The dollar took a nose dive on currency markets yesterday in reaction to a prediction by a prominent European official that the United States is ready to accept a further sharp decline in its currency to help stabilize its stock market.

This prediction by Jacques Delors, president of the European Community Commission, was swiftly denied by the Treasury Department, but not before the dollar plunged to a value of 1.7375 West German marks from 1.7695 marks and to 138.50 Japanese yen from 142 yen the day before.

"Let us not have any illusions," Delors said in an address to the European parliament in Strasbourg, France. "The Americans are prepared to let it {the dollar} fall to 1.60 {marks}, a level about 10 percent below the range that the major economic powers are believed to have agreed upon in February during a meeting at the Louvre Palace in Paris. "The Louvre agreements are going to suffer very much in the coming days. The Americans, who have been unable to get a commitment for more growth in Europe, will be putting pressure on {Europe} by reducing the rate of the dollar."

Delors also lashed out at the West German government, which he charged had "acted irresponsibly" in raising its interest rates just before the stock market's collapse. Higher interest rates in West Germany would slow its economy, hampering U.S. efforts to expand American exports and reduce the U.S. trade deficit -- a major factor in the erosion of investors' confidence in the U.S. economy.

Delors said the Bonn government was not totally responsible for the worldwide collapse in stock markets, but that the West German government "lit the match" under already overheated markets.

Privately, administration officials were reported to be incensed at Delors, who, they pointed out, had no connection with the exchange rate negotiations and had not attended the Paris meetings.

On Capitol Hill, meanwhile, three leading economists told the Joint Economic Committee that the dollar needs to fall further, with two of them -- Jerry Jasinowski of the National Association of Manufacturers and Robert Hormats of Goldman Sachs & Co. -- saying the decline should be slow. The third, Paul Krugman of the Massachusetts Institute of Technology, favored a faster fall.

Hormats called for a "controlled decline of the dollar to improve our competitiveness and to offset the interest rate differentials" between the United States and foreign countries, "but not so much of a decline as to cause apprehensions in the markets."

Many analysts said that statements by Secretary of the Treasury James A. Baker III suggesting that the dollar had to fall in value relative to the West German mark was a major cause of the Oct. 19 "Black Monday" stock market plunge.

Before Delors' surprise statement, the dollar had been on a steady downward course, dipping to 1.75l5 marks and to 139.ll yen, even though there was coordinated intervention by major central banks, including the Federal Reserve, in an effort to stabilize the American currency.

Almost unanimously, traders agreed that the decline in the dollar reflected the huge infusion of cash into the financial system by the Fed, which is attempting to steady the stock market. The Fed's efforts to expand cash and credit in the U.S. economy help the stock market by lowering interest rates.

But lower interest rates also made the dollar less attractive as an investment, and bolstered the widespread -- although not officially confirmed -- belief that the United States, Japan, Canada and the major European powers had agreed to modify the Louvre agreement of February to support the exchange rates then prevailing.

Prior to Delors' statement, currency traders had seemed to be ignoring efforts by central banks to stabilize currencies. Even a statement by West German Finance Minister Gerhard Stoltenberg that central bank intervention could be intensified "on an international level," if necessary, was paid little heed.

Traders suspect that an official move toward a lower dollar was set in motion at the meeting in Frankfurt Oct. 19 among Baker, Stoltenberg and German Central Bank President Karl Otto Poehl. After Baker had publicly criticized West German interest rate policy, the Bonn government made a token gesture toward a more cooperative policy, and the three men pledged that the Louvre Accord would be supported in a "flexible" way. Flexibility in the current situation, market analysts say, points to a lower dollar.

Many of these experts believe that a lower dollar exchange rate will be necessary to accomplish a sizeable reduction of the huge American trade deficit.

"The key issue pertaining to the dollar," said Henry Kaufman of Salomon Brothers in an interview, "is whether Germany will play its necessary international role {by reducing interest rates}. There is the risk of a sharp dollar slide that would evoke the fear that monetary policy won't remain as easy as it should as long as it should. That would lead to higher interest rates -- and that's just what we don't want right now."

The Treasury spokesman said that Delors' statement does "not reflect the policies of the United States government. As President Reagan said yesterday {Tuesday}, the United States is continuing to cooperate closely with other governments to implement the Louvre agreement."

"The trouble is," said one New York market analyst, "is that nobody here believes the Treasury anymore." It is widely believed that the Reagan administration itself is split on the issue, in the wake of published reports that Secretary of State George Shultz and Economic Council Chairman Beryl W. Sprinkel -- who had resigned, but has been asked to stay on -- believe the Louvre Accord sets too high a price for the dollar.

Delors, in his statement, said that a drop of the dollar to 1.60 marks would cut into European exports, and add at least $2 billion to Europe's farm bill. He repeated the frequently made European criticism of the American budget deficit as a primary cause of current economic problems, but also chastised Western Europe for doing too little to boost economic growth.

Meanwhile, officials here, in Japan and Europe indicated that there is no chance of a new meeting of the Group of Seven countries -- the United States, West Germany, Japan, France, England, Canada and Italy -- the participants in the exchange rate negotiations.