* The stock market managed to put its year-end rally back on track, propelled by a rebound in IBM shares.
* The government's 30-year bond shot up, sending yields lower on further evidence that the economy is improving but slowly enough to allay fears that the recovery may bring inflation.
Trading began with a jolt as prices spiked higher at the opening bell. Analysts said the market was poised to continue building on Friday's 44-point run-up in the Dow.
But the initial gains gradually eroded, and by midday the market was in negative territory before bargain hunters surfaced, ensuring a higher finish.
The Dow Jones average added 8.64 to close at 3,321.10 on Big Board volume of 250.43 million shares, up from the previous session's 226.20 million shares.
Advancing issues narrowly outnumbered declining ones on the New York Stock Exchange.
"There was no profound message from the market today, no event that drove trading," said Hugh Johnson, a senior vice president at First Albany Corp.
He and other analysts credited the rise in the price of IBM with supporting the market. IBM, which has been hammered lower for months, rose 2 7/8 to 51 3/4 in heavy trading.
"At long last the market has found that IBM has two directions," Johnson said.
"The fact that IBM showed strength encouraged bargain hunters to step into the market," said Alan Ackerman, an executive vice president at Reich & Co.
Still, trading was somewhat volatile, as illustrated by the Dow's downward dip around midday.
Some of the decline was attributed to tax-loss selling, where traders sell stocks at a loss in order to offset gains on other issues.
Trading was particularly active. "Volume usually abates as you approach Christmas, but volume is strong, and foreign investors and small investors are taking advantage of opportunities," Ackerman said.
Among the market highlights:
* Sears, which refused to comment on a report that it will close 100 of its smaller stores, jumped 1 1/2 to 44 5/8.
* Duty Free International plunged 4 1/8 to 20; the company said fourth-quarter results will be below expectations.
* Digital Equipment, which announced that it was splitting into nine divisions, was unchanged at 31 1/8.
* Many banking issues displayed strength. Among them, Chemical Bank was up 7/8 to 38 5/8; Chase Manhattan Bank rose 7/8 to 28; J.P. Morgan added 1 3/4 to 67 3/8, and Citicorp was up 1/4 to 20 3/8.
* Elsewhere, Kmart slipped 1/2 to 24 1/4; National Health Laboratories gained 1/2 to 17 1/8; Wal Mart fell 5/8 to 63 1/4, and Unisys, whose rating was lowered by an analyst, slipped 5/8 to 10 1/8.
* Costco Wholesale lost 2 7/8 to 22 after it released disappointing same-stores sales for December.
* Eagle Hardware rose 2 1/4 to 24. Alex. Brown upgraded its rating to buy from neutral.
* Cirrus Logic slipped 1/2 to 33 3/4. It plans to merge with Pacific Communication Sciences Inc., a move that will dilute Cirrus' issued capital.
Overseas, the London stock market ended on a new closing high. The Financial Times 100-share average ended the day 34.3 points higher at 2,842.0. In Frankfurt, the 30-share DAX average ended 7.99 points higher at 1,523.57. In Tokyo, the 225-share Nikkei average rose 45.23 points to 17,690.67.
The long bond's yield, which falls when prices rise, was 7.34%, down from 7.39% late Monday, as its price rose 18/32 point, or $5.63 per $1,000 in face amount.
The government reported that the nation's economic output during the July-September quarter rose 3.4%, the best showing in nearly four years. The report was consistent with expectations.
In addition, the Business Cycle Dating Committee of the National Bureau of Economic Research, the official arbiter of the beginning and end of recessions, said the economic slump ended in March, 1991, eight months after it began in July, 1990.
Usually, the bond market reacts negatively to good economic news because it could mean higher inflation. But recent reports on the economy's improved condition have helped the market. They have decreased the likelihood that President-elect Bill Clinton will pursue an aggressive economic stimulation program that could increase the deficit and spur inflation, which erodes the value of bonds.
The improvement in the economy is "not dramatic and won't lead to higher inflation," said William Sullivan, director of money market research at Dean Witter Reynolds Inc. He also said the economic growth seems to be moderate and "consistent with stable if not slightly lower interest rates." Lower rates help the bond market.
Adding to the impression that the recovery is modest, Sullivan said, was a report Tuesday by Johnson Redbook, a weekly retail sales analysis, showing sales in the first three weeks of December down 4.3% from November.