An early rally of the dollar yesterday was reversed by Middle East selling so that U.S. currency finished mixed against major currencies in European trading, dealers said.

The dollar moved higher against all currencies in the early morning, reflecting news of a tentative settlement of the U.S. coal strike.

Also initially aiding the dollar was the Bank of Japan decision of lower its discount rate 0.75 point to 3.5 percent and to impose further controls on purchases of yen by nonresidents.

However, the dollar started to turn down at mid-morning.

Dealers said dollar selling originated in the Middle East, where operators obviously were concerned about the political implications of Israel's air and ground strikes against Palestinian forces in southern Lebanon.

Most affected by the Israeli incursion into LEbanon was the Swiss franc. After opening higher, the dollar fell progressively during the day to end at 1.9370 francs, down from 1.9458 Tuesday.

However, the dollar also dropped against the yen to 232.80 from 232.90 after trading as high as 234.75 in the morning. A dealer said the yen strengthened because of very large commercial order, which evidently wasn't related to an investment in yen.

After trading as high as 2.0630 deutschemarks, the dollar fell back to 2.0492 at the end of the day for only a small gain from Tuesday's late level of 2.0430. Dealers said the Bundes-Bank didn't intervene very much. At the Frankfurt afternoon foreign exchange fixing of 2.0532 marks, the German central bank absorbed a token $6.1r million.

In Brussels, the Belgian national bank cut its discount rate a half point to 6.0 per cent effective today. The dollar finished at 31.91 Belgian francs, up from 31.84.

Elsewhere, the dollar remained little changed against the French franc at 4.7315.

However, sterling eased to $1.9072 from $1.9145. A dealer said "the Bank of England seems to buying quite a few dollar recently so naturally the market is suspicious.