"It's the realization that tools only work if financial institutions avail themselves of the liquidity and then re-lend it," said Art Hogan, chief market strategist at Jefferies & Co.
Up 271 points early on, the Dow Jones Industrial Average fell more than 100 points in the final hour of trade only to recover as the session neared the close.
"I'm hearing the reversal in stocks came on a story that the Fed just concluded a conference call with the Primary Dealers regarding today's announcement; the short version: the Financing Facility will only help commercial banks, not investment banks. Therefore, liquidity and balance sheet issues still exist," said Hogan.
The Dow closed 41.1 points higher at 13,473.9, with 19 of its 30 components ending ahead. AT&T Inc. fronted the advance, its stock ending up 5.7% in a second day of gains after the telecommunications giant painted a rosier picture of future growth in a meeting with analysts.
Of the blue chip's laggards, Citigroup Inc. dropped the most, its stock off 5.3%.
"News that global central banks are pledging liquidity was a positive for the market early in the trading day, but, upon further reflection, some might be pondering if it's really a solution, or further evidence of just how deeply embedded the problems in the financial system have become," said Frederic Ruffy, analyst at Optionetics.
Boeing Co. , another Dow component, fell 2% after its downgrade to equal-weight from overweight at Morgan Stanley.
Financial shares also declined after Bank of America Corp. warned of larger fourth-quarter losses than previously projected. The bank was among the institutions to draw a downgrade by Merrill Lynch, with the broker also cutting its ratings on J.P. Morgan Chase Co. and Wachovia Corp. . .
The S&P 500 gained 8.94 points to end at 1,486.59 while the Nasdaq Composite closed up 18.79 points to 2,671.14.
"Tomorrow we kick off the reporting season with a lot of the major brokers, beginning a parade of what may be more write-downs and negative news in the financial sector," said Hogan.
On the New York Stock Exchange, 1.7 billion shares were exchanged, while nearly 2.3 billion shares traded on the Nasdaq. Advancing stocks outran those declining on both exchanges, by 9 to 7 on the NYSE and 15 to 14 on the Nasdaq.
Crude-oil futures rallied $4.37 to close at $94.39 a barrel after data showed U.S. crude inventories dropped for a fourth straight week and five of the world's top central banks said they were ready to inject cash into the money markets. .
The Fed unveiled a plan Wednesday to add $40 billion in liquidity to the markets, with help from the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank.
"This is a very bullish development for the markets," said Alan Skrainka, chief market strategist at Edward Jones. "The main problem in credit markets has not been that rates are too high, but that financial institutions have been unwilling to lend. This added liquidity should relieve some of that pressure."
Not all market observers, however, saw the move in such a positive light.
"While it could provide additional liquidity to banks, it is not expected to lead to an overall increase in liquidity in the financial system," said Drew Matus, an economist at Lehman Brothers.
Early economic data had the Commerce Department reporting the U.S. trade deficit climbed to three-month highs. .
In a separate report, the Labor Department tallied a 2.7% November rise in import prices.
Asian stocks were mostly lower, with Japan and Hong Kong hurt by Tuesday's steep sel-off of U.S. stocks, which were slammed after the Fed delivered quarter-point cuts to both the Fed funds and discount window rates, less than many market participants had expected. .
Europe stocks shook off early losses after the coordinated central bank action.
By Kate Gibson