The battle lines are now drawn for the stock market. It's the economy vs. the Middle East. And the economy is the favorite.

The Dow Jones industrial average has been rising nicely for the past several weeks, mainly because tensions in the Persian Gulf seem to have abated. But if you listen carefully, you can hear Wall Street giving off some ominous noises.

Take a look at how the overall stock market performed. And then take a look at the action of, say, International Business Machines Corp.'s shares on one recent day. In those two instances, you'll see a conflict between what will probably be the two most powerful forces in the market over the next few months -- the Middle East and the nation's weak economy.

And Wall Street seems to be deciding that the economy's problems are too troublesome to ignore, even if the Middle East settles down.

Stock prices started out sharply higher, for instance, on Dec. 6, the day that Iraq first made gestures toward releasing foreign hostages. For the first time in months, there was a bona fide reason to believe that war could be avoided in the Middle East.

But stocks lost all of those early gains and then some, mainly because investors became spooked about IBM's earnings. IBM shares, which have been on a winning streak of late, ended that day sharply lower and dragged down the rest of the market.

Even more troublesome, some experts say, was the fact that there wasn't any actual bad news about IBM's earnings -- just rumors.

In its reaction to the IBM rumor, some experts believe the stock market was clearly showing a bias for corporate profits and the economy as the most important issue for the remainder of 1990 and into January. Easing tensions in the Middle East -- while a good excuse for an occasional short-term rally -- aren't enough to boost share prices much more over the longer term.

These experts believe any extended rally for the stock market will probably be delayed until lower oil prices, lower interest rates or something else starts to have a noticeable effect on reviving the economy.

Corporate earnings are expected to be lousy in the current quarter. And news like that doesn't often wait to be announced. So stock prices are likely to be under pressure from economic factors well before companies start officially reporting their earnings in mid-January.

The Federal Reserve Board has been slicing interest rates over the past few weeks, and a drop in the nation's discount rate could come any day. The Fed even took the extremely bold step of reducing the percentage of certain deposits that banks must hold as reserves.

While this last move could boost bank profits (perhaps by $1 billion for money-center banks), the real question is: Will it succeed in the intended purpose of stimulating lending? "I have spoken to maybe 100 banks and the answer is no," said Hugh Johnson, a stock market strategist for First Albany Corp.

Even if banks do eventually decide to lend money more freely, the other big unknown is whether consumers and corporations are willing to borrow. Corporate debt has soared through the 1980s and most experts believe companies won't be too anxious to borrow money while business conditions are still weak.

And consumers, said pollster Albert Sindlinger, aren't going to take out loans just yet. "Consumers are not in a borrowing mood," he said. "I don't think consumers are interested in adding to their debt."

If consumers and business don't borrow and banks don't lend, the nation's economy will continue to slip. And while the headline writers on the business pages won't completely ignore the Middle East situation, more and more attention will be paid to the economy. And that isn't likely to cheer up the stock market.

Neither of the two Japanese groups that showed interest in Hilton Hotels earlier this year has expressed any current interest, according to a Wall Street source. A rumor that a mysterious Japanese group might be forming to go after Hilton pushed that company's stock up sharply this past week. There is no way of knowing, of course, whether a third group might be prowling around Hilton, a hotel and casino chain that's being hurt by the slow economy.

Despite the stock's impressive rise, a number of experts expressed doubts about the logic of the rumors. For one thing, the Bank of Japan in the past two weeks has been on the warpath against banks -- both American and Japanese -- lending to Japanese developers for real estate transactions. Hilton said publicly last week that the company isn't for sale and that it didn't know of any offer to take it over.

John Crudele is a columnist for the New York Post.