Stock prices declined sharply yesterday as trading continued at heavy levels, forcing Wall Street to shorten its hours for several days to deal with the mountain of transactions awaiting processing.

Stocks plummeted in the first hour of trading and never fully recovered, with the Dow Jones industrial average posting a 77.42-point loss that took it to 1950.43.

A development that usually provides a powerful boost to stocks -- a cut in the banking industry's prime lending rate -- had no apparent impact yesterday. Banks cut their prime rates -- which is used to determine the rates on many business and consumer loans, including home equity loans -- from 9.25 to 9 percent. {Story on Page A16.}

But traders said there was no evidence of panic in the broad-based decline that followed three days of chaotic trading and record swings by the Dow.

Immediately after the closing bell, New York Stock Exchange Chairman John J. Phelan Jr. announced that the exchange, which normally operates from 9:30 a.m. to 4 p.m., will close two hours early today and again on Monday and Tuesday to ease the administrative pressure on Wall Street firms caused by the enormous trading volume.

The NYSE's move was quickly endorsed by the Securities and Exchange Commission and followed by the American Stock Exchange and the Chicago Board Options Exchange.

Meanwhile, Wall Street executives expressed concerns about the financial fallout that could result from difficulties in processing trades executed earlier this week.

Before trading started yesterday, Phelan read to the exchange floor a message from President Reagan praising the NYSE's "calm, professional manner" during "the extraordinary events of the past few days."

At his press conference last night, Reagan announced the appointment of a commission to look for causes of the turbulence this week in the stock market, which collapsed Monday with a 508-point drop in the Dow industrial average.

{Margaret Shapiro of The Washington Post Foreign Service reported from Tokyo that prices on the Tokyo Stock Exchange fell today, with the Nikkei stock average down 771.86 points to 23,632.59 at the end of the morning session. The decline was attributed in part to disappointment with President Reagan's comments at a press conference last night. People in Tokyo were expecting that Reagan would announce "more drastic" measures to deal with such things as the U.S. trade deficit, one stock analyst said. Domestic sectors of the market were doing all right, analysts said, but companies with U.S. connections were going down.}

On the NYSE, stocks that comprise the Dow average declined more than 140 points in early trading yesterday, with selling pressure from foreign investors so great that trading in many stocks was delayed.

Top-level Wall Street officials said selling pressure was so strong in the first hour that the system "was at what could have been the brink." But stock exchange spokesman Richard Torrenzano said that while many stocks opened late because of imbalances in buy and sell orders, "the market was working as it was supposed to work."

Wall Street traders said there was relief after late morning buying absorbed some of the pressure and began to cut the losses in the Dow.

Adding to concern initially was a 25 percent plunge in the price of the Standard & Poor's 500 stock index futures. This price drop in the S&P contract, which represents a basket of 500 stocks, made traders very nervous; it could have been translated into a potential 500-point drop in the Dow.

The index futures were driven down partially by computer-directed program trading. Program trading is a computer-driven technique designed to profit on price differences between markets by trading stocks and stock index futures simultaneously.

For the first time in three days, the NYSE allowed firms to use its automated order system to conduct program trading in stocks and stock index futures at the opening.

However, the NYSE continued to discourage program trading -- which has been blamed for fueling Monday's drop -- during the rest of the day.

After the initial plunge, stock and futures prices soon headed upward, and trading during the rest of the day was more orderly.

"The market today reflected a desire of people who wished to sell stocks and did sell in a relatively orderly fashion," said First Boston Corp. managing director Jim Freeman. "As long as the market is orderly, I think that is a lot different than what we saw on Monday and part of Tuesday. Today's market did not have the same level of sheer panic."

"I think people are trying to get their bearings and a sense of where we go from here," said Jim Ullman, an executive with Batterymarch Financial Corp., which manages billions of dollars in pension fund assets. "I think there is a great deal of uncertainty and confusion."

Added 30-year veteran Ed McGehrin, an executive vice president and stockbroker with Washington-based Johnston, Lemon & Co. Inc.: "There is a much calmer tone in the investor community in spite of the fact that the market is off 100 points {at midday}."

Following Monday's 508-point plunge, traders, stockbrokers and investors remarkably seemed to adjust to the notion that 100 points, relatively speaking, didn't seem that bad after all.

Announcements by more companies that they will buy back their own stock continued to bolster investor confidence in the market and to support stock prices.

More than 40 companies, including Washington's Federal National Mortgage Association, added their names to the scores of companies that have said they would buy their own stocks.

The companies have said the drops made the buying of their stocks an attractive use of corporate cash.

