Stock and bond prices were battered by two moderate selling waves yesterday: a morning hangover that was diagnosed as adverse reaction to money-supply and credit-tightening fears, and an afternoon selloff that accelerated after Citibank increased its prime lending rate for top business customers.

By the close of trading on the New York Stock Exchange, the average price of a common share had declined 58 cents and the exchange's index of all stocks was down 1.38 points to 68.01. The broad Wilshire Associates index of 5,000 common stocks declined 2 1/4 percent, while the narrower Dow Jones average of 30 NYSE industrial stocks declined 19.41 points, or 2.23 percent, to 851.69.

Overall, it was the biggest one-day decline for stocks in five months. Just last Thursday, stock prices had gained more than in any one day for the past 10 months. Most analysts expect this nervous, erratic trading pattern to continue.

Gail Winslow, vice chairman of the Washington investment firm of Ferris & Co., described the market decline as natural in the wake of news reports studied by investors over the weekend. "If you take a red pen and a blue pen, and circle good news with blue and bad news with red, and there are more red circles, you can guess the market goes down," she said. "There were more red circles yesterday."

Specifically, Winslow and other market analysts pointed to a more thorough look at the December rise in leading economic indicators reported last week, which is expected to be followed by a decline for January because of severe weather conditions and continued recession.

Julius Westheimer, a partner in the Baltimore firm of Baker Watts & Co., said yesterday's market decline probably reflected the scheduled heavy Treasury borrowings this week--three offerings totaling $10 billion today, Wednesday and Thursday--as well as indications the Fed had moved over the weekend to tighten credit after a smaller-than-expected drop in the erratic money supply for the latest week.

Based on these developments, interest rates in the credit markets rose sharply: Short-term Treasury bills rose by 40 to 60 basis points ( a basis point is one one-hundredth of a percentage point). Prices for long-term government bonds fell as much as $15 for each $1,000 of face value (bond prices move in the opposite direction of interest rates), and corporate bond issues were off about a half point.

After absorbing these developments, the stock market seemed to level off after noon yesterday until Citibank boosted its prime rate to 16 1/2 percent from 15 3/4 percent. Although money market analysts had said for two weeks that interest costs would force a prime rate increase, it was "a pretty stiff amount," in the words of Winslow.

Volume on the NYSE was 48 million shares compared with 73.4 million shares last Friday. Nationwide trading of NYSE shares on all exchanges and in the over-the-counter market totaled 55.42 million.

Analysts said that much of the activity yesterday represented profit-taking, where active traders sell stocks purchased at lower prices if they think the market has hit a temporary high point.

Of NYSE issues traded yesterday, 1,149 declined, 398 advanced and 315 were unchanged. The pattern was similar in other markets: Over-the-counter trading showed 290 issues up, 950 down and 2,130 unchanged as the National Association of Securities Dealers market index declined 1.57 points to 186.82. On the American exchange, 400 issues declined, 182 advanced and 202 were unchanged, with the Amex index off 8.28 points at 287.38.

Area rail stocks were mixed, with Southern of Washington up 50 cents to $91.13 and Roanoke-based Norfolk & Western up 75 cents to $50.38. The two firms, which are planning a merger, reported record profits for 1981. CSX Corp. of Richmond, owner of the Chessie and Seaboard rail systems, fell $1.13 to $55.

MCI Communications of Washington was most active in the OTC market, unchanged at $31.88 on a volume of 360,400 shares.