NEW YORK, AUG. 3 -- Stock prices gyrated wildly today due to rapidly changing rumors about the conflict in the Persian Gulf and fears that rising oil prices caused by the turmoil would push the U.S. economy into a recession.

The Dow Jones industrial average, down more than 120 points at its low, dropped 54.95 points, or 1.92 percent, to 2809.65. Volume surged to about 294 million shares as trading for the second straight day was the highest since last October's "mini-crash."

Oil prices rose by more than $1 a barrel to about $24.50, but that wasn't the only troubling economic news. Recession fears were compounded by a Labor Department report that the nation's civilian unemployment rate rose to 5.5 percent from 5.2 percent last month, the highest level in two years.

The stock market's vulnerability was highlighted by the extreme price swings during the day. At 2 p.m., the Dow industrials were down by 123 points owing to speculation that Iraqi troops in Kuwait might move next on Saudi Arabia, the world's largest oil exporter.

Shortly thereafter, however, stock prices rebounded and trimmed their losses in response to a statement by Soviet Foreign Minister Eduard Shevardnadze that Iraq would withdraw its troops from Kuwait "very soon."

The Iraqi government later announced that it planned to begin withdrawing its forces from Kuwait on Sunday, but that report came after the stock market had closed. While traders said that news clearly was positive, they cautioned that the outlook for next week remained cloudy. In particular, they expressed concern over Iraq's statement, in the same announcement, that it would not restore to power the Kuwaiti leadership that was ousted by the invasion.

"It's very uncertain in terms of what the ruling structure will be in the country, in terms of whether {Kuwait} will be just another state or province of Iraq," said Brian C. Rogers, a portfolio manager and president of the T. Rowe Price Equity Income Fund.

Several prominent stock market analysts said that the twin blows in recent weeks of a sharp run-up in oil prices and a spate of economic reports indicating that the United States may be heading into a recession may herald the start of a U.S. stock market slump that could last into next year.

"I think we're in kind of the early stages of a cyclical decline, or bear cycle, which may take a number of months ... and could eventually bring the Dow and the {Standard & Poor's} averages down by maybe 20 to 25 percent from their highs," said Richard T. McCabe, manager of the market analysis department at Merrill Lynch.

Abby Joseph Cohen, chief strategist for Barclays de Zoete Wedd, said, "There has been a stream of news flow suggesting that the economy is weaker than people had thought. ... All of a sudden, the very positive tone in the market had begun to change {recently}, and then the Iraqi situation on top served as a catalyst" to drive prices down.

Iraq's invasion of neighboring Kuwait has sent world petroleum prices soaring partly in an emotional response to political instability in the oil-rich Persian Gulf, and the accompanying threat that oil supplies from the region will be reduced. In addition, Baghdad's power play has strengthened the hand within the Organization of Petroleum Exporting Countries of Iraqi President Saddam Hussein, a strong advocate of higher oil prices.

On the New York Mercantile Exchange, the nation's largest public market for crude oil, the benchmark futures contract for September delivery of West Texas Intermediate crude jumped $1.38 to $24.49 for a 42-gallon barrel. That means that oil prices -- for which a 50-cent-per-barrel change in price is considered a major movement -- have jumped by nearly $3 a barrel in two days.

The price touched a high for the day of $26.25 a barrel, on the rumors that Iraq might attack Saudi Arabia, but it fell back on Shevardnadze's assurance that a pullout from Kuwait was imminent.

"Basically what you have is a building realization that the Iraqi invasion means higher oil prices, and they will stick for a while," said Lincoln F. Anderson, an economist at Bear Stearns & Co. He said Bear Stearns has raised its oil price forecast for the second half of this year from $18 a barrel to $25 a barrel.

The surge in oil prices sent stock prices reeling across U.S. markets and worldwide. In addition to the drop in the Dow average, the Standard & Poor's 500 stock index fell 8.23 to 407.06, the Nasdaq composite index of over-the-counter stocks fell 11.43 to 417.46, and the American Stock Exchange market value index closed down 5.52 at 346.63.

Stock prices plunged in both Japan and Western Europe, which rely more than the United States on imported oil. In Tokyo, the Nikkei index of 225 stocks dropped 729.42 points, or 2.41 percent, to 29,515.76 in light trading. That drop was even larger than yesterday's loss of 592.81 points, and left the index below 30,000 for the first time since May 1. In Europe, the London FTSE-100 index fell 0.9 percent to 2284.6.

Several American analysts said that an economic slowdown in Western Europe and Japan, owing to higher oil prices, would curb U.S. exports to those regions and thus hurt the American economy as well.

The dollar continued to climb, albeit at a slower rate than yesterday, as investors shifted funds into the U.S. currency on the theory that it was a "safe haven" in a time of political stress. In late New York trading, the dollar was quoted at 149.93 Japanese yen, up from 149.30 a day earlier. It climbed to 1.5935 West German marks from 1.5910.

At the end of a day of hectic trading, gold for current delivery settled at $377.40 an ounce, up 60 cents on New York's Commodity Exchange. Early gains by the precious metal were trimmed by late profit-taking.