Interest rates on short-term borrowing by the U.S. Treasury yesterday surged to a record 10.531 percent.

That was the average return to investors bidding to buy 13-week Treasury bills, the department said. The return shot up from 9.855 percent last week, far surpassing the record of 9.930 percent set on Aug. 26, 1974.

Meanwhile, the Commerce Department reported that retail sales in August, paced by an increase in purchases at gasoline stations, rose 0.7 percent to a seasonally adjusted $72.8 billion.

And the Federal Reserve Board said that the total mount of consumer installment credit outstanding rose by $2.44 billion in July on a seasonally adjusted basis, compared to a rise of $2.56 billion in June and $3.73 billion in May.

The big increase in yields to investors in Treasury bills came in the wake of moves by the Federal Reserve to boost interest rates generally in an effort to slow down the expansion of credit and cool inflation.

Fed governor Nancy Teeters, speaking at an economic forecasting conference of the Federal National Mortgage Association here, called the outlook for both prices and unemployment "truly discouraging."

Officially, the Fed has predicted a shallow recession and slow recovery beginning early next year, with unemployment rising by 0.3 to 0.5 percentage points each month for a while. The unemployment rate jumped from 5.7 percent to 6 percent in August, it was reported last week.

Teeters said the current situation "makes policy formulation very difficult" because there is "no clearly right policy to follow" in terms of monetary decisions. Any easing of interest rates probably would lead to a "severe decline in the value of the U.S. dollar" because of reaction in international exchange markets.

For the present, however, the Fed has tightened its policies to the point that major banks across the country are now charging their most-credit-worthy customers 12 3/4 percent interest on loans. Many observers expect this prime rate to reach 13 percent shortly.

For the Treasury, its new 26-week bills carried an average return of 10.294 percent, up from 9.775 last week. The new rate means that banks and savings institutions, beginning Thursday, can pay a rate of 10.294 percent on the so-called money market certificates they issue in minimum $10,000 denominations.

The Commerce Department also issued revised retail sales figures for July showing a 0.7 percent rise equal to that for August. Earlier a 0.4 percent increase had been reported.

After adjustment for inflation, however, retail sales in August were still more than 7 percent below the level of last December, analysts estimated.

Excluding automotive stores, sales rose 0.8 percent to a total of $59.4 billion. Sales at grocery stores declined very slightly, probably reflecting a drop in retail food prices last month.

In July, consumers borrowed $26.85 billion in new installment credit while repaying $23.58 billion. At the end of July, consumer installment credit outstanding reached $295.05 billion, up 16.2 percent from a year earlier.