The stock market did a dramatic see-saw, dropping sharply in the morning amid concern about the money supply and then rebounding firmly in the afternoon thanks to favorable assessments of the economy.

The Dow Jones Industrial Average, once down by close to 16 points from Friday's close of 1190.02, closed at 1,200.56 today, up 10.54. Bond prices generally closed slightly higher with little trading.

Market analysts, though surprised at the $7 billion money supply jump announced Friday, had generally expected an increase of about half that size. But with little altering of monetary policy expected from the Federal Reserve in coming days, most analysts found little reason in the data to alter policy judgments.

"The 25 point rise in the market from its low had to be a positive judgment that the Fed is constrained from making any significant policy changes," said Monte Gordon, director of research at The Dreyfus Corp.

Moreover, there was little concern expressed by Wall Street investment strategists about the continuing budget stalemate in Washington, with most analysts noting that the high deficits are, in the short run, helpful to the economic recovery.

"Today's deficits do not represent a negative or restraining force on the economy," noted John Paulus, chief economist for Morgan Stanley & Co. "If anything they are stimulating the recovery.

The National Association of Business Economists said the economy was on the verge of a more buoyant recovery than had been predicted and Jack Lavery, the influential Merrill Lynch & Co. chief economist, in a report published today, called the "general tone of the economic yardsticks remarkably upbeat."

What Gordon termed "a knee jerk reaction" to the money supply figures was held responsible for the early decline in the Dow industrial average, the most closely followed stock gauge. But by mid-afternoon that pattern had reversed and 835 New York Stock Exchange issues gained with 790 declining.

Of the 30 stocks that make up the industrial average, 21 gained. Volume reached 84.9 million shares, up from Friday's total of 75.1 million. The New York Composite Index was up 68 cents and the average price per share rose 27 cents.

Blue chip issues fared well, with General Motors up 1 1/2 to 66 7/8, International Business Machines up 1 1/4 to 112 1/2, and American Express, buoyed by news of a three for two stock split and an increased dividend, was up 1 1/4, closing at 67 3/4.

On the American Stock Exchange, trading was relatively slow with volume totaling 11.7 million shares, down from Friday's figure of 14.7 million.

The averge price per share rose 9 cents, as 327 stocks gained and 323 declined.

On the over-the-counter markets, the Nasdaq composite index closed at 303.86, up 0.30 point.