The stock market took heart today from another prime rate cut and a sharp decline in the money supply and prices soared.

The Dow Jones Average jumped 19.88 points to 992.66.

Analysts said that stock prices seem to be poised for another assault on the Dow average's 1,000 milestone, a barrier it crossed briefly on Nov. 20 during the investor elation that followed the presidential victory of Ronald Reagan.

Today's climb in the Dow average of 30 industrial stocks was the biggest one-day increase since Dec. 22. The 992.66 close was the highest since Nov. 28 when the average ended at 993.34.

Analysts said that the sharp rise in the Dow average overstated the increase in stock prices in general. While the Dow average rose 2.04 percent, the broader New York Stock Exchange index was up 0.82 point to 79.08, a gain of about 1 percent.

Nevertheless, most stocks gained in price today, with those advancing in price leading those falling in price by 1,341 to 418 on the New York Stock Exchange.

Morgan Guaranty Trust Co., the nation's fifth-largest bank, announced that it would cut its prime lending rate to businesses from 20 1/2 percent to 20 percent. The bank announced the drop about the same time the 10 a.m. bell sounded to open trading on the New York Stock Exchange today.

Minutes earlier the Federal Reserve Board reported that the money supply declined a sharp $2.5 billion. In an effort to restrain money growth to fight inflation, the Federal Reserve Board had pushed interest rates to their highest levels in modern history. The high rates not only have choked off some of the economic rebound apparent in the fall, they also made it more expensive to buy stocks on credit and more attractive for many would-be stock purchasers to invest in high-yielding, riskless investments such as Treasury bills.

Stock prices surged at the opening bell and the Dow average was up 11.26 points by 10:30 a.m. Prices rose steadily until early afternoon. The Dow had increased more than 18 points by 1 p.m. Prices then began to retreat, but heavy buying near the bell sent stock prices up about 5 points in the final half-hour of trading.

Trading volume on the New York Stock Exchange, which has been light in recent weeks because of the Christmas and New Year's holidays, rebounded strongly today. About 59 million shares of stock were traded on the NYSE today, compared with 28.9 million shares on Friday.

Over on the American Stock Exchange, the index rose 1.67 points to 357.27.Stocks gaining in price outnumbered stocks falling in price by more than 2 to 1 on the American Exchange.

International Business machines, which said it is lowering the price on its newest version of "Selectric" typewriters by 12 percent, increased 1 1/4 to 70 3/8 a share. The Aluminum Company of America rose 2 1/8 to 62 3/4, while Morrison-Knudsen, Alcoa's new partner in a joint venture in residential and commercial real estate project near Denver, fell 5/8 to 44 3/4.

The NASDAQ composite index for the over-the-counter market closed at 204.17, up 0.62 point.