STOCKS : Dow Off 17.66; Good Inflation News Ignored

Stocks fell in quiet trading Friday, despite an encouraging report on inflation.

The Dow Jones industrial average lost 17.66 points to 2,996.20, finishing the week down 10.06 points. A bout of computerized selling late in the day was mostly responsible for Friday’s loss.

Losing issues topped gainers by about 5 to 4 on the New York Stock Exchange, where volume slowed to 144.07 million shares from 163.89 million Thursday.

The Labor Department reported that inflation at the wholesale level dropped 0.2% in July. Excluding food and energy prices, which are often subject to sharp swings, the index was up 0.2%. Read either way, the data strongly suggested that inflation is under control, and that the Federal Reserve has room to ease credit conditions further.

The Fed this week cut interest rates to help pull the economy out of recession, and many analysts believe additional cuts are necessary to guarantee a recovery.

“The thing the market’s waiting on is a prime rate cut,” said Don Hays, investment strategist at Wheat First Securities.

Many analysts believe that the economy won’t start to rebound noticeably until the nation’s banks lower their prime lending rates and pass on the Fed’s easing to consumers. Banks last lowered their prime rates on May 1, to 8.5%.

Outside of interest rate concerns, analysts also noted that many traders left early Friday for traditional long summer weekends.

Among the day’s highlights:

* Health maintenance organization stocks plummeted after Merrill Lynch downgraded them. The decline was led by California HMOs, including FHP International, off 3 3/4 to 20 1/2. (Story and stock list, D2.)

* Another Southland health company, Community Psychiatric, tumbled 2 3/8 to 27, weighed down by talk that third-quarter earnings might not meet expectations.

* Auto stocks also declined broadly on profit worries, with GM down 1 3/8 at 38 1/8, Ford losing 1 to 31, and Chrysler falling 1/2 at 12.

* Brokerage Salomon Inc. fell 1 7/8 to 34 3/4 on word that it had discovered irregularities in connection with its bids at auctions of Treasury securities. * On the plus side, International Game Technology rose 1 1/4 to 52 3/4. The company said it was chosen to supply a system for the lottery in the Canadian province of Manitoba.

* Much of the strength was concentrated in the same stocks that have led the advance in recent weeks, as investors stayed with the strong. Harley-Davidson jumped 3 to 46 1/4, Gap Inc. added 1 1/8 to 40 3/8, computer firm AST Research rose 3/4 to 27 7/8, and Federal National Mortgage rose 1 1/4 to 60 1/4.

Overseas, London stocks tumbled as Wall Street faltered. The Financial Times-Stock Exchange 100-share index slid 30 points to 2,570.6. It hit a record high 2,601.7 a week ago. In Frankfurt, the DAX index ended a moderate session just 2.0 points higher at 1,632.21.

In Tokyo, the Nikkei average eased 47.84 points to 23,434.62.

In Mexico City, the Bolsa index inched up less than 1 point to close at 1,148.13, ending one of the worst weeks of the year. The index dropped 4.3% for the week.

Meanwhile, some South American markets continued to soar as foreign money poured in. Argentine stocks rose for an eighth straight day, as the general index of the Buenos Aires exchange jumped 3.2% to 84,513,463. In Chile, the IPSA index of the Santiago exchange closed at 248.10, up 6% for the week.

Credit

Bond yields closed mixed after the market was boosted by a favorable inflation report.

The price of the Treasury’s benchmark 30-year bond fell 1/16 point, or about 63 cents per $1,000. Its yield inched up to 8.24% from 8.23% late Thursday.

But most shorter-maturity bonds rose in price, pulling their yields down slightly as traders focused on good inflation news.

The lack of inflation at the wholesale level in July suggests the Federal Reserve will ease interest rates again, and that could mean a new rush of money into bonds to lock in yields, traders said.

The only real drag on the bond market was news that brokerage Salomon Inc. had uncovered rule violations in its bids at Treasury bond auctions in February and December. Analysts said investors were concerned that Salomon, a major bond dealer, would sell some securities as a consequence, which could depress prices.

The federal funds rate, the interest banks charge on overnight loans, was quoted at 5.375%, down from 5.625% Thursday.

Currency

The dollar finished higher against most major currencies in light trading.

The dollar closed in New York at 1.728 German marks, up from 1.714 Thursday, and at 136.55 yen, up from 136.15.

Commodities

Gold for October delivery settled at $361.10 an ounce on New York’s Comex, up $1.10; September silver climbed 4.8 cents to $3.98. Platinum for October rose $4.30 on the New York Merc to $355.20.

Also on the Merc, light, sweet crude oil for September delivery rose 4 cents to $21.62 a barrel.