Al Jazeera's John Terrett in New York said that the feeling on Wall Street was that the US authorities would step in to aid AIG because of its importance to the US economy.
CNBC television said Henry Paulson, the US treasury secretary, opposed the idea. However, Bloomberg News cited a person familiar with the negotiations as saying that the Federal Reserve, the US central bank, was mulling a "loan package".
Finance officials across the globe had appealed for calm on Tuesday, trying to avert a panic after months of market turmoil set off by worries over US subprime, or high-risk, housing loans.
|Markets have plunged following the
collapse of Lehman Brothers [AFP]
The market also appeared encouraged by the US Federal Reserve decision to hold interest rates steady at two per cent despite the recent market turmoil, a move seen as a sign of confidence in a recovery.
Although the US central bank had been expected to leave rates the same, some economists had said a cut was a possibility following the turmoil of the last two days.
The European Central Bank, Bank of England and Bank of Japan also injected $160bn into money markets throughout the day in a bid to boost liquidity.
Meanwhile, oil fell beneath $90 a barrel on prospects that the growing economic gloom would further dampen demand for energy, although it ended the day at just above $91.
Speaking to Al Jazeera, Manus Cranny, a market analyst in London, said: "I don't think anybody can say this is the bottom of the market. I think there are more issues to come in terms of write downs [lowering value].
"The fundamentals for all of us on a global scale are going to change in terms of what we can borrow, the terms on which we can borrow and the amount and repayment programmes.
"Better governance [is needed] and whether we go down the road of regulation is yet to be seen."
Tuesday's recovery in the US followed a tumultous day on Monday in the global stock markets.
In Europe on Monday the London stock market dived 3.34 per cent in afternoon deals.
The FTSE-100 index also dropped below 5,000 for the first time since July 2005, when the British capital was hit by a wave of attacks on its public transport system.
Earlier on Tuesday, officials from Asian markets had called emergency meetings after the biggest one-day point loss for Wall Street's Dow Jones index since the September 11 attacks on the US in 2001.
Japanese shares dropped almost five per cent and Hong Kong shed 5.4 per cent.
Tokyo, Hong Kong and Seoul had also shut on Monday because of public holidays, meaning their losses were exaggerated as they caught up on events.