Stocks fell sharply today as a government report signaled that wages are rising faster than expected in a tight labor market, heightening inflation jitters and setting the stage for a possible increase in interest rates.

The Dow Jones industrial average fell 180.78 points to close at 10,791.29, a loss of 1.6 percent. The index managed a modest rebound late in the session, recovering from a loss of as much as 258.04.

Even with today's sell-off, the biggest point drop since a 191.55-point fall on July 20, the Dow still is up 17.5 percent so far this year, well above analysts' expectations when 1999 began.

Broader indicators also tumbled. The Standard & Poor's 500-stock index fell 24.37, to 1341.03, and the Nasdaq composite index fell 65.83, to 2640.01. Technology and drug companies led the decliners.

Stocks were battered today after the Labor Department said its Employment Cost Index, considered the best measure of changes in wages and benefit costs, rose 1.1 percent in the second quarter. [Story, Page E1.]

Bond prices fell steeply. The price of the Treasury's benchmark 30-year bond fell $7.81 per $1,000 invested, pushing its yield to up to 6.07 percent, from 6.00 percent late Wednesday.

The threat of higher interest rates hit financial stocks hardest. J.P. Morgan, down 3 3/8 at 130 5/8, was the steepest decliner in the Dow.

Technology shares were mostly lower. Those stocks, which are often highly valued, become less appealing when interest rates are high and corporate profits may be hurt. IBM fell 3, to 215 3/8, and Microsoft dropped 3, to 87.

Drug stocks were weaker across the board, led by Glaxo Wellcome, which said it will miss its 1999 target of double-digit earnings growth. Glaxo shares fell 4 1/8, to 51-3/16.

The Dow's losses would have been much steeper without 3M and Procter & Gamble, which rose after posting strong earnings reports. Shares of 3M rose 1-11/16, to 90-13/16, and Procter & Gamble rose 2, to 88 1/8.