NEW YORK — The stock market fell Thursday after an increase in oil prices and a surprise rise in West German interest rates derailed its recent rally.
The Dow Jones industrial average closed down 9.53 points at 2,377.38 after falling 25 points earlier in the day.
The decline wiped out a portion of this week's 50-point advance in the Dow that had been built on a belief that inflation was under control and U.S. interest rates might fall.
The rise of two key West German rates, undertaken to tame inflation, renewed the interest rate worries here, because the German rates are likely to be matched by other nations.
Declining issues outnumbered advances by about 7 to 5 in nationwide trading of New York Stock Exchange-listed stocks.
Volume on the floor of the Big Board came to 175.97 million shares, down from 191.51 million in the previous session. Nationwide, consolidated volume in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 208.04 million shares.
Besides the rate hike, investors were grappling with the effects of sharply higher oil prices, which jumped $2.04 a barrel to $24.65 for May crude. The May contract expired and a good deal of the advance was attributed to technical factors that aggravated worries about tight supplies of North Sea oil.
The West German announcement that the central bank had raised both its discount and Lombard rates put immediate pressure on stocks and bonds. But analysts said they are not convinced the Federal Reserve will necessarily be compelled to follow suit.
"I don't believe the Federal Reserve feels any pressure at all, unless the dollar should start to move lower rapidly," said Mark Tavel, Rothschild Asset Management president.
In addition, brokers said some traders were eager to cash in on the market's recent gains with stocks at their highest levels in more than 18 months.
Block trader Bob Grohskopf at Morgan Stanley & Co. said some of the day's activity may have been related to the expiration Friday of certain options contracts.
Digital Equipment bucked the downtrend, climbing 5/8 to 99 5/8 in active trading. The company reported earnings for the fiscal quarter ended April 1 of $2.05 a share. That was down from $2.33 a share in the year-ago period, but still better than most analysts had expected.
Navistar led the active list, down 1/2 at 5 1/2. The company said it has reduced its internal earnings forecasts for the current quarter and the full fiscal year that ends Oct. 31.
In Tokyo, shares ended a dull day's trading with the Nikkei 225-share average 178.68 points, or 0.54%, lower at 33,185.15.
In London, share prices on the London Stock Exchange fell sharply following news that the West German central bank raised its discount rate. The Financial Times 100-share index was down 22.6 points, or 1.1%, at 2,064.4.
Bond prices dropped sharply in active dealings in response to the rise in West German interest rates.
The U.S. Treasury's benchmark 30-year bond fell 11/16 point, or nearly $7 per $1,000 face amount. Its yield, which moves in the opposite direction from its price, rose to 9.01% from 8.94% late Wednesday.
Yields on short-term government securities also soared.
"It (the West German central bank) shocked the market back to reality," said William Sullivan Jr., an economist for Dean Witter Reynolds Inc. "It reinforced the notion that inflation remains a global problem and that trend in interest rates is toward higher levels."
In the secondary market for Treasury securities, prices of short-term governments fell between 1/4 point and 15/32 point, intermediate maturities fell by between 1/2 point and 3/4 point, and long-term issues were down as much as 23/32 point, according to Telerate Inc., the financial information service.
The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
Yields on three-month Treasury bills climbed to 8.93% as the discount rose 23 basis points to 8.63%. Yields on six-month bills rose to 8.98% as the discount jumped 12 basis points to 8.49%. Yields on one-year bills rose to 9.33% as the discount gained 17 basis points to 8.62%.
The federal funds rate, the interest on overnight loans between banks, traded at 9.875%, down from 11% late Wednesday.
The dollar fell sharply in hectic trading following the interest rate hikes by West Germany's central bank.
Gold prices were mixed. Republic National Bank of New York said gold was bid at $385.25 an ounce as of 4 p.m. EDT, up from $382.80 late Wednesday.
Earlier in Tokyo, before the German rate hike was announced, the dollar rose to 132.28 Japanese yen, from 131.88 yen on Wednesday. Later in London, the dollar traded lower at 132.10. In New York, the dollar fell further to 131.15 yen, from 132.58 yen on Wednesday.