Treasury Secretary James A. Baker III signaled a sharp shift in economic policy yesterday, indicating that the administration's current top priority is to avoid a recession by pushing down interest rates and permitting the dollar to fall against other major currencies.

Baker's views, published in a newspaper interview and endorsed by the White House yesterday, caused the dollar to plunge to record lows against the West German mark and Japanese yen. {Details on Page F1.} They also revived criticism of his performance as the administration's chief economic spokesman.

In the interview reported in yesterday's Wall Street Journal, Baker said he believes a tight monetary policy and rising interest rates contributed to the recent stock market plunge. Baker said he wants to "make sure" the Federal Reserve provides enough money to the banking system to hold down interest rates.

Earlier in the year, Baker and the Fed had sought to help bolster the value of the dollar by raising interest rates and encouraging foreigners to buy dollars and invest them in the United States.

Meanwhile, several major commercial banks, led by Chase Manhattan, cut their prime lending rates from 9 percent to 8.75 percent, contributing to a solid gain in the stock market. The Dow Jones industrial average closed at 1985.41 yesterday, up 40.12 points, for a 2.1 percent gain. {Details on Page F1.}

The prime rate -- a reference to which rates charged on many business loans and a growing number of consumer and home equity loans are tied -- was also reduced by a quarter of a percentage point late last month after the stock market nearly collapsed and the Fed began to pump large amounts of money into the banking system.

White House spokesman Marlin Fitzwater confirmed yesterday that the Treasury secretary was speaking for the administration. But after the dollar's steep decline on foreign exchange markets, Fitzwater said he was "concerned about any misunderstanding" that might arise from the interview. The United States "will continue cooperating closely with its {Group of Seven} partners to foster exchange rate stability," he said.

Other Treasury officials seemed to be playing down the significance of the Baker interview, which contained relatively few direct quotations from the Treasury secretary. However, no administration official said the report was incorrect.

Financial market analysts interpreted the administration's statements as clearly spelling the end of a nine-month effort undertaken with the help of the six other major industrial countries in the Group of Seven -- Japan, West Germany, France, Britain, Italy and Canada -- to hold the value of the dollar within a set range relative to other major currencies. The purpose of the effort to stabilize exchange rates, from the U.S. viewpoint, was to avoid a surge of inflation that might be set off by rapid increases in prices of imported goods, and to aid in attracting large amounts of foreign capital to the United States to finance the nation's large trade deficit.

The Baker performance "is devastating to the market," said one analyst. "All we see is vacillation and political expediency."

A significant number of economists, including a group testifying before Congress yesterday, believe that whatever the inflationary consequences, the value of the dollar must come down by as much as 25 percent from its current level to enable the United States to eliminate its $160 billion trade deficit with the rest of the world.

While most attention was focused on Baker's comments, market-determined interest rates continued to fall here and in several other industrial nations. Yields on 30-year U.S. government bonds fell below 8.8 percent as the Treasury auctioned $4.8 billion worth of the securities yesterday. Rates on such bonds were just under 9.5 percent a few days ago and were nearly 10.5 percent before the stock market plunge on Oct. 19.

Key interest rates also were lowered yesterday by the central banks of West Germany and Switzerland, following similar actions by their counterparts in Britain and the Netherlands the day before.

However, the West German Bundesbank did not cut its 3 percent discount rate -- the rate it charges on loans to financial institutions -- as many analysts had hoped, so that its action had little impact on exchange markets. In addition, the bank's reduction in another important short-term rate was aimed more at keeping the value of the mark within agreed-upon bounds relative to other European currencies than affecting the value of the dollar, analysts said.

In London, Conservative Prime Minister Margaret Thatcher, in an unusual personal intervention, sent a private message to President Reagan late Wednesday regarding the upheaval in financial markets. Later, she publicly blamed the U.S. budget deficit for that turmoil.

"A convincing package to reduce the U.S. budget deficit is a vital first step toward restoring confidence in the financial markets," she said in the House of Commons.

Prior to Oct. 19, many financial market participants believed that if the administration and the Federal Reserve wanted to keep the dollar from falling, they would have to keep raising interest rates to make dollar investments attractive to foreigners -- who increasingly feared a loss in their investments if the dollar did decline. There also were concerns both in the market and at the Fed that the economy was strong enough that inflation would accelerate in 1988.

As a result of Black Monday, market sentiment changed radically. Instead of worrying about inflation, many investors now fear that the financial uncertainties and the big drop in wealth associated with market declines around the world could bring on a recession. The administration's policy shift -- coupled with the change in market sentiment and an easing of the Fed's tight monetary policy -- have all contributed to the recent drop in interest rates.