Aggressive selling cut deeply into a broad range of stock prices yesterday as turmoil continued in the financial markets over fears of rising interest rates.

The Dow Jones industrial average, composed of 30 blue chips, closed at 2545.12, down 16.26 points. At one point, the key index fell as much as 62 points, to break the psychologically important 2500 level.

"The selling was climactic ... the market went from complacency to fear," Ralph J. Acampora, market analyst at Kidder, Peabody & Co., said about the market's deep midday plunge.

Falling stocks outnumbered rising stocks by a 6-to-1 margin, with 1,532 issues falling and only 252 gaining on the New York Stock Exchange.

The Dow has now fallen 177 points, or 6.5 percent, since Aug. 25 when it hit an all-time high of 2722.42.

The financial markets continued to react negatively to Friday's announcement by the Federal Reserve that it was raising the discount rate, the rate the Fed charges member banks, to 6 percent from 5.5 percent. Major banks quickly raised their prime rate to 8.75 percent from 8.25 percent. The prime rate is the rate banks charge their best customers.

Higher interest rates raise fears that inflation will heat up, which would hurt the economy and the companies that issue stocks and bonds. They also cut into the value of bonds.

Some analysts said they were concerned that the discount rate boost was too small to help strengthen the falling dollar, which has been at the heart of the weakness in the bond market.

The waves of selling in the stock market were kicked off early in the day when large institutional traders unloaded millions of dollars worth of stocks that are part of computerized trading strategies. After stock prices fell, market analysts said, other traders began to buy stocks to cover "short" positions, helping the market recover.

Short sellers, who sell stocks borrowed from brokers, are betting that stock prices will fall. When prices drop, short sellers lock in their profits by buying the stocks they sold.

Volume was extremely heavy at the NYSE, with 242.8 million shares changing hands.

The NYSE's composite index fell 1.99 at 175.59. The American Stock Exchange index was down 7.29 at 347.13. The Nasdaq composite index for the over-the-counter market closed at 437.60, down 8.88.

Standard & Poor's index of 400 industrials fell 3.84 to 366.30, and S&P's 500-stock composite index was down 3.14 at 313.56.

As bond prices dropped, yields rose. Bond prices and interest rates move in opposite directions to adjust the yield on older bonds to make them competitive with newer bonds.

The bellwether 30-year Treasury bond fell $16 for every $1,000 of face value, raising the yield on the bond to 9.63 percent from 9.47 percent earlier.

The heavy selling of recent days prompted Goldman, Sachs & Co., to urge customers to increase the cash levels of their portfolios by trimming stocks. Steven Einhorn, cochairman of the investment policy committee, said the firm recommended going to 35 percent cash from 20 percent cash and to 65 percent equities from 80 percent.

At T. Rowe Price Associates in Baltimore, home of many mutual funds, Vice President Steven E. Norwitz said telephone traffic was heavier than usual as shareholders moved funds from equity funds to money market funds.

Monte Gordon, research director at Dreyfus Corp., said the strength of the dollar in international currency trading was "key" to the performance of the markets.

"As long as the dollar is not stable, you will have an unstable market."

Gordon said market participants were wary of the impact the latest U.S. trade deficit figures, due Friday, might have on the dollar and on the financial markets. Another increase in the deficit, he said, would destabilize the dollar against foreign currencies and create new concern that the Fed will have to further tighten credit.

The dollar closed slightly lower yesterday in quiet trading