The stock market closed out the worst week of the modern era yesterday with another 8.40 drop on the Dow Jones industrial averages to 838.01. Volume was heavy and the retreat was extremely broad.

The five straight days of decline for the Dow produced a 59.08 loss for the week - the largest weekly decline in the 93-year-history of this most closely watched of all market indexes.

Unlike past record market plunges, this week's decline was not caused by any cataclysmic event but rather from a building feeling among investors that already high interest rates may have any effect, thereby threatening a recession.

Traders reported yesterday there was wholesale dumping of stocks by some institution investors, in a mirror of the buying panic that occurred earlier this year.

"There were large pieces of stock for sale," said Jacques Therriot, a senior vice president with Smith Barney, Harris Upham. "Some accounts only wanted to hear what was on the buy side of the list, indicating that they were interested in nothing but selling. Things are always done to extremes in the market and this was another case."

The Dow was down as much as 12 points earlier in the session and mounted a mild rally in the final hour. But the analysts said this was primarily a technical rebound from the severe slide.

Volume was 43.8 million shares on the New York Stock Exchange, an increase over Thursday's turnover of 32 million shares.

More than 10 times as many stocks declined as advanced on the big board.

"These are pretty bad breadth figures," said Richard McCabe, vice president for market analysis at Merrill Lynch. "When the advance-decline figures ar so lopsided, it usually means you're getting to some climactic stage."

McCabe said the secondary stocks, which have been moving up for more than 3 1/2 years in an extended bull market advance, have been particularly hard hit.

Investors, who had been shrugging off rising interest rates all year, this week became extremely worried that the Federal Reserve Board was going to continue raising rates to much higher levels, possibly inducing a crunch and a severe recession.

The Fed after the close of the market last Friday announced a one-half point hike in the discount rate to a record 8.5 percent. This week, after a meeting of the Federal Open Market Committee, short-term money market interest rates were raised to what some analysts think is the 9 percent level. And on Thursday the Fed announced an explosive $3.8 billion increase in the money supply, a sign that higher interest rates have done nothing to bring the money supply under control.

Meanwhile, the dollar continued to hit record lows all week in spite of the discount rate boost, which would normally blster the U.S. currency, and in spite of the passage of the administration's energy bill, which many had hoped would prove a tonic for the dollar.

Some analysts, like Robert Stovall at Dean Witter Reynolds, had predicted before the week began that the market would be moving up as a result of the passage of the energy bill and, more important, the tax bill which included liberalized capital gains provisions for investors.

But instead the Fed discount rate increase proved to be the wallop that sent the market reeling for the entire week.

The market dropped 21.92 points on Monday its biggest loss in nearly four years - another 8.83 points on Tuesday, 6.67 points on Wednesday, 13.26 points on Thursday, and ended with yesterday's 8.40-point decline.

Some analysts said they expected a bounce back next week because of the extremely oversold condition of the market, but predicted that it would be only technical.They also said that investors may decide to stick to the sidelines on Monday, waiting for the administration to announce the second phase of its anti-inflation program on Tuesday.

But most of the elements of the package have already been floated in the press, and investors appear to have discounted the guidelines program in advance as toothless.

"Investors are fearful that monetary policy and thereby higher interest rates are going to be the only inflation fighting tool that's going to be used or will have any effect," said Loeb Rhoades Hornblower research director Gary Helms.

On the NYSE, gambling issues continued to be active and were mainly lower. Airline issues, which also had been on a recent speculative binge, continued their subsequent fall back with Pan American World Airways down 1/4 to 7, Eastern Airlines down 5/8 to 9 3/4 and Trans World Airlines down 1/2 to 19 1/2.

Warner Communications was down 3 5/8 to 41 3/8 after the Wall Street Journal reported that two company officials have been accused of taking a bribe that is linked to a Mafia figure.

Memorex, which had disappointing third quarter earnings, continued its drop with a 1 3/8 loss to 36.

The American Stock Exchange index was down 5.78 to 152.32, an extremely sharp dropoff onthis index and an indication of the severity of the decline for smaller capitalized secondary stocks.

The NASDAQ composite index for the over-the-counter market closed at 123.82, off 3.40.