Blue chip stocks shot higher in the closing minutes of trading, pushed up by selective buying in a handful of big name stocks such as International Business Machines Corp. and American Telephone & Telegraph Co.
* A report that the Federal Reserve stands ready to raise interest rates to check inflation provoked a sharply mixed reaction in the Treasury market. The yield on the key long bond went sharply lower.
* Gold had a volatile day, falling sharply in New York after rallying in Europe and Asia.
The stock market was also bolstered by the bond market and by a drop in gold and silver prices as evidence that inflation could be waning.
The Dow Jones industrial average rose 14.95 to 3,507.78.
Declining issues were about even with advancers on the New York Stock Exchange. Big Board volume totaled 196.73 million shares, down from 273.28 million on Friday.
"Sentiment overall is on the cautious side," said Alfred Goldman at A. G. Edwards & Sons. "I would not say bearish. Cautious and certainly not bullish."
Analysts attributed the light volume to lingering concern that the Federal Reserve may raise interest rates to cool inflation pressures.
Hugh Johnson, chief investment officer at First Albany, said strength in some cyclical stocks including auto, airlines and chemicals was a sign of modest optimism about the prospects for the economy.
Several waves of computerized buy programs lifted the Dow Jones industrials higher. Buy programs added about 7 points to the Dow in the last 10 minutes of trading.
Traders also pointed to a drop in gold and silver prices as evidence that inflation could be waning.
While that was supportive for many stocks, gold stocks fell in sympathy with gold prices, with ASA Ltd. down 1 3/8 to 48 5/8 and Newmont Gold off 5/8 to 43 3/8.
Among the market highlights:
* The inflation jitters sent some consumer stocks lower. Pepsico led the most actives on the NYSE, falling 3/8 to 36 1/2.
* Kellogg slipped 2 3/4 to 53 7/8 after the company said its second-quarter earnings per share would be about 10% below the record 68 cents per share achieved in the second quarter of 1992. And General Mills fell 2 to 67 3/8 after announcing that it would take a 28-cent to 30-cent per-share restructuring charge.
* IBM rose 1 3/8 to 49 3/4 in active trading. The company said it will issue $3 billion of long-term debt and preferred stock during the next nine to 12 months.
* AT&T; finished up 1 3/8 to 60 1/2. The company introduced technology that expands the use of touch-tone telephones for banking transactions, ticket purchases and other services.
* Dresser Industries rose 7/8 to 22 3/8. The company said its second-quarter net earnings rose to 28 cents per share, before a special charge, from 10 cents.
* Dow Chemical rose 1 1/4 to 56 after PaineWebber upgraded its rating of the stock.
* In NASDAQ trading, technology stocks shone. Tele-Communications Inc. Series A stock advanced 1 1/4 to 21 7/8. MCI rose 1/4 to 51 1/4 after declaring a 2-for-1 stock split.
* Circus Circus rose 2 1/2 to 55 after winning site approval for a gaming facility in Mississippi, in conjunction with ITT Sheraton and Horseshoe of Las Vegas.
In overseas trading, Frankfurt's 30-share DAX average shed 7.55 points, to end at 1,603.04. In Tokyo, the 225-share Nikkei average finished 81.31 points lower at 20,476.16. London's Financial Times 100-share average gained 13.4 points to close at 2,825.6.
The policy shift last week by the Federal Reserve Board , reported in the Wall Street Journal on Monday, helped assuage much of the market's recent anxiety that inflation could get out of control.
At the same time, however, market participants grew fearful that any tightening by the central bank would batter the value of short-term interest rates.
Demonstrating that concern, yields on short-term maturities in the secondary market, where newly sold securities are traded, soared and their prices fell.
But the yield on the benchmark 30-year Treasury bond edged just below 7.00% from 7.04% late Friday, pushing its price up half a point, or about $5.00 per $1,000 in face amount. Its price moves in the opposite direction from the yield.
The divided response in the Treasury market reflected how the character of fixed-income securities can differ with their maturities.
Higher interest rates on new securities would hurt the value of already sold bonds. But shorter-term interest rates stand to sustain the biggest losses from a tightening because the central bank targets short-term rates to carry out its monetary policy.
Long-term bonds, meanwhile, are more sensitive to inflation increases that can erode their value over many years, until the bond's principal comes due. Their prices fell sharply in the last two weeks on a rally in gold prices, an unexpected spurt in consumer and producer prices in April and a sharp rise in the nation's money supply in early May.
On New York's Commodity Exchange, gold for current delivery sank $3.60 an ounce to $373.90. Silver prices behaved similarly; it rose overseas before retreating in the United States. Silver for current delivery fell to $4.535 an ounce from $4.669.
Meanwhile, light, sweet crude oil for July delivery fell 16 cents on the New York Mercantile Exchange to $19.72 a barrel.
In currency trading, the dollar gained against other major currencies as speculation that U.S. interest rates might move higher sparked buying.
In New York, the dollar rose to 110.60 yen, up from late Friday's 110.35 yen. The greenback settled at 1.637 German marks, up from 1.627 narks.
Market Roundup, D10