NEW YORK, NOV. 17 -- The stock market and the dollar suffered broad setbacks today, reflecting deepening disappointment that federal budget talks have failed to produce a compromise after more than two weeks of closed-door wrangling.

The stock decline occurred in relatively subdued trading activity, however, and market indicators were recovering as the session moved toward the close.

The Dow Jones average of 30 industrials, which rose 14.09 points Monday, fell 26.85 points to close at 1922.25. The widely followed market index had been down nearly 52 points at noon.

Analysts said market participants were intent on the budget talks, which moved into a 17th day of searching for a politically palatable mix of spending cuts and tax increases to reduce the size of the anticipated federal deficit.

"The market is looking for a willingness to do something that looks responsible," said Philip Erlanger, chief technical analyst for Advest Inc., a brokerage based in Hartford, Conn.

The dollar fell sharply amid what analysts labeled rising pessimism over the budget negotiations.

In Tokyo, the dollar closed at 136.05 yen, down from 136.85 yen late Monday, snapping a four-session rise. Dealers there said the dollar fell sharply on rumors that the budget talks had broken down, and recovered partially when the rumors were denied.

Later in London, the dollar traded at 135.82 yen. In New York, the dollar later tumbled to 135.595 yen from Monday's 137.125 yen, a drop of more than 1.1 percent.

{In late-morning trading in Tokyo Wednesday, both the dollar and stock prices rose moderately as the mood shifted to one of optimism about the budget-cutting talks in Washington.}

Declining issues led gainers by 3 to 1 in the overall tally of New York Stock Exchange-listed issues, with 399 up, 1,204 down and 371 unchanged. The NYSE composite index fell 1.95 to 136.21.

Volume on the Big Board came to 148.25 million shares, compared with 164.34 million shares Monday.

Analysts say the financial markets view a compromise on the budget as a sign that the United States is willing to act and not simply talk about cooperating with other nations in restoring stability to the world's financial markets following last month's frightening declines in stock prices.

Allied Signal led the list of most actively traded stocks on the New York Stock Exchange, rising 1 5/8 to 33. A two million share block traded early in the session at 30 7/8.

Pacific Gas & Electric, the second most active stock, fell 1/8 to 17 7/8 after a 1.6 million share block traded at 18.

International Business Machines fell 2 1/4 to 117 3/4, General Electric fell 3/8 to 45 and Unisys fell 1 1/2 to 31 1/4.

American Telephone & Telegraph fell 7/8 to 28 5/8. It proposed lowering its interstate long distance rates by an average of 3.6 percent.

Retail stocks fell. Sears, Roebuck dropped 1 to 36, J.C. Penney fell 1 3/4 to 43 5/8 and K mart lost 1 1/8 to 28 5/8.

Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 173.70 million shares.