly 1.3 billion shares exchanged hands, and declining stocks edged ahead of those advancing, also by 3 to 1.
On the New York Mercantile Exchange, crude-oil futures gained $1.48 to $91.56, while gold futures fell $1.1 to $806.3 an ounce.
Standard & Poor's said it may downgrade its ratings on bond insurers Ambac Financial Group Inc. and MBIA Inc.
In Washington, the Fed said U.S. banks had borrowed $20 billion for 28 days at 4.65%, with a total of 93 banks bidding in Monday's auction, asking for $61.6 billion. The bid-to-cover ratio was 3.08. .
"These results suggest that funding needs are more widespread throughout the banking system, a point that is likely to make the Fed a bit more concerned about the financial system than before the auction," said Drew Matus, an economics at Lehman Brothers.
The scenario "slightly increases the odds of a rate cut at the next FOMC [Federal Open Markets Committee] meeting," said Matus.
Morgan Stanley unveiled a new $5.7 billion write-down on its way to posting a fourth-quarter loss of $3.59 billion, leading CEO John Mack to refuse a bonus. The Wall Street Journal reported that top executives at Bear Stearns will also forgo bonuses this year.
Shares of Morgan Stanley gained 4.1% while those of Bear Stearns fell 0.6%.
The trend of Asian and Middle Eastern investors taking stakes in Western financials continued, with China Investment Corp. taking a $5 billion Morgan Stanley stake. .
Elsewhere, RealtyTrac reported that November foreclosures were up nearly 68% from a year ago, though down 10% from October. .
On the interest-rate front, minutes from the last Bank of England meeting revealed the U.K. central bank voted unanimously to cut rates, a surprise for economists, who were expecting a closer decision.
After the close of trading, Nike and Oracle Systems will announce results.
Elsewhere, Palm dropped 7% after the handset-devices maker forecast current quarter revenue up to 13% below average analyst estimates.
The Nikkei 225 ended 1.2% lower in Tokyo. In London, the FTSE 100 was flat.
U.S. stocks closed a choppy session with gains on Tuesday, with Best Buy and Adobe Systems closing higher after quarterly reports. The Dow industrials rose 65 points, the S&P 500 ended 9 points higher and the Nasdaq Composite tacked on 21 points.
By Kate Gibson