Stock prices suffered their third serious setback in a row in the heaviest trading day in history on both the New York and American Stock Exchanges.

Stocks rallied during the last two hours of trading, however. The Dow Jones Industrial Average, which was down nearly 25 points at 2 p.m., was down 8.27 points at the 4 p.m. close of trading on the New York exchange.

That, however, was a far cry from the 26.45 points the Dow index lost Tuesday or the 13.57 declone on Monday. Last Friday the Dow closed at its year's high of 897.61. Today the Dow closed at 849.32.

Market analysts attributed most of the decline in prices to investors' fears of the Federal Reserve Board's new tight monetary policy, which is expected to reduce bank lending, sharply raise interest rates further and trigger a serious recession.

Undoubtedly, many investors also were "psyched out by the October syndrome," said Newton Zinder of E.F. Hutton and Co. Last October, the Dow index fell more than 100 points in two weeks. Fifty years ago, in late October 1929, the market hit its first crash that marked the beginning of the Great Depression.

Trading was heavy all day, and at some points the high-speed New York Stock Exchange tape was running more than an hour late. The tape had never run later than 35 minutes since it was installed in 1964.

Final volume for the day on the NYSE was 81-62 million chares. The previous record trading day was 66.3 million shares on Aug. 3, 1968.

The lateness of the tape and the heavy trading suggests that both institutions and individuals were selling heavily, especially in early trading. i

"A 100-share trade takes up just as much time on the tape as a 10,000-share trade," one analyst noted.

Because rising interest rates make it increasingly expensive for individuals to buy stocks on margin (that is to borrow from their broker some portion of the cost of the stock), individuals may have decided to bail out today after losses on Monday and Tuesday, another analyst suggested.

"You can ignore rising interest rates when stock prices are rising as they have been most of the year," Zinder said. But when prices start to fall at the same time the interest brokers charge their customers rises, selling will increase.

Many large banks raised their broker loan rates a percentage point or more Tuesday at the same time the banks raised their prime lending rate to corporate borrowers.

Brokers generally borrow funds from banks, add several percentage points to the loan and re-lend to customers who maintain so-called margin accounts. Margin account interest rates are now near 17 percent.

As on Tuesday, few industries or stocks escaped a decline. Only 131 stocks rose in price today, while 1,658 declined. On the American Stock Exchange, 49 issues advanced and 766 declined.

The American Exchange also had a record trading day, as 13.23 million shares changed hands. The previous record was 11.4 million shares on Dec. 31, 1969.

But both exchanges recorded their lows for the day around 2 p.m. and prices began to rise as investors saw chances to buy some bargains. The recovery first became apparent among what are commonly called "blue chips," the richest and best-capitalized companies.

Texaco Inc., one of the most active on the New York Exchange, closed at $29.625 a share, down 25 cents. It had been much lower in earlier trading.

Other active stocks, such as IBM -- which is in the midst of trying to sell $1 billion of notes and debentures -- also closed below their Tuesday closing price but above their lowest level of the day.

One of the few companies to gain was CBS, closing up 75 cents a share at $50. The company announced today that it would enter the motion pictures business.

Hutton's Zinder said the rally near the close of trading today may mean that the stock market has reached the end of the decline triggered by the Federal Reserve actions.

In large part, the panic selling of stocks this week reflects investor uncertainty about whether the tight-money policy will result in a serious recession. In general, however, recessions have been good for stock prices, after an initial decline when slower economic grwoth results in lower corporate earnings.

However, one analyst cautioned, while the market might have over-reacted to the new Fed policy this week, the grounds for a strong recovery are not there yet until investors can see whether the Fed is successful in its latest try at reducing inflation.

The New York Stock Exchange index was down one point at 59.53. It fell 2.05 on Tuesday.

The american Stock Exchange index was off 7.50 today, closing at 212.65. It fell 12.26 Tuesday.

Like the Dow Jones Industrial Average, the American index hit its yearly peak last Friday, when is closed at 235.15.

In the over-the-counter market, the National Association of Securities Dealers NASDAQ index closed down 5.89 at 139.31.

At least one new stock issue was postponed because of the hectic market situation. Montana-Dakota Utiltities Co. said it would defer temporarily an 850,000-share offering scheduled for today. The company set no new sale date.