The Dow Jones industrial average advanced 36.04 points, or 0.4 percent, to 8,602.65, retreating from a 122-point gain and briefly dipping into negative terrain.
"The market's nervousness is still there," said Tom O'Brien, head trader at Guzman & Co. "The volume wasn't that much on the sell-off this afternoon. And it didn't seem to be related to index arbitrage."
The afternoon liquidation occurred after Russia released the details of its plan to repay its short-term ruble-denominated debt.
Russia said it will repay $40 billion in ruble-denominated debt at interest rates of 20 percent to 30 percent, and over a three-to-five-year time frame. But the interest rates on the debt were less than the market had expected and not tradable until maturity, a negative for many holders of the debt. Also, 75 percent of the debt will be paid back in rubles, another negative.
Before the debt repayment plan was announced, the Russian ruble slid 10 percent to 7.86 to the U.S. dollar. But the key RTS stock index increased 2.4 percent.
"While parts of Asia, Latin America, and Russia are facing significant economic weakness, on balance the global economic picture remains sound," Edward M. Kerschner, chief investment strategist and chairman of the investment policy committee at PaineWebber Inc., said in a research report.
"The sum of all these problems is not sufficient to pull S&P 500 profits down," Kerschner said. "The Federal Reserve can let rates go as low as necessary to avert a domestic slowdown."
Overseas, Japan's Nikkei 225 index rose back above the important 15,000-point barrier, rising 0.6 percent to 15,072.93. However, the gains were tempered by doubt that Parliament will enact a number of bills to address the heap of bad loans sitting on the books of Japanese banks.
In Europe, London's FTSE 100 index rose 1.4 percent, Frankfurt's DAX index lifted 2.3 percent and Paris' CAC 40 index added 1.9 percent.
Latin American markets also brightened. Venezuela, which on Friday allowed its currency to float within specified limits - a de facto devaluation - saw its benchmark IBC index surge 3.7 percent. And Brazil's Bovespa index of 58 stocks rose 2.2 percent.
In the currency market, the U.S. dollar gained vs. the Japanese yen on comments by Japanese Finance Minister Kiichi Miyazawa. Miyazawa intimated Japan would be less likely to intervene in the currency market to support its currency.
"The testing action in U.S. stocks that we have seen over the past two weeks serves to build a base from which the market will be able to build a meaningful uptrend," said Robert Dickey, managing director of technical research at Dain Rauscher Wessels. "The problem is that it may be stuck here for another month or two in this bottominprocess before it moves substantially higher.
"It's still early, but a large part of the near-term risk has been wrung out of many stocks and it's time to build some positions in your favorites," Dickey said.
In Tuesday's market highlights:
- The Standard & Poor's 500 Index rose 0.4 percent.
- New York Stock Exchange losers outnumbered winners by 8 to 7, after advancers dominated losers by 3 to 1 during the morning rally.
- On the Big Board floor, turnover expanded 19 percent to 670 million shares.
- The Nasdaq Composite advanced 0.4 percent. Declining issues led advancers by 3 to 2 in the Nasdaq Stock Market. Volume totaled 685 million shares.
- The Russell 2000 Index of small-capitalization stocks sank 1.0 percent.
- In the bond market, the 30-year Treasury advanced 14/32, to yield 5.434 percent.
- Toll Brothers gained 2 1/8 to 29 5/8 after releasing fiscal third-quarter results of 67 cents a share, 12 cents ahead of Wall Street's consensus estimate. Toll earned 46 cents a share in the year-ago quarter. The company's order backlog rose 29 percent vs. the same period a year ago.
- Gap slid 2 to 64. PaineWebber lowered its rating to "attractive" from "buy." The stock has been a leader, bounding from a low of 18 in 1997 to its Aug. 13 high of 68.
- Keebler Foods added 3/8 to 26 3/4. The second-largest U.S. cookie and cracker producer will buy President Baking for $450 million in cash. President is best known for being the top maker of Girl Scout cookies.
- K&G Men's Center skidded 4 15/16 to 10 15/16. The operator of men's apparel superstores met most analyst forecasts with its second-quarter earnings of 13 cents a share. But the company steered analysts to expect second-half results to be less than expected, pressuring the stock.
- Healthcare products manufacturer Steris picked up 3 1/8 to 30. The shares will be added to the S&P 500 index after trading closes Wednesday.
- American Home Products rose 1 7/8 to 58 after the Food & Drug Administration late Monday received priority review status for Celebra, its COX-2 inhibitor used to treat osteoarthritis, rheumatoid arthritis, and pain.