STOCKS : Global Markets Sink; Dow Takes a 25.99 Dive

Investors lost more ground Wednesday on Wall Street as markets around the globe responded to unpleasant economic news, interest rate worries and unfounded rumors regarding the Persian Gulf crisis.

The Dow Jones industrial index closed down 25.99 points at 2,458.65 after recovering from an early morning slump spurred by a 1,108-point free fall in Tokyo’s Nikkei index. By the time trading had closed in New York, the value of U.S. stocks had fallen by $28.9 billion--a mere drop in the bucket considering that stock values are down a whopping $630 billion, to $2.88 trillion, since they hit their 1990 peak of $3.52 trillion in July.

Japanese traders were primarily responding to rumors that fighting had broken out in the Middle East, said Trude Latimer, market strategist at Josephthal & Co. in New York. U.S. officials later denied the report, but by then the Japanese market had closed.

Although the prospect of war is the most dramatic influence on markets around the world, Japanese investors are jittery for other reasons, analysts said.

Japan, which has benefited from exceptionally low interest rates, is now facing a period in which inflation and interest rates are on the upswing. Moreover, the value of real estate and stocks are falling steeply. Worse still, analysts said, the nation is heavily leveraged and has been using overvalued stocks and properties as collateral for their loans.

Japanese companies are also hurt by a slumping U.S. economy because Americans are big buyers of Japanese goods. And the island nation is almost totally dependent on foreign oil, while the United States produces nearly half of its oil requirements.

Wednesday’s 4.75% drop in the Nikkei was the ninth-largest decline, in terms of points, in the Tokyo exchange’s history. Notably, seven of these market dives have occurred in 1990, causing Tokyo’s main indicator of market strength to plunge from its high of nearly 37,000 to Wednesday’s close at 22,250.62.

Following early morning jitters caused by the Japanese decline, Wall Street also began to react to more substantial economic worries--including weak durable goods orders and a hike in the broker’s borrowing rate, a little-known but important index.

Orders for durable goods--such as washing machines, cars and tanks--fell 0.8% during August, the Commerce Department reported Wednesday. But that relatively modest decline masks the true picture, analysts noted. Without a 12.4% increase in defense-related orders, durable goods orders would have been down 11.2%.

Meanwhile, banks hiked the interest rate they charge brokerage firms to borrow to 9.5% from 9.25%.

“The fact that that rate was up, not down, indicated that interest rates have firmed,” Latimer said. “These broker loan rates do not change casually, so some people are saying ‘Oh my gosh, maybe next will be the prime rate.’ ”

* Regional banks were among some of the biggest losers. Los Angeles-based First Interstate lost 1 5/8, closing at 22; Security Pacific fell 1 1/8 to 21 and Wells Fargo dropped 1 7/8 to 46 3/8.

* Among the blue chip stocks, IBM lost 1, closing at 105 3/8. Eastman Kodak fell 1 to 39 1/8, AT&T; dropped 3/8 to 31 1/2 and General Electric slipped 5/8 to 55.

* Entertainment stocks were the one bright spot. MCA, which is in merger discussions with Matsushita Electric, jumped 7 1/4 to 61 1/4. Disney rose 3/8 to 90 1/2, and Paramount climbed 5/8 to 35 1/2.

The New York Stock Exchange composite index posted a 1.68 decline, closing at 167.52. The American Stock Exchange market-value index was down 3.11 to 310.06. And the NASDAQ over-the-counter index fell 4.75 to 350.03.

Meanwhile, stock prices were up slightly in London, where the Financial Times-Stock Exchange index closed at 2,000, up a fraction from 1,999.2 on Tuesday. In Frankfurt, West Germany, the DAX index was up 28.59, closing at 1,381.99.