One of the negative elements in a stock market dominated by institutional investors was the announcement yesterday by Chrysler Corp. treasurer Fred Zuckerman that he was shifting funds in the auto maker's $3.5 billion pension plan out of stocks and bonds and into cash or short-term securities that are easily converted to cash.

Zuckerman said he has reduced the fund's exposure to the stock market from 50 percent to 35 percent and its exposure to the bond market from 38 percent to 25 percent.

"That is not a bullish view," Zuckerman said. "It is important to think about how we in this country can jar the policymakers into action. I hope that what has been a debacle in the capital markets, dramatic in the past week and not so good since Aug. 25, creates an opportunity for the president and the Congress to build political bridges that couldn't be built before."

Zuckerman said he hoped that Washington would take action to reduce the federal budget deficit and the trade deficit, both of which pose threats to the economy.

He said the current conditions in the stock market prompted him to increase his cash, a move he said would give the Chrysler fund maximum flexibility no matter what comes in the weeks and months ahead.

"Any market which has the wild gyrations we have seen in the past few weeks is an unstable market," Zuckerman said, adding that the United States will see a "horrendous bear market" unless Washington policymakers take swift and decisive action on the deficits.

After the 144-point drop to 1883 early yesterday, the Dow industrial average recovered nearly 100 points by 11 a.m. But the rally proved short-lived as a wave of selling sent the average down once more. For most of the afternoon, the Dow bounced around in the 1900s, never again testing the morning lows but failing to break out of the day-long slump.

On the NYSE, losers outpaced gainers 4 to 1 as the heavy volume of 392.6 million shares put pressure on the financial system.

The volume was considerably higher than anything seen until recent days, when more than 600 million shares changed hands in one blistering day.

The broader New York composite index closed down 5.57 yesterday at 139.45.

At 1950.43, the Dow is about 800 points below its high for the year of 2722.42, and more than 200 points above the low of 1738 set on Monday.

Prices also declined on the American Stock Exchange, where the market index fell 12.95 to 269.02 as 26.6 million shares changed hands. The Nasdaq index of trading in the over-the-counter market posted a drop of 15.73 to 336.13.

Among local companies, Marriott Corp., which has traded as high as 43 3/4 a share this year, closed at 31 5/8, down 1 3/8; Gannett Co. Inc., which peaked at 56 1/4 this year, closed at 36 5/8, down 2; Riggs Bank, which has traded at 33 3/4, closed at 24 1/4, unchanged; Washington Post, which has traded at 269, closed at 195, down 4.

On the NYSE, IBM, which has traded at 175 7/8 this year, closed at 120, down 2 3/4; Federal Express, which has traded at 75 1/2, closed down 3 1/4 at 53 1/2; Exxon, which peaked at 50 3/4, closed at 43 1/2, down 1/4, and GE, which peaked at 66 3/8, closed at 47 1/8, down 3 3/8.

Among the unfavorable factors in trading yesterday were widespread rumors about negative comments made by market prognosticator Robert Prechter. There were widespread rumors that Prechter had informed his subscribers that the Dow was headed for new lows.

But some analysts said yesterday's market drop on Wall Street was driven by a combination of declines in stock prices in London, weak trading late in the day on the Tokyo Stock Exchange, and a natural tendency for traders to take profits after Wednesday's record 186-point surge.

"I think it was a very classic knee-jerk oversold bounce {on Wednesday}," said Alfred E. Goldman, an analyst with A.G. Edwards. "I think individuals for the first time in eight years became aggressive buyers. Of course, today we are down in the tubes."

The immediate concern on Wall Street has turned from the drop in stock prices this week to the pressure on firms to process the billions of shares that have been traded this week. Stock transactions normally settle within five business days, which means trades executed last Monday must settle by next Monday.

The fears range from the potential collapse of firms in Chicago, New York, London and Tokyo that are so far behind in paperwork they do not realize they are out of capital, to the possibility that foreign and domestic investors who purchased shares or stock index futures on Monday will not live up to their orders.

That concern could have damaging consequences for major U.S. investors, such as pension funds and Wall Street investment firms, which attempted to minimize their losses earlier in the week through sophisticated trading strategies. The fear is that the trades they executed will never take place because the other side of the trade will walk away.

Employes of the major stock exchanges and their member firms have announced extended working hours in the evening and throughout the weekend, which are designed to help process the huge backlog of trades.

A top-level Wall Street source said the successful resolution of the trades was critical. There could be massive problems because the global stock trading system has been stretched "like a rubber band" and is in no position to withstand further shocks.

The pressure on Wall Street prompted the SEC, following the NYSE's decision to close early, to applaud the move in a statement that sought to boost confidence by concluding: "The commission emphasizes that the securities industry remains in a strong capital position."

Privately, Wall Street officials are nervously awaiting the first major casualties from the record trading volume worldwide.