NEW YORK, AUG. 20 -- The stock market swept ahead with renewed force today, recovering the losses it sustained earlier in the week and setting new highs.

The Dow rocketed 40.97 points to a new high of 2706.79, toppling Monday's record of 2700.57. The finish marked the Dow's second close above 2700 and many analysts said the new record would be taken by market participants as confirmation that the market will move higher.

Volume on the New York Stock Exchange came to 196.57 million shares, up from 180.88 million in the previous session.

The market's sharp decline on Tuesday and early Wednesday stirred talk that stocks might at last have started a period of retrenchment. But a sudden rally in the last hour of trading Wednesday brought buying enthusiasm back to life.

After the market closed, the New York Stock Exchange reported that short interest -- sales of borrowed stock by investors who hope to repurchase it at a lower price -- rose 62.2 million shares in the month ended Aug. 14 to a record 546.3 million shares. An increase in short interest is usually viewed as bullish for the market because it means that if prices continue to rise, short-sellers must come to market as buyers to cover their short positions or risk losing even more money.

Analysts said today's trading demonstrated that investors still had a good deal of idle money they were eager to invest in the market on any sign of momentary price weakness.

Traders also were encouraged Thursday to see interest rates declining.

Today's gain was broad as well as strong, with other important market indicators finishing at record highs. The New York Stock Exchange composite index rose 2.66 to 187.04, surpassing its previous record of 186.95, set Aug. 13. Standard & Poor's 500-stock index climbed 5.01 to 334.84, topping its record of 334.65, also set Aug. 13. Standard & Poor's index of 400 industrials rose 6.23 to 390.98. The price of an average share jumped 62 cents and the number of advancing issues overwhelmed losers 1,256 to 414 among the 2,008 issues traded on the New York Stock Exchange.

"This bull is unrelenting," said Al Goldman, director of technical market analysis at A. G. Edwards & Sons in St. Louis. "The upside volume is swamping downside volume. If it's not yet a feeding frenzy, there's no question that the urge to own stocks by sidelined cash has gone from being passive to active and that speculation is rising."

Gainers among the blue chips included International Business Machines, up 2 1/8 at 174 3/4; General Electric, up 2 at 65 7/8; Philip Morris, up 3 1/8 at 106 3/4; DuPont, up 3 1/8 at 129 3/4, and Merck, up 1 7/8 at 207 5/8.

In the technology sector, Digital Equipment picked up 5 1/4 to 184 3/4; Compaq Computer 2 1/4 to 56 1/2; Texas Instruments 1 to 70; Hewlett-Packard 1 5/8 to 66 5/8 and Honeywell 1 5/8 to 88 1/2.

Speculation about possible takeovers or restructuring moves seemed to boost such issues as Transamerica, up 2 3/4 at 49 3/4, and MCA, up 4 1/8 at 63 3/8, both in active trading.Moore Corp., which was added to Standard & Poor's 500-stock composite index, gained 1 1/8 to 25. When a stock is introduced to the 500, it typically jumps ahead on buying by funds set up to duplicate the performance of the index