NEW YORK, FEB. 5 -- Wall Street stocks closed higher today, with the broad market especially strong, as lower interest rates again fired up demand for stocks.

The Dow Jones industrial average closed up 16.09 points at 2788.37 amid what some traders called "churning" action. New York Stock Exchange volume surged to 290 million shares traded, the second-highest level of the year and near the 318 million shares traded on Jan. 17, when the market exploded upward in reaction to initial reports of war in the Persian Gulf. Gaining issues led losers by a ratio of more than 2 to 1.

Investors, anxious to boost equity holdings, sought low-priced values on optimism that lower interest rates will pull the economy out of recession, many traders said. But Robert Stovall, president of Stovall/21st Advisers, said investors may be overly optimistic about the economy and the Persian Gulf War.

Yet, he said, "I let the market talk to me," he said. "When you see rates dropping and price and volume surging, you'd better go along with it or get out of the way."

Traders said the market is taking in stride what bad news it has had to digest. Although General Motors fell 2 1/8 to 35 1/8 in New York Stock Exchange trading, following Monday's announcement of a 47 percent cut in its quarterly dividend, it lost only 1/8 in volume that includes Pacific Coast trading.

"GM is cutting its dividend and costs on expectations the recession will be long, but investors are buying on the assumption the recession will be relatively short," said Peter Davies at Nomura Securities Co.

In addition, the first part of the Treasury's record $34.5 billion auction this week was greeted by strong demand as investors snapped up $12.65 billion in three-year notes, dealers said.

Slumping interest rates kept many small investors on the sidelines, but Japanese institutions and Wall Street firms stepped in to buy up the issue, producing an average yield of 6.98 percent -- the lowest in four years.

The Treasury holds its so-called refunding auction four times a year to raise money to help cover the federal deficit. The current auction came after aggressive moves by the Federal Reserve to lower interest rates in an effort to pull the country out of recession.

Traders stressed that the sharp rally over the past five sessions -- which has brought the Dow's gain since the outbreak of the Persian Gulf War to 279 points at today's close, or 11.2 percent in only 14 sessions -- prompted some discretionary profit-taking.

"That's the percentage gain of some entire bull markets and months of market work," one trader remarked, "so it's no wonder people are beginning to lock in some profits."

Some financial service stocks continued to advance on optimism that the interest rate cuts will boost trading, which would be good for business.

American Express rose 1 3/4 to 24 7/8, Morgan Stanley added 3 1/8 to 65 1/2, Salomon Inc. added 3/4 to 24 1/2, Merrill Lynch gained 3/4 to 25 1/4 and Federal National Mortgage climbed 7/8 to 43 3/4.

Amgen jumped 3 1/2 to 83, leading a biotechnology stock rally. Genetics Institute rose 3 1/2 to 52 1/4, Genzyme Corp. added 1 1/8 to 33 3/8 and Centocor rose 1 1/2 to 60 1/4.

American Home Products rose 2 1/2 to 54 3/8. Smith Barney upgraded its rating on the company to a "buy" from a "hold," based on expectations of a turnaround at the company.

The stock of Pepsico added 1 3/4 to 28 3/4 after it reported better-than-expected fourth-quarter results. Its earnings rose 36 percent from a year ago.

Schlumberger's fourth-quarter profits were slightly below analysts' estimates. It fell 2 5/8 to 56 1/4.

Broad stock indexes also moved moderately higher. The Standard & Poor's 500 closed up 2.92 at 351.26, the NYSE composite rose 1.61 at 191.89, the Value Line gained 2.94 at 272.48, the Amex Market Value was up 3.25 at 326.40 and the Nasdaq composite added 7.40 at 432.20.