Interest Rate Jitters Scare 81 Points Out of Dow : Markets: Widespread selloff is steepest since November, suggesting long-awaited ‘correction’ in stock prices may be here.

The U.S. stock market’s near-vertical ascent of recent months came to an abrupt halt Thursday, as share prices fell in a broad decline tied to interest rate jitters.

The Dow Jones industrial average, which had rocketed 588 points, or 15.3%, between Jan. 1 and Wednesday, plunged 81.96 points, or 1.9%, on Thursday to 4,340.64.

Some investment pros called the market’s setback long overdue and said investors’ natural urge to protect the stunning paper profits many have racked up this year will probably lead to additional selling pressure today.

“It would be extremely dangerous to go rushing into the market here,” said Peter Anderson, investment chief at IDS Advisory Group in Minneapolis.

Indeed, many analysts say stocks face a difficult test in coming days, as Wall Street finds out whether the number of sidelined investors who have been waiting to buy stocks at lower prices will outnumber share owners eager to take profits.

Thursday’s decline in the Dow, the biggest one-day point drop since the blue-chip index fell 91.52 points Nov. 22, was tied at least partly to the government’s report that the country’s overall trade deficit narrowed only slightly in March.

Traders said Treasury bond yields were pushed higher on the news, in part because investors feared that the recent rebound in the dollar’s value will be short-lived without significant progress in bringing the trade deficit down.

A weaker dollar could encourage fresh dumping of U.S. bonds by foreign investors, driving yields up.

But some analysts, noting that bond yields were only modestly higher Thursday--and that the dollar was mixed--said the trade report may merely have provided a convenient excuse for investors who have grown uneasy with stocks’ rise over the past few months.

“The market had become very overextended,” said Alan Ackerman, analyst at Fahnestock & Co. in New York.

Stocks began dropping at the opening bell, and the Dow was off 43 points at 3 p.m. EDT. Then computerized program trading kicked in, and the Dow’s final-hour slide wasn’t interrupted even though the New York Stock Exchange’s automatic curbs on such trades kicked in when the index fell 50 points.

In the broad market, losers swamped winners by 17 to 5 on the NYSE, but trading volume wasn’t extraordinarily heavy. And most stock indexes fell less than the Dow.

The Standard & Poor’s 500 index, for example, dropped 7.49 points, or 1.4%, to 519.58. And the Nasdaq composite index of mostly smaller stocks lost just 0.9%, though some traders warned that the technology-heavy Nasdaq market could face heavy selling today.

Because tech stocks have been among the biggest gainers this year, profit taking by nervous investors may be severe. “I think they’re going to beat the living hell out of technology,” Anderson said.

But some Wall Streeters say the stock market’s resilience shouldn’t be underestimated. Many portfolio managers who believe that the economy’s “soft landing” is intact, and that bond yields will remain relatively low, will be eager to buy stocks on weakness, said Len Hefter, Nasdaq market trader at Jefferies & Co. in Dallas.

“I’m not sure institutional money is ready to throw in the towel yet,” he said.

A normal “correction” in stock prices in a bull market could take the Dow down as much as 10% from its peak, analysts note. Ackerman said he doubts the Dow will lose that much. “I see this as a pullback, not a correction,” he said. “A 5% drop looks like an appropriate retrenchment.”

Among Thursday’s highlights:

* The Dow was led lower by AT&T;, down 1 3/8 to 49 7/8; 3M Co., down 2 3/8 to 57 7/8; Caterpillar, down 1 7/8 to 60 7/8, and Philip Morris, off 1 3/4 to 68 3/8.

* Many drug stocks slumped after Johnson & Johnson warned that some analysts’ 1995 earnings estimates were somewhat high. J&J; fell 2 1/4 to 62, Bristol Myers dropped 1 1/2 to 63 5/8 and Pfizer slumped 1 3/8 to 81 7/8.

* Technology stocks closed mixed. Semiconductor issues such as Texas Instruments, up 5/8 to 119 1/2, remained strong, but software giant Computer Associates fell 4 to 68 3/4. Also, Xerox tumbled 4 3/8 to 117 3/4 after failing to raise its dividend.

* In Mexico, the Bolsa stock index plummeted 49.99 points, or 2.4%, to 2,014.76 in tandem with the U.S. market.

In the U.S. bond market, a mild selloff sent the 30-year Treasury bond yield up to 6.89% from 6.86% on Wednesday.

* MARKET BEAT

A savvy L.A. money manager is closing his stock fund to new investors. D3