NEW YORK, SEPT. 18 -- The Dow Jones industrial average recovered from a 33-point midday loss to close up 3 points today amid widespread talk that the Federal Reserve would soon move to lower short-term interest rates.

A substantial drop at midafternoon in the federal funds rate -- the rate at which overnight loans are made among banks -- triggered the afternoon rally and momentarily captured the attention of traders otherwise fixated on the day's dour economic news and rumors, heatedly denied, about financial problems at banking giant Chase Manhattan.

Other market observers said the change in the funds rate was something of a technical aberration and did not result from any move by the Fed to nudge rates lower.

At the close, the Dow stood at 2571.29, up 3.96, while declining issues outpaced advancing ones by a 4-to-3 ratio. New York Stock Exchange volume was light to moderate at 141 million shares.

Dow component Primerica was a prominent loser. Down almost 4 points in early trading, it closed off 2 5/8 at 23 1/8 amid fresh impressions in the market of an overall trend of rising delinquencies on consumer credit, as well as an unprecedented fine levied by the New Jersey Insurance Commission on Primerica's Transport Life subsidiary.

Other insurers that were hard hit included MBIA Corp., off 3 1/2 at 31 7/8, and muni-bond insurer UNUM Corp., down 2 1/8 at 46 1/2.

Among the big banks, Chase was off 7/8 at 15, a new 52-week low after a 3/4-point loss on Monday, amid rumors that the bank is having difficulty rolling over its commercial paper. A Chase spokesman denied the report and blamed arbitrageurs for "spreading certain rumors in an unsettled commercial-banking climate." J.P. Morgan lost 1/2 to 32 3/4 after posting an earlier full-point loss, while Wells Fargo also trimmed a full-point deficit to 1/2 to close at 54. Bankers Trust dropped 3/4 to 36 3/8.

Adding pressure on the banks was news that PaineWebber lowered its yearly estimates on the entire group. The brokerage dropped 1990 earnings estimates on regional banks by about 10 percent and on money center banks by 15 percent to 20 percent. Earnings slashes were deepest for Bank of New York, Chemical, First Chicago and Chase.

The Dow transportation index finished up 13.51 at 901.45, thanks to a 7 5/8 surge to 105 in UAL Corp. United Airlines unions were reported to be meeting with banks later this week to consider a lower, $175- to $180-per-share bid for the airline.

The Dow utilities rose 0.63 to 200.52.

Among broad stock indexes, the afternoon rally was largely confined to blue-chip measures. The Standard & Poor's 500 finished up 0.83 at 318.60 and the NYSE Composite rose 0.26 to 174.88, but the Value Line skidded 0.76 to 241.50, the Amex Market Value fell 2.02 to 319.69 and the Nasdaq Composite was down 1.90 at 372.21.