STOCKS : Dow Falls 39; Mideast, Inflation Fears Cited

Stock prices closed sharply lower Thursday as investors fled the market, wary of developments in the Persian Gulf and the inflationary implications of a renewed jump in oil prices.

The Dow Jones industrial index closed down 39.11 points, or 1.5%, at 2,593.32. In the broader market, declining issues outnumbered gainers by a margin of more than two to one in nationwide trading of New York Stock Exchange-listed stocks, with 482 up, 998 down and 501 unchanged.

Big Board volume remained light at 120.8 million shares, down from Wednesday’s 134.2 million. Investors concerned over the volatile Mideast situation sold stocks before the long Labor Day weekend.

“No one wants to lug anything over the long weekend given what’s going on in the Mideast, which is a big question mark,” said Dave Mulanaphy, managing director of Asset Management Partners.

Some futures-related program trading contributed to a late afternoon wave of selling.

The latest uncertainty over the Persian Gulf came on reports that Iraq’s air force commander said Baghdad would send warplanes and missiles against Israel and Saudi Arabia if war broke out between Iraq and U.S.-led forces in the Persian Gulf. The comments caused jitters about a flare-up.

While hope of a quick diplomatic solution to the gulf crisis emerged over the past several days, the lack of action on either side soured opinion. “Now, the feeling is this is going to drag out,” said Tom Callahan, executive vice president at Yamaichi International.

Market highlights:

* The Dow, which managed to hold above last week’s low of 2,483, was pulled down by IBM, off 2 1/8 to 101 3/4; Merck, down 2 to 80, and GM, down 1 3/8 to 39 1/4.

* Oil stocks continued their yo-yo pattern, losing ground again despite higher oil prices. Exxon fell 1 to 48 7/8, Arco dropped 2 1/4 to 133 1/2, Amoco lost 1 3/8 to 54 and Unocal slipped 5/8 to 30 3/4.

* High-tech stocks saw a second day of heavy selling on concerns about slowing business. Conner Peripherals tumbled 1 3/4 to 21, Teradata gave up 1 1/2 to 20 3/4, Intel dropped 1 7/8 to 33 1/8 and Oracle fell 7/8 to 10 3/4.

* Bank of New England dropped 5/8 to 1 in active trading on rumors that the Federal Deposit Insurance Corp. plans to intervene soon because of the bank’s continuing financial problems. The rumors were denied later.

* Sierra Tucson, an alcohol and drug rehabilitation center operator, tumbled 4 3/4 to 7 1/2 after it said it expects lower third-quarter and full-year profits.

In Tokyo, stocks rose despite a hike in Japan’s discount rate to 6% from 5.25%, and other Asian markets rose in sympathy. The benchmark Nikkei average of 225 shares surged 775.17 points, or 3.1%, to 25,669.96.

In London, prices also rose as uncertainty over the Mideast crisis eased its grip. The Financial Times 100-share index was up 27.9 points, or 1.3%, at 2,153.6.

In Frankfurt, German shares started strongly but many early gains were wiped out by profit taking and talk of a negative outlook for Volkswagen despite a rise in profits. The 30-share DAX index ended just 1.29 points higher at 1,638.95.

CREDIT Bond Prices Sink on Investor Jitters Bond prices closed mostly lower as the market was buffeted by higher oil prices, an interest rate hike in Japan and continued nervousness about the Middle East, traders said.

The price of the Treasury’s benchmark 30-year bond fell 17/32 point, or about $5.31 per $1,000 face amount. Its yield, which rises when the bond’s price falls, rose to 8.97% from late Wednesday’s 8.92%.

Mike Wolski, a vice president at the bond trading firm Carroll McEntee & McGinley, said the market opened strong but prices were driven lower after Iraq’s air force commander said Iraq would bomb Israel and Saudi Arabia if his nation were attacked.

A jump in oil prices further softened bond prices, traders said. Meanwhile, higher rates in Japan threaten to make U.S. bonds less attractive to global investors.

The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8%, unchanged from late Wednesday.

CURRENCY Dollar Heads Up Despite Japan Move The dollar gained against all major foreign currencies in U.S. trading, even against the Japanese yen, despite the Bank of Japan’s decision to raise a key interest rate.

Ronald Holzer, chief currency dealer at Harris Trust in Chicago, said the dollar’s advance didn’t reflect any fundamental improvement in sentiment. He said dollars were bought by dealers taking profits on other currencies.

Some of the dollar buying was motivated by a desire to adjust currency holdings ahead of a three-day weekend in the United States. U.S. financial markets will be closed Monday for Labor Day.

At the end of New York trading, the dollar was quoted at 144.10 yen, up from 143.55 yen on Wednesday.

The dollar also rose to 1.564 German marks, up from Wednesday’s finish of 1.560.

COMMODITIES Gold Futures Rise; Silver Turns Lower Precious-metals futures prices settled mixed in trading on the New York Commodity Exchange as the market continued to react to news from the Middle East.

In other markets, energy futures were higher; grain and soybean futures fell; cocoa prices surged, and livestock and pork futures were mostly lower.

Gold, as it has in recent weeks, moved in tandem with the energy market. Gold for delivery in September finished at $386.70 an ounce, up $1.20. But silver for September lost 1.9 cents to $4.81 an ounce.

Market Roundup, D6