Inflation at Home, Tension Abroad Send Dow Down 66

The stock market, which had lapsed into an edgy calm in recent days, was wrenched again Thursday by new warlike noises from Iraqi President Saddam Hussein, and signs of mounting inflation and a weakening economy at home.

In a last-minute selloff, the Dow Jones industrial index fell 66.83 points to 2,681.44, a 2.4% drop on a light New York Stock Exchange trading volume of 138.6 million shares, compared to 135.2 million on Wednesday. The fall followed two sessions in which the Dow had moved less than one point, and marked the index’s lowest point since the Kuwaiti crisis began Aug. 2.

“Saber-rattling has rattled the market,” said Jonathan Groveman, head of equity trading for Ladenburg, Thalmann & Co. in New York. “We went from a couple days of stabilization to more bad news. This market is riveted by what’s going on over there.”

The market was also reacting to news that the inflation rate, as measured by the consumer price index, rose 0.4% last month. Another report showed that housing starts fell 2.6% last month to their lowest point since 1982.

In other markets:

* Oil gained in trading on the New York Mercantile Exchange. September futures contracts jumped 90 cents a barrel to $27.36.

* Gold continued its rise. Futures contracts for August added $6.60 to $409.20 an ounce in New York trading.

* Overseas stock markets also were hit. In Tokyo, the Nikkei index slid 562.68 to 27,549.44 on Thursday and fell another 870.59 points, or 3.16%, to 26,678.85 as of today’s midday close. In Frankfurt, West Germany on Thursday, the DAX index gave up 14.7 to 1,727.45. A drop in the London market shaved 17.2 points off the Financial Times-Stock Exchange 100 index, to 2222.1.

Other U.S. stock indexes suffered with the Dow. The Standard & Poor’s 500-stock index fell 7.67 to 332.39. Over-the-counter markets also went head over heels, dropping the NASDAQ composite index 9.18 points, or 2.2%, to 402.27.

Declining issues outnumbered gainers 1,285 to 325 on the New York Stock Exchange.

Stock traders were troubled by several Mideast developments. In an “open letter” to President Bush, Iraq’s Saddam Hussein spoke of “American deaths,” and also ordered Britons and Americans in Kuwait to report to a hotel.

Additionally, it was clear that contrary to earlier hopes, King Hussein of Jordan was not carrying a message from Saddam Hussein to Bush. Earlier reports said the king would bring a proposal for a resolution of the crisis.

James Creber, partner in the New York investment firm of Miller Tabak Hirsch, said traders were looking Thursday at “a combination of stagflation at home, the costs of expensive military buildup over there and the prospect of war. It’s a tough combination.”

He said that in an effort to divine how the combination would affect the market, some traders were taking out market charts from 1973-1974, when the country was hit by the first oil crisis. The S&P; 500 index, the market gauge favored by money managers, dropped to 75 from 125 in that period, a 40% loss, Creber noted.

“So you see things can really get pretty bad,” he said.

Thursday, the Dow tumbled rapidly in the last half hour of trading and triggered one of the “circuit breaker” devices intended to provide time outs in disorderly markets. The fall meant that traders performing the kind of computer-directed trading called index arbitrage couldn’t sell the stocks involved in those trades except when prices were rising.

But the limits on programs didn’t stop fearful money managers from bailing out, joining others who have exited the market since mid-July. The Dow now is off 318 points, or 10.6%, from its all-time high of 2,999.75 on July 17.

Highlights:

* The stocks that were hit hardest were many of the growth stocks that investors had crept back into over the past week--adding credence to the bears’ view that even those stocks won’t be able to hold onto any short-term gains. Merck plunged 4 1/8 to 83 3/4, Procter & Gamble tumbled 2 7/8 to 80 5/8, Philip Morris lost 2 to 45 1/4, Home Depot slumped 2 1/4 to 34 7/8 and Gillette dropped 3 to 60.

* Oil and oil-related stocks were mixed. Mobil rose 1/4 to 66 3/4 and Arco gained 1 1/4 to 135, but Dresser Industries dropped 2 7/8 to 51 1/8 and Halliburton fell 3/4 to 55 1/4.

* Gold stocks continued their rise, as ASA jumped 2 5/8 to 56 1/4 and Newmont Gold rose 1 1/8 to 54.

* Security Pacific plunged 3 to 28 3/4. The company disclosed that its earnings in this year’s second half would be lower than expected due to slower growth in non-interest income and an increase in provisions for loan losses. The increase in loan-loss provisions reflects a weaker economy and continuing real estate problems in Arizona, Australia and Great Britain, Security Pacific said.

After the news, Merrill Lynch cuts its 1990 earnings estimate for the bank to $5.70 a share from $6.35, and its 1991 estimate to $6.20 from $6.80.

The Security Pacific bomb helped send other California bank and real estate companies’ stocks sharply lower. Wells Fargo slumped 3 1/8 to 59 5/8, Ahmanson fell 3/8 to 16 7/8 and First Interstate lost 1 3/8 to 31 1/4. Among home builders, Kaufman & Broad dropped 3/8 to 7 1/2, Del Webb lost 1/2 to 6 1/4 and Standard Pacific fell 3/8 to 7 5/8. Elsewhere, Hilton plunged 2 3/8 to 37 5/8.

THE DOW’S DECLINE Dow Jones Industrial average on the half hour Wednesday close: 2,748.27 Thursday close: 2,681.44, down 66.83