NEW YORK, OCT. 12 -- Rumors of peace in the Persian Gulf sent stock prices up and oil prices down today, even though many traders said they questioned the validity of the reports.

"The market is on eggshells. Any little rumor can really move it," said James A.C. Kennedy, director of research at the T. Rowe Price mutual funds group in Baltimore.

Unconfirmed reports that Iraq may be considering withdrawing from Kuwait led the Dow Jones industrial average to climb 32.92 points to close at 2398.02. Oil prices dropped below $40 a barrel, as the benchmark November futures contract on the New York Mercantile Exchange fell 73 cents to $39.69 a barrel.

Although traders welcomed the stock rally, they did not view it as particularly significant, because the market had been poised for a technical "bounce" after three straight days of substantial losses. Despite today's gains, the Dow industrial average was down 112.73 points, or 4.5 percent, for the week.

"The market was looking for an excuse to rally, only because it's been down so much," said Joseph A. DeMarco, managing director for securities trading at Marinvest, an investment management firm here.

Volume was fairly heavy, with about 188 million shares traded on the New York Stock Exchange. But the rally was not broad-based, as gainers outnumbered losers by only a 3-to-2 ratio.

Stock prices were up sharply at the opening after the British Broadcasting Corp. (BBC) reported that Iraqi leader Saddam Hussein had indicated to a senior Soviet official that Iraq did not rule out withdrawing from Kuwait if it felt safe from a U.S. air attack.

Shortly before noon, the market rallied again when an exiled Iraqi Kurdish opposition group said that members of the Iraqi leadership had been asked in a survey whether they supported a pullout from Kuwait.

"When that {second report} came across the wire, the market jumped. We also saw the bond market rally," said Kent A. Kelley, executive vice president at TIMCO, an investment management firm in Hartford.

Asked why the markets believed the reports, Kelley said: "Some element of this market is irrational."

Later, a State Department official was quoted by United Press International as saying that "any report of a possible Iraqi withdrawal would appear to be very unlikely at this time."

Much of today's rise in prices was attributed to technical adjustments by investors. But Kennedy of T. Rowe Price was among several stock pickers buying selected stocks as long-term investments.

"We're in there buying because we see individual bargains. The market as a whole smells like there's still a downside to it," Kennedy said.

Takeover interest perked up during Friday's rally as MCA Inc. rose 4 points to close at 57 7/8 amid optimism that Japan's Matsushita Electric would buy the company for between $6 billion and $7.5 billion.

Among broad stock indexes, blue-chip averages clearly led the rally and secondary measures lagged. The Standard & Poor's 500 was up 4.57 at 300.03, the NYSE Composite up 2.22 at 164.42, the Value Line up 1.47 at 218.21, the Amex Market Value up only 0.26 at 293.97 and the Nasdaq Composite up 1.94 at 327.55.