STOCKS : Drop in Prime Triggers Rally; Dow Up 21.12

NEW YORK —  News of a long-awaited cut in the bank prime lending rate helped inspire a moderate rally in the stock market Monday.

The Dow Jones index of 30 industrials rose 21.12 to 2,794.37, recouping nearly all of Friday’s 22.83-point loss.

Advancing issues outnumbered declines by about 8 to 7 in nationwide trading of New York Stock Exchange-listed stocks, with 805 up, 717 down and 470 unchanged.

Numerous banks across the country lowered their prime rates to 10% from 10.5%.

The prime is used as a reference point from which interest rates on numerous types of loans are calculated.

Open-market money rates, which reflect the most current sentiment among investors and would-be lenders, were little changed to moderately higher in today’s activity.

Philip Morris led the active list, down 1 1/8 at 41 after a federal appeals court ruling that was interpreted as raising the possibility of broadened legal battles for cigarette manufacturers.

The shares of Pan American World Airways closed up 1/4 at 3 1/2 on a Cable News Network report that the troubled airline was in merger talks with privately held NWA Inc., the parent of Northwest Airlines. An NWA spokesman had no comment on the report.

A spokesman for Pan Am also declined comment but added that Pan Am was talking to “the heads of major airlines, including foreign airlines” in search of a merger partner.

Among other actively traded blue chips, Exxon rose 3/4 to 49 1/2, American Telephone & Telegraph added 1 1/8 to 45 3/4, Coca-Cola edged up 1 5/8 to 77 1/2, General Electric gained 3/8 to 66 and International Business Machines rose 5/8 to 100 3/8.

Pacific Telesis gained 1 1/4 to 49. The company announced a new program to buy back as many as 25 million of its shares.

Single-country investment companies, which have been prominent gainers in recent weeks, were mostly higher again. Germany Fund climbed 1 5/8 to 18 5/8, Helvetia Fund added 7/8 to 15, Austria Fund rose 1/2 to 21 1/8, Malaysia Fund gained 1/2 to 22 3/8, and India Growth Fund moved ahead 3/4 to 20 1/4.

Big Board volume declined to 140.11 million shares from Friday’s 158.53 million.

Tokyo stocks ended a roller-coaster session slightly higher as the market struggled for direction after its steep drop Friday. The 225-share Nikkei index finished 20.20 points up at 38,294.96 after swinging in a nearly 550-point range throughout the day.

Share prices fell on London’s stock exchange on disappointment that a January rally had failed to materialize. The Financial Times 100-share index finished 13.2 points lower at 2,431.3 points.

CREDIT Bond Prices Slip Despite Cut in Prime Most bond prices declined Monday as traders and investors virtually ignored a cut in the prime rate and worried instead about a weaker dollar and inflation.

The prime rate reduction “was just swatted away by the market,” said Ward McCarthy, a managing director of Stone & McCarthy Research Associates Inc.

The Treasury’s closely watched 30-year bond fell 13/32 point, or $4.06 for each $1,000 face value. That boosted the yield to 8.09% from 8.06% late Friday.

A drop in the prime normally helps the credit market because lower interest rates mean higher bond prices. But traders have expected the reduction since the Federal Reserve moved to lower the federal funds rate, the interest on overnight loans between banks, to about 8.25% on Dec. 20.

The federal funds rate, the interest on overnight loans between banks, was quoted at 8.25%, up from 8.125% late Friday.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds fell 5/32 point to 92 29/32. The average yield to maturity rose to 7.29% from 7.28% late Friday.

CURRENCY Dollar at 20-Month Low Against Mark The dollar fell sharply against key foreign currencies in active trading, skidding to a 20-month low against the strong West German mark amid continued concerns about declining U.S. interest rates.

Gold prices also slipped after a mixed performance overseas.

On the Commodity Exchange in New York, gold bullion for current delivery settled at $403 an ounce, down $3.30 from Friday. Republic National Bank of New York quoted a late bid for gold at $401.80 an ounce, off $4.45.

Currency dealers said the prime-rate cut helped depress the dollar in foreign exchange. The cut reflects more liberal credit policies by the Federal Reserve since late 1989 and lowers borrowing costs for a number of businesses and consumers.

Lower interest rates are seen as bearish for the dollar since they make dollar-denominated investments less attractive to foreigners.

Strong interest in the mark pushed the dollar to its lowest level against that currency since late April, 1988, according to Ronald H. Holzer, a vice president at Harris Trust & Co. in Chicago.

The dollar fell to 1.6685 marks from 1.6895 marks late Friday.