Dow Skids 28.38 as Rumors of Embassy Bombing Hit Market

The stock market tumbled in moderate trading Tuesday, as the dollar and bond prices weakened and pent-up selling was unleashed by rumors that the U.S. Embassy in Kuwait had been bombed.

The rumors were later officially denied, but the selling spree persisted.

The Dow Jones industrial index finished 28.38 points lower at 2,418.53, after dropping to a low for the day of 2,401.15. Declining issues outnumbered gainers about 2 to 1 on the New York Stock Exchange.

Big Board volume totaled 165.48 million shares, up from 142.49 million on Monday.

“I think the bond market is an important factor here,” said Michael Metz, an analyst for Oppenheimer & Co., noting that the decline in bond prices--sparked by a weaker dollar--had a negative effect on Wall Street.

Bond prices and interest rates generally move in opposite directions, and higher interest rates are a historic enemy of the stock market because they tend to discourage investment. A lower dollar has raised concern recently that inflation could be rekindled by making imports more expensive.

The rumors that the embassy in Kuwait had been bombed, which surfaced in the late morning, caused a sharp drop in stock prices.

The embassy later said there had been an accidental explosion related to construction at the building, and there weren’t any injuries. But the selling continued despite the denial, market participants said.

“It looks like the stock market was just looking for an excuse to go down anyway,” said Harry Laubscher, a vice president of the investment firm Tucker, Anthony & R. L. Day Inc. “It indicates that the path of least resistance is on the downside.”

Investors have been disappointed in recent weeks with the narrowness of the stock market’s advance, which has benefited a relatively small number of “glamour” issues.

“We’re running the market on a handful of blue chips,” said Lawrence Wachtel, an analyst for Prudential-Bache Securities.

Analysts said the Commerce Department’s report Tuesday that its main forecasting gauge of future economic activity climbed 0.7% in May was a bit better than expected but failed to impress Wall Street.

The report that orders to U.S. factories for manufactured goods were unchanged in May, as a steep decline in military demand offset strength in civilian categories, was said to have had little effect.

Among actively traded issues on the NYSE, Santa Fe Southern Pacific jumped 3 3/4 to 50. The Interstate Commerce Commission voted not to reconsider its earlier rejection of the proposed merger between the Santa Fe and Southern Pacific railroads.

Burlington Northern, which said it was interested in buying some parts of Santa Fe Southern Pacific’s rail system, jumped 5 to 82 3/4.

AT&T; declined 1/2 to 27 5/8. Officials of the telephone giant said its performance is likely to improve in the second quarter.

Pacific Telesis fell 1 to 26 1/2; Commonwealth Edison dipped 5/8 to 34 5/8; IBM lost 2 7/8 at 162 1/2, and Philips Petroleum was up 1/8 at 16 5/8.

Lackluster Bond Trading

In the credit markets, meanwhile, bond prices fell during a lackluster session with little news to influence trading.

The Treasury’s key 30-year bond slipped point, or $2.50 per $1,000 face amount, while its yield rose to 8.50% from 8.48%.

Corporate and municipal bonds were mixed.

Bond prices rose after the leading indicators report, but the gains later eroded, and analysts were hard-pressed to find a reason for the market’s performance.

“There’s not a lot going on,” said Maria F. Ramirez, a managing director at Drexel Burnham Lambert. “I think we’re going to see this kind of summer doldrums over the next few weeks.”

Ramirez said the market was still absorbing new issues from last week’s Treasury auction of two-, four- and seven-year notes.

In the secondary market for Treasury bonds, prices of short-term governments were unchanged to 1/32 point lower, intermediate maturities ranged 1/8 point to 5/16 point lower and 20-year issues dropped point.

In corporate trading, industrials fell 1/8 point and utilities slipped .

Among tax-exempt municipal bonds, general obligations rose point in quiet trading and revenue bonds were down 1/8 point.

The federal funds rate, the interest on overnight loans between banks, traded at 6.25%, down from 6.438% late Monday.