NEW YORK — The stock market took its sharpest drop in more than three weeks Wednesday, responding to words of caution from Federal Reserve Chairman Paul A. Volcker.
The Dow Jones average of 30 industrials fell 11.48 to 1,280.37, its biggest decline since it lost 13.91 points Feb. 11.
Volume on the New York Stock Exchange came to 116.94 million shares, against 116.37 million Tuesday.
Appearing before the House Budget Committee, Volcker repeated his oft-stated concerns about deficits in the government's budget and the nation's international trade accounts.
He said one danger raised by these circumstances was the possibility of a "very sharp" decline in the dollar from its recent lofty levels in foreign exchange.
He suggested that a decline in the dollar would probably cause a significant drop-off in foreign investors' enthusiasm for U.S. investments.
The resulting visions of reduced demand for vehicles like Treasury bills and bonds helped send interest rates higher in the credit markets.
Rates on short-term Treasury bills rose slightly. Prices of long-term government bonds, which fall when rates move up, showed declines in the neighborhood of $5 for every $1,000 in face value.
The market's 1985 rally has flattened out in recent weeks as interest rates have turned upward in the credit markets.
Another apparent drag on the stock market has been its repeated inability since late January to break through the 1,300 level in the Dow Jones industrial average. Though the average closed at a record high as recently as last Friday, it has retreated on at least four occasions after climbing briefly above 1,300.
General Dynamics dropped 2 1/8 to 77 3/8 on top of a 2 3/8-point loss Tuesday. The Defense Department has stopped making general and administrative payments to the company for at least 30 days while it checks allegations of improper billing.
Among other aerospace stocks, McDonnell Douglas slumped 2 to 81 and Lockheed 1 1/2 to 51.
ITT Corp. rose 1 to 33 3/8. The company acknowledged rumors that financier Jay Pitzker of Chicago might be preparing to make a takeover bid but added that it did not believe that there was any substance to the reports.
Middle South Utilities rose 3/8 to 13 3/8 and was catapulted to the top of the active list by a series of block trades just before the close.
In the daily tally on the Big Board, about five issues declined in price for every three that advanced. The exchange's composite index fell 0.83 to 104.64.
Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 140.46 million shares.
Standard & Poor's index of 400 industrials lost 1.91 to 202.23, and S&P's 500-stock composite index was down 1.58 at 180.65.
The NASDAQ composite index for the over-the-counter market dropped 1.65 to 285.45.
At the American Stock Exchange, the market-value index closed at 227.79, down 1.09
The Wilshire index of 5,000 equities closed at 1,864.080, down 14.185.
Large blocks of 10,000 or more shares traded on the NYSE totaled 2,152, compared to 2,163 on Tuesday.
In the credit markets, some traders said both bond and stock prices fell in tandem with the dollar, which weakened after Volcker's testimony.
In the secondary market for Treasury bonds, prices of short-term governments fell 6/32 point, intermediate maturities lost 14/32 point and long-term issues slumped 26/32 point, according to the investment firm of Salomon Bros. Inc.
In corporate trading, industrials and utilities fell 3/8 point in light trading.
Among tax-exempt municipal bonds, general obligations and revenue bonds dropped point in light activity.
Yields on three-month Treasury bills, meanwhile, edged up 1 basis point--or one-hundredth of a percentage point--to 8.69%. Six-month bills rose 2 basis points to 8.94%, and one-year bills rose 5 basis points to 9.10%.
Yields on 30-year Treasury bonds climbed to 11.93% from 11.82% late Tuesday.
The federal funds rate, the interest on overnight loans between banks, traded at 8.25%, down from 8.375% late Tuesday.