* Long-term Treasury prices dipped, and yields jumped to six-week highs as traders speculated whether inflation fears would prompt the Federal Reserve to tighten monetary policy.
* Blue chip stocks eked out modest gains, as fears that renewed inflation will spawn higher interest rates weighed on the market.
* The dollar advanced against other major currencies amid speculation that U.S. interest rates soon might head higher.
Fed policy makers were scheduled to meet behind closed doors today. The proceedings won't be made public for about six weeks. But some bond market participants fear that the central bank may decide to push up interest rates to help keep a lid on inflation, which has risen to an annual rate of 4.2%.
The yield on the Treasury's main 30-year bond rose to 6.96% from 6.93% Friday. It was the long bond's highest yield since it hit 6.96% on April 6.
The long-bond's price, which moves in the opposite direction, fell 3/8 point, or $3.75 per $1,000 in face value.
Many market analysts believe that the Fed will probably sit tight when Chairman Alan Greenspan and other top bank officials meet.
But the market has been spooked by last week's government reports showing big jumps in wholesale and consumer prices, and has begun to focus on the possibility of higher interest rates, which would decrease the value of bonds.
"The market is certainly bothered by the fact inflation has gotten worse, and some fear that the Fed might start to contemplate tightening monetary policy," said William Dudley, a senior economist at Goldman, Sachs & Co.
The federal funds rate, the interest on overnight loans between banks, rose to 3.75% from 2.913% late Friday.
The market was focused primarily on the inflation outlook after last week's double-barreled blast of higher producer and consumer prices in April, analysts said.
The Dow Jones average rose 6.92 points to 3,449.93 on Big Board volume of 227.58 million shares, down from 252.91 million in the previous session.
In the broader market, declining issues outnumbered advances by about 5 to 4 on the New York Stock Exchange.
Stocks have taken their cue from bonds in recent months, and bond prices tumbled Monday on concerns about inflation, said Carmine Grigoli, chief U.S. portfolio strategist at Baring Securities.
Last week, government data showed consumer and producer prices rising more than expected in April. Inflation erodes the value of fixed-income securities such as bonds.
Low interest rates are good for stocks because companies can borrow at less cost and because they make the potential return from stocks more attractive. Because interest rates are now so low, there are few viable investment options to stocks, and that is helping to support share prices, analysts said.
Also on the economic front, investors are worried about President Clinton's ability to push his economic proposals through Congress, said James Solloway, director of research at Argus Research Corp.
A third factor depressing the market was concern over possible U.S. military involvement to halt the violence in Bosnia, Solloway said.
Among the market highlights:
* Merck rose 1 1/4 to 38 5/8, Abbott Laboratories rose 1 1/8 to 28 1/8, Glaxo rose 1/2 to 20 1/4, and Bristol-Myers Squibb rose 1/2 to 59 7/8.
Airline stocks fell. The shares had moved up in recent weeks on meager news, with no real indication that consumer demand is strong enough to bring the industry back to profitability any time soon, Solloway said.
* AMR, the parent of American Airlines, fell 1 1/2 to 70, Delta Air Lines dropped 1 to 58 3/8, and United Airlines tumbled 1 3/4 to 138 1/2.
* In other actively traded NYSE issues, Royal Dutch Petroleum dropped 1/8 to 90 1/2 in dividend-related trading.
* Time Warner rose 1 1/2 to 35 and U S West dropped 3/8 to 40 5/8 after the regional phone company said it will buy a 25% stake in Time Warner's cable and entertainment operations for $2.5 billion.
* Kmart lost 1/2 to 22 1/2 after reporting weak earnings. Lowe's rose 2 5/8 to 35 1/4 after reporting better than expected earnings.
* Xerox fell 3 1/8 to 72 1/4 after projecting disappointing second-quarter profit.
Stocks ended mixed abroad. Frankfurt's 30-share DAX average closed 6.63 down at 1,627.88, while Tokyo's 225-share Nikkei average was up 91.36 points to 20,565.51. In London, the Financial Times 100-share average ended 11.1 points higher at 2,858.1.
Currency dealers said the dollar traded near the top of its recent range and wound up the New York session well above its opening levels. There weren't any market-moving developments, but a perception that U.S. interest rates might move higher at least in the near term provided some incentive to buy dollars.
Higher U.S. rates would enhance returns on dollar-denominated investments.
The dollar moved lower against the Japanese yen in New York trading. It closed 111.30 Japanese yen, up from 110.80 yen on Friday. the dollar was quoted at 1.613 German marks, up from 1.602. The British pound fell to $1.536, compared to $1.5385 late Friday.
Meanwhile, gold prices finished mixed after surging last week on inflation concerns. On the Commodity Exchange in New York, gold for current delivery shed 20 cents an ounce to $367.50. Silver for current delivery fell to $4.403 an ounce from $4.444 on Friday.
In energy trading on the New York Mercantile Exchange, light, sweet crude oil for June delivery rose 3 cents to $19.51 a barrel.