Rising interest rates hit the stock market over the head with a sledge hammer yesterday.

The Dow Jones average of 30 industrial stocks plunged 21.92 points to close the day at 875.17, just above its low for the day. The drop was the 13th largest in history for the Dow and the biggest decline since Nov. 18, 1974, when it retreated by 22.69 points.

Volume was a moderate 24.7 million shares, up slightly from Friday's turnover of 21.9 million shares on the Big Board.

"All year, the market has held up well in the face of rising interest rates," commented E. F. Hutton analyst Newton Zinder. "But maybe the latest increase in the prime to a double-digit rate and the increase by the Fed in the discount rate to a record 8.5 percent was the proverbial straw that broke the camel's back."

After the market closed Friday, the Federal Reserve Board announced a half-point increase in the discount rate, the interest it charges member banks. It was the sixth boost this year.

Analysts said the size of the increase took many people by surprise and was taken as an indication that the Fed would continue tightening short-term rates to wring inflation out.

Furthermore, the dollar's continued decline against the German mark to all-time lows despite a realignment of European currencies and the higher level of U.S. interest rates also depressed investors who are tired of hearing that the dollar has bottomed out.

Japan yesterday announced its third largest monthly trade surplus ever, adding to concern that the world's trade imbalance has yet to begin to turn around.

Leon Cooperman, head of the investment policy committee at Goldman Sachs, called yesterday's drop "a technical correction" in response to six weeksof rising interest rates, and said the probable downside for the Dow industrials is now around 800 to 825.

"The market got itself disconnected from interest rates, and now it is reconnected," said Cooperman.

The market has two concerns about interest rates. One is that a continuing ratcheting up of the rate level eventually will produce a recession, perhaps a sharp one. Second is that higher interest rates traditionally lure money out of the stock market into high-yeilding, fixed-income investments.

Yesterday's retreat was extremely broad. On the New York Stock Exchange, 1.368 issues dropped while only 213 advanced. The broad NYSE index dropped 1.13 points to 57.80.

E-Systems, with a sharp drop in third-quarter earnings, dropped 1 3/8 to 27 1/8 on the NYSE. Virginia Electric Power was active but unchanged at 14 4/8. LTF Corp., which entered into a consent decree with the Securities and Exchange Commission on violations of the reporting provisions of the securities laws, was down 1/2 to [WORD ILLEGIBLE] Joseph Schlitz Brewing was down 1 to 12 1/2 on lower third-quarter net.

On the American Stock Exchange, the index was down 2.96 points to 167.33. Only 144 issues were higher, while 556 declined.

Resorts international was active on the Amex, ahead 1 to 46 1/2. The Amex removed the 100 percent margin requirement it had imposed when the stock was rising sharply for an extended period recently.

In the over-the-counter market, the NASDAQ composite index closed off 1.64 points to 133.94.