Mounting caution by businessmen in the face of the fast-deepening recession prompted American companies to pare back their inventories slightly in May, the government reported yesterday.

Although the decline was only 0.1 percent, it nevertheless marked the first month that inventory levels have dropped since December 1975, in the wake of the 1974-75 recession.

Analysts said executives most likely were wary that the recent plunge in sales might leave them with overly heavy volumes of unsold stocks -- a situation that worsened the impact of the 1974-75 slump.

The figures came as the nation's second-largest bank, Citibank of New York, announced another quarterpoint drop in its prime lending rate in response to continuing sluggishness in demand and reductions in other interest rates.

The move, which put Citibank's prime at 11 1/4 percent, from 11 1/2 percent previously, was expected to be followed by other major banks. The prime is the interest rate banks charge their most creditworthy corporate customers.

Meanwhile, the Federal Reserve Board reported that the nation's basic money supply, known as M1-A,, remained virtually unchanged during the week ended July 2, dropping by $500 million from the previous period to a new level of $371.1 billion. (See table on D11.)

The board said a somewhat broader measure of the money supply, known as M1-B, also held virtually steady, edging down by $400 million to a new level of $391 billion. M1-B also includes other checkable deposits at banks and thrift institutions.

The Fed also disclosed yesterday that, as part of its efforts to fine-tune its earlier restraint effort, the board's policymaking Open Market Committee voted last May to lower the target range for the key federal funds rate.

Minutes published yesterday showed that at its May 20 meeting, the FOMC agreed to hold the federal funds rate to between 8 1/2 percent and 14 percent -- substantially below the 10 1/2 percent-to-19 percent range set on May 6.

The federal funds rate is the interest rate banks charge each other for overnight loans. It is a key policy indicator to which other short-term interest rates are pegged.

In line with the same adjustment effort, the FOMC also voted to raise its short-term growth targets for the various monetary aggregates, which had been increasing less rapidly than the board intended.

The new targets are 7 percent to 7 1/2 percent for M1-A, which comprises currency and demand deposits; 7 1/2 percent to 8 percent for M-1B; and 8 percent for M-2, which includes Euro-dollars and small time deposits at commercial banks and thrift institutions.

The Fed has been trying to push more available reserves into the banking system to help offset the slumping economy, while at the same time preventing the money supply from surging out of hand.

The central bank's earlier restraint efforts had dampened the growth of the monetary aggregates somewhat more severely than officials had intended. Congress has been asking the Fed to move up toward the center of its targets.

Separately, the New York Federal Reserve Bank reported that commercial and industrial loans by the nation's large banks rose $1.218 billion during the week ended July 2, reversing a $102 million decline the previous period.

The New York Fed also estimated that net borrowed reserves at the nation's commercial banks averaged $385 million in the week that ended on Wednesday, up from a scant $70 million the previous week.

The figures on business inventories showed overall inventory levels down $425 million in May to a seasonally adjusted $445.1 billion, compared to a revised increase of $6.2 billion, or 1.4 percent, the previous month.

The decline was mostly at the retail and wholesale levels, where stockbuilding fell by 0.6 percent and 0.4 percent respectively. Manufacturers' inventories edged up 0.2 percent after soaring 1.7 percent in April.

However, the falloff in inventory levels came in the face of a sharp 1 percent decline in sales. As a result, the closely watched inventory-to-sales ratio stood virtually unchanged, with stock levels totaling 1.52 months' sales.