The stock market suffered new losses yesterday after a day of nervous gyrations, but the major damage was in the bond market, where a sharp sell-off occurred as Treasury bond interest rates rose to almost 9.5 percent -- their highest level since early last year.

The Dow Jones industrial average, the stock market's key indicator, closed at 2602.04, down 8.93 points. The Dow, which spent most of the day on the minus side, was off as much as 29 points at 2 p.m. but recovered somewhat by the close of trading.

The Dow has now fallen 60 points in two days -- 120 points since a record high Aug. 25.

The bond market was the focal point of yesterday's action as the price of the bellwether 30-year Treasury bond fell $17.50 for every $1,000 of face value, raising yields to almost 9.5 percent. The bond's price dropped $11.50 per $1,000 on Tuesday. Bond prices and interest rates move in opposite directions in order to adjust the yield of older bonds to make them competitive with newer bonds.

Market analysts said the fall in bond prices was based on continued weakness of the dollar in global currency markets and signs of growing strength in the nation's economy. The bond market interprets both events as the forerunners of tighter money policies, higher interest rates and losses in the value of bonds.

In the currency markets, the dollar fell below 141 yen and below 1.8 West German marks. Analysts said a weak dollar raises fears among investors that the Federal Reserve will have to boost interest rates to bolster the currency.

Jim Wiess, a trader at Oppenheimer & Co., said the choppiness of the stock market was based on a battle of psychology between traders with two schools of thought.

"One group believes that this correction is their last chance to buy before the Dow goes to 3000. The other group says, 'This is the beginning of the end,' " Wiess said.

Wiess said that computerized selling programs, a major part of Tuesday's loss, continued yesterday but were balanced by a number of buying programs.

Richard McCabe, market analyst at Merrill Lynch, said that he expects continued downward movement in the market for a few days but that the Dow would bottom at between 2525 and 2550 points, for a loss of about 7 percent from its all-time high of 2722.42.

At that range, he said, stock prices were likely to recover and move to 2800 or even 2900 by the end of the year. "I don't think we've made a top," he added.

Richard Fontaine, portfolio manager of the Capital Appreciation Fund at T. Rowe Price Associates in Baltimore, said: "Higher interest rates are going to mean a significantly lower stock market.

"The bears have had a good week and a half," said Fontaine. "The question is: Are the bulls going to be able to rally? The jury is still out."

Volume on the New York Stock Exchange totaled 199.9 million shares, compared with 193.45 million shares Tuesday. Declining stocks outran winners by nearly 3-1 on the NYSE. The NYSE composite index fell 1.09, to 180.12; the Standard & Poor's index of 400 industrials fell 1.93, to 376.33, and S&P's 500-stock composite index was down 1.72 at 321.68.

The Nasdaq composite index for the over-the-counter market dropped 3.57 to 448.93. At the American Stock Exchange, the market value index closed at 357.71, down 2.05.

AT&T was the most active NYSE-listed issue, rising 1/8 to 33 1/8. General Electric followed, unchanged at 60 1/2. IBM was third, slipping 3/8 to 162 1/2. National Semiconductor rose 3/8 to 16 5/8 in active trading. It has agreed to buy Schlumberger's Fairchild Semiconductor unit.

Among other stocks, General Motors slipped 3/4 to 88, Coca-Cola rose 7/8 to 51 3/8 and USX fell 1 1/4 to 36 1/8. Merck rose 4 3/8 to 209 3/4. Its new cholesterol-lowering drug was approved by the Food and Drug Administration Tuesday