The U.S. trade deficit improved significantly in September, dropping $1.6 billion from the August total that jolted global financial markets last month, the government reported yesterday.

The September merchandise trade deficit of $14.1 billion marked the best performance in four months, and markets around the world rallied on the news.

The Dow Jones industrial average, a key measure of stock performance, closed at 1960.21, up 61.01 points. The dollar, after having fallen nearly 5 percent against the Japanese yen and the West German mark since the stock market plunge Oct. 19, firmed on New York markets.

White House spokesman Marlin Fitzwater cheered the September figures as "especially encouraging" because they showed both an $800 million increase in exports and an $800 million dip in imports, due mostly to lower oil prices.

With one eye on financial markets, Fitzwater added, "These numbers should be received well."

But congressional Democrats, who consider trade a possible issue in next November's presidential election, pointed out that the figures for the first nine months of the year are running at an annual rate that would put the 1987 totals higher than last year's record $156 billion.

"The markets had a positive reaction to the trade numbers today because they came in lower than some of our gurus had predicted, and we are all grateful for that," said Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) "We have a long way to go before we put the trade problems behind us," added Senate Majority Leader Robert C. Byrd (D-W.Va.).

"The deficit underscores the need for speedy congressional action on strong and effective trade legislation," said AFL-CIO President Lane Kirkland.

While some Republicans in Congress are trying to use the market collapse and improved trade figures for September to derail a major trade bill, Democrats and some Republicans said they plan to press on with a House-Senate conference on the legislation. It is increasingly unlikely they will be able to get legislation to the president's desk this year, however.

U.S. Trade Representative Clayton K. Yeutter warned of the dangers of the bill turning protectionist.

"The trade deficit does remain a problem," said Yeutter, "but it is clear that the proper response is to break down global trade barriers, not to retreat into protectionism."

A month ago, the monthly trade deficit report helped set the stage for the Oct. 19 market collapse because it was worse than generally expected.

Yesterday's announcement had a considerably smaller impact. Jerry Jasinowski, chief economist of the National Association of Manufacturers, called the report "solid but undramatic," while Stephen Roach, senior economist at the Wall Street firm of Morgan Stanley Co. Inc., described it as "slightly better than expected," and added, "I would underline the word 'slightly'."

"These trade numbers are a step forward," said Jasinowski, "but don't represent a dramatic enough improvement" to signify a major turn after five years of record trade deficits.

Jasinowski said the effects of a 50 percent decline in the dollar over the past 2 1/2 years haven't had a significant impact on the trade deficit, leading him to predict "a large improvement in trade" in 1988 with a $40 billion increase in exports that will be "the best hope for avoiding a recession."

William T. Archey, international vice president of the U.S. Chamber of Commerce, called the figures "a harbinger" because of a $622.6 million drop in the United States' trade deficit with the European Community -- which went from $2.1 billion in August to $1.4 billion in September. As a bloc, the EC Common Market is the United States' largest trading partner.

"It shows that currency differences are really being felt in Europe and the relative openness to U.S. products there," Archey added.

Exports to the 12-nation EC rose by $600 million while Common Market imports fell by $400 million, with most of the export differences representing increased sales of American-made manufactured products.

But the stubborn trade deficit with Japan, the nation's largest, persisted -- dipping to $4.6 billion in September from the previous month's $4.9 billion.

America's trade imbalance with Japan continued despite six straight months of decreases in Japan's overall trade surplus with the world and an increase in sales of Western European products in Japan.

Both Yeutter and Commerce Secretary C. William Verity Jr. cited the growth in manufacturing exports, which were 20.5 percent higher this September over last, as a particularly encouraging sign.

Manufacturing exports grew by $1.1 million in September over August, with most of the increase coming in high-technology products such as computers, aircraft and telecommunications equipment.

"American manufacturers have made gains in their competitiveness and appear poised for a significant expansion of exports that will enable them to regain market shares both internationally and here in the United States," Yeutter said.

While imports totaled $14.1 billion in September, the $800 million decrease over the previous month was due largely to lower oil prices.

But imports of manufactured goods, especially Japanese cars -- which have not been selling well in this country this year -- also declined. Auto imports from Japan fell $400 million to $1.6 billion.

The United States also ran substantial trade deficits with Taiwan, ($1.8 billion, the same as August); the OPEC nations ($1.6 billion, down $243 million); South Korea, ($813 million, down $89 million), and Hong Kong, ($632 million, down $77 million).