Investors bet that a bailout plan can be passed later this week. Dow jumps 400 points.

By Alexandra Twin, CNNMoney.com senior writer

Last Updated: September 30, 2008: 2:39 PM ET

NEW YORK (CNNMoney.com) — Stocks rallied Tuesday afternoon as investors scooped up shares battered in the bloodletting that followed Congress’ failure to pass a $700 billion bank rescue plan.

But credit markets remained frozen. Several closely-watched measures of bank lending fear hit all-time highs, as firms continued to hoard funds.

The Dow Jones industrial average (INDU) added 400 points before scaling back a bit, with 90 minutes left in the session, recovering some of the record 777 points lost the day before.

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