NEW YORK, AUG. 16 -- The Dow Jones industrial average fell 66 points today amid fears of inflation and escalating tensions in the Middle East.

Overall on the New York Stock Exchange, declining issues swamped advancing stocks by a nearly 4-to-1 ratio.

Traders said the market responded sluggishly but decisively to a broad spectrum of cheerless developments. These included a tumbling bond market following a higher-than-expected reading on July consumer prices, slumping housing starts, more unnerving news from the Middle East, a battery of disappointing news on the corporate front and another skid in the U.S. dollar.

{In Tokyo, stocks dropped more than 3 percent Friday morning on gloom over the Persian Gulf crisis, the fall accelerating in late trading after President Bush announced a U.S. naval blockade of Iraq, the Associated Press reported. The 225-share Nikkei average was down 870.59 points, or 3.16 percent, at the midday close, to 26,678.85.}

The Dow lost 20 points in the first minutes of trading as bonds posted a nearly full-point loss following a higher-than-expected rise in July consumer prices. The consensus among analysts was that the CPI reading for July is already bad enough to dissuade the inflation-conscious Federal Reserve from even considering lower interest rates to shore up the sagging economy.

On the corporate front, prominent slides on disappointing news in such diverse issues as Hewlett-Packard, Security Pacific, Ohio Edison and Reuters Holdings only served to further undermine a market already nervous over Mideast developments.

By late afternoon, the Dow had lost more than 50 points, triggering the New York Stock Exchange's curb on computerized program selling, even though, by most estimates, index-arbitrage selling was only a contributing factor to today's decline. The "collar," however, only seemed to make cash traders even more nervous, and the Dow lost another 16 points in the final minutes of trading.

At the close, the Dow was down 66.83 at 2681.44 on moderate volume of 140 million shares. Since it closed just shy of 3000 22 days ago, the Dow has dropped more than 10 percent.

Hewlett-Packard dropped 1 7/8 to 35 7/8 in a high-volume sell-off after the company announced lower-than-expected earnings for its third fiscal quarter.

A new tumble in California money-center banks also served to unhinge the bulls. Security Pacific led the way down, off 3 at 28 3/4 by the close, after Merrill Lynch cut earning estimates, citing in part a filing with the Securities and Exchange Commission in which the bank conceded that second-half 1990 earnings may not match those of 1989. In sympathy, Wells Fargo dropped 3 1/8 to 59 5/8, and First Interstate eased 1 3/8 to 31 1/4.

Disney, a closely watched stock since it was clobbered by perceptions of falling attendance at theme parks, fell 3 7/8 to 104 3/4, threatening to test its recent lows near 102. Disney is regarded by some technical traders as a modern-market bellwether.

The American depositary receipts for Reuters Holdings PLC plunged 6 3/8 to 51 3/8 after traders interpreted a company announcement as implying that there were bugs in its Dealing 2000-2 system for the automated matching of deals in foreign exchange markets.

Among Dow components, prominent losers were the consumer-nondurable, "recession-hedge" stocks that had been bid up earlier in the week. Merck tumbled 4 1/8 to 83 3/4, Procter & Gamble dropped 2 7/8 to 80 5/8 and Philip Morris fell 2 to 45 1/4. But fully 14 other issues posted full-point losses and more.

The Dow transports sank 21.90 to 939.78, while the interest-sensitive utilities skidded 2.58 to 202.59 as the U.S. 30-year Treasury bond was trashed for a 1 22/32 loss.

Broad stock indexes were devastated without exception. The Standard & Poor's 500 closed down 7.67 to 332.39, the NYSE Composite was down 3.81 at 182.73, the Value Line fell 4.50 to 259.12, the Amex Market Value was off 3.81 at 336.83 and the Nasdaq Composite was down 9.18 at 402.27.