FINANCIAL MARKETS : Dow Drops 33.65 Points on Surge in Wholesale Prices

Renewed inflation fears gripped the financial markets Friday after a sharp jump in August wholesale prices, sending stock prices sharply lower and long-term bond yields to a two-month high.

The news prompted piles of sell orders on Wall Street and sent the Dow Jones industrial average down 33.65 points to close at 3,874.81. It was the biggest one-day decline since June 30 and put the best-known stock average barometer back to its levels of mid-August. For the week, the blue chip average lost a modest 10.77 points.

At one point in the afternoon, the Dow was down more than 50 points, prompting automatic restrictions on high-volume computerized trading. A bounce in the last hour helped trim the losses.

In the broader market, declining shares outnumbered advancers by 3 to 1 on New York Stock Exchange volume of 294.32 million shares.

In the Treasury bond market, the bellwether 30-year bond, whose yield stood at 7.56% on Thursday, closed at 7.70% on Friday. It was the bond’s highest yield since it shot up to 7.73% on July 11, the peak of the Treasury bear market that began in February. Its price, which falls when yields rise, dropped 1 5/8 points, or $16.25 per $1,000 in face value.

The dollar fell against most major currencies, as investors worried that a new round of inflation would erode its buying power. In New York, the dollar closed at 99.20 Japanese yen from 99.50 on Thursday, and at 1.538 German marks from 1.556.

The Labor Department reported a surprisingly big 0.6% jump in the producer price index, following a strong increase of 0.5% in July.

The increase “very much supports the view” that the Fed will raise short-term interest rates again within the next few months to cool the economy and keep inflation from skyrocketing, said Michael Moran, chief economist at Daiwa Securities in New York.

The report “was a cold shower,” said Paul Kasriel, money market economist at financial services giant Northern Trust Co. in Chicago. “It certainly has sensitized the market to the view that maybe inflation is not going to be quite as tame or move up quite as gradually.”

Among the market highlights:

* USAir Group Inc. ended off 1/2 to 6 1/8. The crash of a USAir jetliner outside Pittsburgh could lead travelers to fly on other airlines, analysts said.

* Mercantile Stores jumped 7 5/8 to 54 1/2, adding to a gain of 6 5/8 on Thursday. It said it is in talks with a third party, which it did not identify, regarding a possible merger.

* Xyplex, which makes and supports high-performance data-communications networks, surged 9 1/2 to 27 3/4 after a $28-a-share takeover offer from Raytheon Co.

* Transportation stocks were broadly lower. Federal Express fell 1 3/8 to 69 1/4 and trucking company Roadway Services lost 1 to 60 3/4 on the Nasdaq.

* Financial stocks, sensitive to interest rates, were also among Friday’s losing issues. Morgan Stanley declined 2 1/4 to 65 7/8 and Chase Manhattan Bank was down 1 to 36 1/4.

* Microsoft dropped 1 1/16 to 56 7/8 after an executive of the software company said it plans a 50% increase in research and development spending, prompting some investors to fear profit erosion.

* Qualcomm gained 1 7/16 to 24 11/16. Shares of the maker of digital wireless communications gear rose for the second day after long-distance company Sprint said it will use Qualcomm’s technology.

* American Mobile Systems rose 1/2 to 11 after it reported that Nextel, a provider of mobile services, made a buyout offer equaling $10.80 per share.

Meanwhile, stocks closed lower in foreign trading. London shares collapsed during the afternoon session, with the FTSE-100 average closing down 40.7 points at 3,139.3. That was 83.4 lower from a week ago.

In Frankfurt, the blue chip DAX-30 average closed 12.78 points up at 2,185.15. In Tokyo, the Nikkei-225 average closed down 19.90 points at 19,897.88, a fall of 755.95 points on the week.

Mexico City’s Bolsa index finished down 6.81 points at 2,755.35.