Americans continued their love affair with foreign goods in July, pushing the U.S. trade deficit with the rest of the world to a new monthly record of $25.2 billion as a surge of imports overwhelmed improving demand for American exports.

The United States ran record deficits in July with all of its major trading partners, including Japan, China, Canada and Western Europe. So far this year, the trade deficit is running at an annual rate of $247 billion, compared with the $164.3 billion gap recorded last year. But as a share of the country's total economic output, the trade deficit is still below the record set in 1987.

The trade report unnerved financial markets yesterday. The Dow Jones industrial average fell 225.43, to 10,598.47, after falling as much as 272.03 during the session. The 2.1 percent decline was the Dow's biggest one-day drop since it fell 235.53 points on May 27.

Many analysts see both benefits and potential dangers for the U.S. economy in the burgeoning trade gap.

On one hand, the flood of low-priced imports helps hold down inflation and helps satisfy roaring consumer and business demand in the U.S. economy.

On the other hand, the deficit reflects trouble for manufacturers, farmers and other U.S. exporters and raises the possibility of a sharp decline in the dollar that could create broader financial turmoil.

The trade report contributed to a sell-off of the dollar against the Japanese yen. A dollar bought 104.85 yen in late New York trading yesterday, down from 106.11 late Monday.

The July trade deficit surpassed analysts' expectations of a $23.8 billion gap and exceeded June's revised $24.6 billion deficit by $600 million. Imports of oil, chemicals and lumber led the increase.

And while July imports rose to a monthly record of $104.2 billion, U.S. exports actually rose slightly--by $400 million, to $79 billion--which may lessen some of the political pressure for measures to limit imports. Greater shipments of semiconductors and medical and oil-drilling equipment led the increase in exports.

Many economists and market strategists view the growing trade gap as a reflection of the continued strength the U.S. economy relative to others around the world. With record low unemployment and rising wages, U.S. consumers are feeling confident enough to spend freely and are buying more and more imported goods. And because many imports are cheaper than their domestic counterparts, they help hold down inflation here.

By contrast, the economies of Europe, China and many developing countries are suffering from sluggish growth, and hence their demand for U.S. exports is rising only slightly.

Commerce Secretary William M. Daley said in a statement that the deficit is likely to remain at record levels for the remainder of the year because the U.S. economy "should continue to grow at a solid pace, supporting continued growth in imports." He promised to push America's trading partners for greater access to their markets--a key aim of U.S. exporters.

One sector hurt by the trade deficit is manufacturing, which suffers both from weak exports and increased domestic competition from imports.

But the National Association of Manufacturers sounded sanguine about the report. A rising trade deficit "does not lower living standards, increase the unemployment rate or reduce American competitiveness," NAM economist Dave Huether said in a statement. "In fact, just the opposite is true. A healthy state of affairs domestically--low unemployment, strong investment, low inflation--results in higher imports as consumers purchase affordable foreign-made goods."

Many economists caution, however, that the deficit could trigger a rise in U.S. interest rates if it causes the dollar to fall too far too fast, spurring foreign investors to dump U.S. stocks, bonds and other securities.