* Stocks finished mixed as the market struggled to keep its year-end rally on track. The Dow Jones industrials added 8.64 points to 3,321.10, but most major indexes closed slightly lower.
* Key European markets showed robust gains on new signals from Germany that interest rates could be headed lower.
* Bond yields tumbled for a second straight day, as inflation worries remained subdued despite more signs of economic revival.
* The dollar jumped on expectations for lower German interest rates. In commodity markets, lumber futures soared as a tight supply situation worsened.
Prices spiked higher at the opening bell, as buyers attempted to build on last Friday's surprise 44-point Dow rally.
But the initial gains gradually eroded, and by midday the market was in negative territory before bargain hunters surfaced.
By the close, advancing issues narrowly topped losers on the New York Stock Exchange, where volume totaled 250.43 million shares, up from Monday's 226.20 million.
Some analysts said the market's tone late in the day was improved by a rebound in beleaguered IBM, which gained 2 7/8 to 51 3/4. "At long last the market has found that IBM has two directions," said Hugh Johnson, analyst at brokerage at First Albany Corp.
"The fact that IBM showed strength encouraged bargain hunters to step into the market," added Alan Ackerman, an executive vice president at Reich & Co.
Still, most broad stock indexes were down for the day. The Standard & Poor's 500 lost 0.39 point to 440.31; the NASDAQ composite index of smaller stocks lost 1.62 points to 660.84.
Some of the decline was attributed to year-end tax-loss selling--that is, investors selling their poor-performing stocks to generate capital losses that can be used to offset gains on other issues.
Overall, many analysts were surprised by the heavy trading volume, both in the United States and in Europe. "Volume usually abates as you approach Christmas, but volume is strong, and foreign investors and small investors are taking advantage of opportunities," Ackerman said.
London and Paris stocks posted hefty gains as investors bet on a gradually improving economy in Europe in 1993. Sentiment was boosted after German central bank chief Helmut Schlesinger said that long-term German interest rates could fall below 6% eventually, from about 7.5% now, if inflation is controlled.
In London, the Financial Times 100 index shot up 34.3 points, or 1.2%, to a record 2,842.00, for the fifth consecutive gain. "Everyone and his dog are buying stocks," one London dealer said. "We're getting calls from people we haven't heard from in a year."
In Paris, the CAC-40 index rocketed 38.08 points, or 2.1%, to 1,824.37, the highest close since Sept. 25.
But in Frankfurt, the DAX index added just 7.99 points to 1,523.57.
And in Tokyo, the Nikkei average rose a mere 45.23 points to 17,690.67.
Among U.S. market highlights:
* Bank stocks led the market. Traders said some big investors want to show these stocks on their year-end statements to clients, because banks have been among the market's top performers all year.
J. P. Morgan jumped 1 3/4 to 67 3/8, Banc One zoomed 2 to 51 7/8, NationsBank gained 5/8 to 52 5/8, First Interstate rose 1/2 to 47, and Chemical Banking added 7/8 to 38 5/8.
* Industrial issues also were strong, including Eaton, up 7/8 to 80; Cummins Engine, up 1 7/8 to 78 3/8; Nucor, up 7/8 to 73 5/8; Illinois Tool Works, up 5/8 to 65, and Ford Motor, up 3/4 to 41 3/4.
* On the downside, retailers continued to pull back after a strong fall rally. Membership-warehouse firm Costco Wholesale lost 2 7/8 to 22 after reporting disappointing same-stores sales this month.
Worries that Christmas retail sales might be ebbing also hit Penney, down 2 1/8 to 74 1/2; Gap, off 1 1/8 to 33 1/4; Dayton Hudson, down 1 1/4 to 72 3/4; Authentic Fitness, off 1 1/4 to 18 3/4, and Price Co., which fell 1 3/8 to 35 1/4.
Sears bucked the trend, rising 1 1/2 to 44 5/8 on rumors that it will close 100 of its smaller stores.
* Among the day's big losers, Duty Free International, which operates duty-free stores at airports, plunged 4 1/8 to 20. It said fourth-quarter results will be below expectations because of slow sales along the U.S.-Canada border.
* Among Southland issues, personal organizers maker Day Runner tumbled 3 1/8 to 8 1/8 after saying sales and earnings in the fourth quarter won't meet expectations. It cited in part a changing mix of product sales.
Treasury bond yields fell further, though analysts cautioned that trading remained light.
The yield on the 30-year T-bond eased to 7.34% from 7.39% Monday, as the bond's price rose 18/32 point, or $5.63 per $1,000.
Yields have been edging lower for weeks, as bond traders show increasing confidence that inflation will remain subdued in 1993 even if the economy grows.
On Tuesday, 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.
Bond traders believe that the better economic reports have decreased the likelihood that President-elect Bill Clinton will pursue an aggressive economic stimulation program that could increase the federal budget deficit and spur inflation.
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.
The federal funds rate, the interest on overnight loans between banks, was 2.94%, down from 3.00% late Monday.
The dollar rose against most key currencies, strengthened by predictions from Germany's central bank chief that interest rates could fall sharply in Germany.
The comments contributed to a renewed appetite for dollars, because lower German rates would make German bonds less attractive--and could make U.S. bonds more attractive by default.
In New York, the dollar closed at 1.590 German marks, up sharply from 1.569 marks late Monday.
Elsewhere, the greenback closed at 123.75 Japanese yen, up from 123.09 yen late Monday.
The British pound was quoted at $1.537, less expensive than $1.558 late Monday.
Lumber futures prices soared on the Chicago Mercantile Exchange as wholesalers seeking supplies for the new year found little lumber available from U.S. mills.
On other commodity markets, precious metals retreated; oil futures fell; grains and soybeans were mixed, and livestock and meat futures were mixed.
Spruce two-by-fours for January delivery shot up the permitted daily limit of $5 to $268.80 per 1,000 board feet.
It was the fourth limit gain in the last six trading sessions for lumber, which has risen by $23.50, or about 9.6%, in a month.
Elsewhere, gold dropped $1.80 to $332.20 an ounce, and December silver fell 4.8 cents to $3.682 an ounce on New York's Commodity Exchange amid profit taking after last week's rally.
Profit taking also lowered oil futures prices on the New York Mercantile Exchange. Light, sweet crude oil for February delivery fell 14 cents to $19.84 a barrel.