Industrial production tumbled another 0.8 percent last month as manufacturers continued to slash their output of cars, business equipment and the materials that go into them, the Federal Reserve reported yesterday.

It was the largest drop in the last six months and clear evidence that the recession is not over.

Separately, the Labor Department said producer prices for finished goods rose a seasonally adjusted 0.5 percent, almost entirely because of the end of rebates offered in September on many 1982-model cars and trucks and increases in sticker prices for the 1983 models.

The prices on finished goods other than cars and trucks rose only about 0.1 percent, the department said. A 0.2 percent drop in consumer food prices offset some other increases, including a sharp 11.8 percent rise for tobacco products.

The October decline in the index of industrial production, which covers the output of the nation's factories, mines and utilities, was the 13th in the last 15 months. The index is now 11.4 percent below its peak in July 1981, the Federal Reserve said.

Automobile assemblies dropped significantly last month to an annual rate of 4.7 million units from the 5.5-million-unit rate of both August and September, the Fed reported.

A number of economists, both in government and in the private sector, now expect a decline in gross national product this quarter.

Jerry Jasinowski, chief economist of the National Association of Manufacturers, called the October fall in production "a warning that the recovery may not start unless we see a sharp reduction in interest rates."

The Federal Reserve's top policymaking group, the Federal Open Market Committee, met yesterday to set a monetary policy course for the next several weeks. As usual, no announcement was made of the FOMC decisions.

In a Boston speech last night, Fed Chairman Paul A. Volcker declared, "I am well aware interest rates are still historically high, and that it is not yet clear that a broad-based recovery is underway. Obviously, in the circumstances, further reductions in interest rates would be welcome.

"But we also want to be sure that lower rates can continue so that the recovery will last," Volcker said. "Therein lies the challenge for economic policy -- and for monetary policy specifically: We need to combine recovery with further progress toward [price] stability or we would risk losing both."

Volcker gave no details of how the Fed will try to meet that challenge in the short run. He said the Fed is pursuing its money growth targets with "flexibility and judgment."

Then he added, "What we do not have the flexibility to do is to abandon broad guidelines for monetary and credit growth as a means of judging policy over a period of time. The danger of creating excess liquidity is not so much immediate, when there is so much surplus capacity and unemployment, but rather when the economy begins to regain forward momentum."

Economist Lawrence Kudlow of the Office of Management and Budget made the same point in a briefing for White House staff aides Monday. Bank reserves and the monetary aggregates have grown rapidly over the last three months, Kudlow said. These trends "are likely to raise serious doubts over the sustainability of the inflation progress of the past two years," he said.

An administration official yesterday described the Fed as being "caught between a rock and the hard place." Any attempt to slow the growth of reserves and of money likely would mean higher interest rates, but at some point the Fed will be forced to be less generous and at that point rates will have to rise anyway, he said.

In the 12 months ended in October, producer prices for finished goods increased 3.6 percent -- less than half the 7.4 percent rise over the course of the previous 12 months. Consumer food prices went up 1 1/2 percent in the last year.

Energy prices fell 0.1 percent last month as a 1.3 percent decline in gasoline prices and a 0.9 percent drop in natural gas prices overcame a 1 percent rise in heating oil costs.

Meanwhile, prices for intermediate goods such as flour, lumber and similar products that go into finished goods fell 0.2 percent. Prices for crude materials such as grain, raw cotton and crude oil went down 0.7 percent. Crude oil prices alone rose 2.4 percent last month, however.

Outside of the auto area, the biggest drop in industrial production came in the output of business equipment, which fell 2.3 percent in October and is down 19.1 percent in the last 12 months.

Production of defense and space equipment was the only bright spot in the Fed's report. It went up one-half percent in October and is up 6 1/2 percent over the last year.