WASHINGTON — The Federal Reserve said Tuesday that it would become a lender of last resort to corporate America and signaled a possible interest rate cut, but the stock market nose-dived again as the financial crisis continued to defy the best efforts of policymakers.

Normally, even a hint of easier credit would have been enough to rally markets, especially when coupled with the Fed's apparently unprecedented decision to purchase as much as hundreds of billions of dollars of short-term corporate debt — the loans businesses count on to fuel daily operations but now have trouble getting because of the credit freeze-up.

But these are not normal times, and after a brief morning rise, the Dow Jones industrial average market bumped steadily downward, losing 508.39 points, or 5.1 percent, to close at 9,447.11. The Dow has dropped more than 800 points in the last two days, and nearly 1,700 points, or 15.2 percent, since the beginning of last week. The broader Standard & Poor's 500 index fell 5.7 percent.

Federal Reserve Chairman Ben Bernanke hinted the central bank would weigh an interest rate cut perhaps before the next scheduled meeting at the end of the month. But even as he promised to continue using all the power at his disposal, he offered a grim assessment of the road ahead.

"The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth," he said.

Meanwhile, recognizing that the financial crisis is now affecting state and local governments, the White House announced that it had opened talks with local officials. "We're talking to states and reviewing the issue," White House spokesman Tony Fratto said.

California Gov. Arnold Schwarzenegger has asked the federal government to step in on behalf of states that face problems selling the bonds they use to raise operating funds until tax receipts are received. Massachusetts delayed the sale of $750 million in short-term notes for the second time in two weeks Tuesday as turmoil in the credit market undermines demand.

On Wall Street, traders said they feared rescue efforts in Europe as well as the United States would not ward off a bruising downturn in the overall global economy. Even with more cash available, they said, it will take some time for banks to fix their balance sheets.

"Most people are coming to the realization that the financial crisis will probably be worked out in one way or another, but there's still a recession to deal with," said Phil Roth, a market analyst at New York brokerage house Miller Tabak & Co.

Although signs of global economic trouble have been building for weeks, actions by European governments in recent days to prop up major banks have crystallized the depth of the problem in the minds of U.S. investors. British officials were expected to announce a plan this morning to rescue their nation's failing banks.

The Fed's announcement it would enter the market for short-term commercial paper was credited with an immediate easing of conditions in some parts of that market, which supplies funds for such basic corporate needs as meeting payrolls and financing inventories.

Nonetheless, some observers are questioning whether the government is spreading itself too thin and whether even the Fed could single-handedly salvage all the financial markets.

"Everyone knows they can't save everybody," said Carol Miller, manager of the Federated Capital Appreciation fund.

The government's various rescue efforts, including the $700 billion plan passed by Congress last week, are still in the planning stages and will not begin operation for several weeks.

Senior Fed officials said the aim of the commercial paper program is to rebuild the confidence of money-market mutual fund operators who usually buy much of the short-term debt issued by American corporations. In recent days, they said, even solvent companies have not been able to issue debt with terms longer than a day or two.

The officials said that roughly half three-month commercial paper it intends to purchase would come from financial companies, which have been especially hard hit by the turmoil.

Fed officials said they would buy secured and unsecured debt, at their discretion. Details are still to be worked out, but issuers of unsecured debt would have to pay a fee of some sort, perhaps a kind of insurance premium, to ease the risk for the central bank.

In another effort to restore public confidence and allay fears of future bank failures, the Federal Deposit Insurance Corp. on Tuesday gave initial approval to a plan to double the amount that banks pay to insure their deposits starting Jan. 1.

Congress last week temporarily increased the coverage for individual accounts to $250,000 from $100,000, although the FDIC said that did not affect its plans to increase the premiums that underwrite the insurance.

The FDIC estimates the Deposit Insurance Fund will take a $13 billion hit this year from the failure of IndyMac Bank and a dozen other institutions, and projects $27 billion in additional bank failure costs by the end of 2013.

Bankers said they could afford the increase — an average institution would see its premiums rise from 6.3 cents per $100 of deposits to 13.5 cents — and noted the importance of the fund in maintaining customer confidence that their money is safe.

But the American Bankers Association said the higher premiums would mean they would have less money to lend. And consumers are likely to see increased fees or lower interest rates for their deposits to make up for the additional premiums.

For his part, President Bush tried to sound a reassuring note while acknowledging the crisis. "Right now we're in tough, tough times, no question about it," he said as he paid a visit to Guernsey Office Products in Chantilly, Va., a Washington suburb. "But you can't convince me that in the long run, that we're not going to get back on our feet again. And if anybody ever says that, they don't understand the American spirit.

"No question, in the short term ... the value of your 401(k), if you're in stocks, is going to go down," Bush said. "I wish I could snap my fingers and make what happened stop. But that's not the way it works.

"Let's give this time," he added. "Let's give this plan time to get these credit markets eased up so that normal business can begin."