Stock prices and the dollar surged on international financial markets yesterday, propelled by a sharp drop in the U.S. trade deficit for September and reports that an agreement was near on a plan to reduce the federal budget deficit.

On Wall Street, the Dow Jones industrial average rose 61.01 points to close at 1960.21, for its seventh-largest point gain on record. However, the prices of the 30 blue chip stocks that make up the Dow remained 20 percent below their level of mid-October, before the market's 508-point plunge on Black Monday, Oct. 19.

The report of improvement in the U.S. trade gap caused the battered dollar to rise against the Japanese yen and the West German mark in foreign exchange markets in this country and Europe. It also was credited for boosting stock markets in London, Paris and Frankfurt.

The U.S. stock market took off at the opening bell, shortly after the Commerce Department announced that the September trade deficit fell to $14.1 billion from $15.7 billion in August and that exports increased $800 million and imports shrank by $800 million. {Story on Page F1.}

Adverse reaction last month to the August figures helped propel the stock market on a downward course that culminated in Black Monday.

Economic Council Chairman Beryl W. Sprinkel said yesterday that as a result of the market collapse, the administration probably will lower its estimate for economic growth next year by a percentage point. {Story on Page F1.}

A rally in the bond market yesterday, set off by the strength that the trade report gave to the dollar, sent prices higher early in the day. But the rally fizzled when it became clear that talks under way in Washington were not likely to produce a quick agreement on a package to lower the federal budget deficit.

Improvements in the trade and budget deficits lessen the pressure for high interest rates to attract foreign investment.

Bond prices, which move inversely to interest rates, closed marginally higher as the key 30-year Treasury bond rose 1/16 of a point, or about 60 cents for every $1,000 in face value. Its yield fell to 8.87 percent from 8.88 percent a day earlier.

Statements on Capitol Hill that an agreement on a budget deficit wouldn't come this week set back the stock market, but only briefly. The Dow's day-long advance weakened temporarily but was energized by a sudden buying surge near the close of trading.

In New York foreign exchange markets, the dollar climbed to 135.835 yen from 135.05 yen on Wednesday, and to 1.6885 West German marks, up from 1.6765. The dollar went even higher overseas, but lost some ground when the budget talks stumbled.

The gains in the U.S. stock markets were broad, with advancing stocks leading declining issues more than 3 to 1 on the New York Stock Exchange. Trading was brisk, with 206.3 million million shares changing hands on the Big Board.

"It was a market dying for one little morsel of good news," said Michael Metz, a market analyst for Oppenheimer & Co. of New York.

Yesterday marked the first time since Oct. 23 that the NYSE and other exchanges operated on a normal schedule, closing at 4 p.m. The exchanges had been closing early to help ease the paperwork jam caused by a huge surge in trading, including two 600-million share days on the NYSE Oct. 19 and Oct. 20.

Since Black Monday, analysts agreed, the market has been searching for a new level of comfort for stock prices. But they disagreed on how close the market is to finding that level.

Patrick G. Torpey, market analyst at E.F. Hutton, said, "We had the best of all worlds today." But, he added, "The big fear is that people will think that as a result of what happened today that we're going to go a lot higher. This is a rally within the stabilization process. It's still a volatile market and you can't rule out some hits along the way."

Hugh A. Johnson, chief economist for First Albany Corp. of Albany, N.Y., said, "We're not quite at the 'Happy Days are Here Again' stage" -- referring to a popular Depression-era song -- "but there is a fairly positive tone creeping into the market." He called the trade deficit figures "a catalyst" that brought "fence sitters" back into the market to buy stocks yesterday.

But Johnson said the budget deficit discussions were an even more important factor in the market's psychology. Making the budget deficit cuts, he said, will send a message to West Germany and Japan that this country is interested in promoting a worldwide reduction in interest rates. "It is an important signal to our trading partners that we are getting our act together," he said.

"The pieces are falling into place," Johnson said. "The trade numbers are improving, Washington is taking believable steps on the budget deficit, it seems that West Germany is willing to be more cooperative. And all of this keeps the positive tone of the market alive."

Metz, too, said he thought the budget deficit talks were a more important long-range factor than the trade figures.

"Once you do something about the budget," he said, "you will curb the excesses on consumption. That will help curb imports and that will go a long way to rectify the problem."

More important, he said, cutting the budget deficit "demonstrates political will," which he said will have an important psychological impact.

The market's broad-based advance was reflected in the major market averages. The NYSE composite index rose 3.42 to 138.88.

Standard & Poor's index of 400 industrials climbed 8.52 to 284.33, and S&P's 500-stock index moved up 6.62 at 248.52.

The Nasdaq over-the-counter composite index gained 6.20 to 324.00. And at the American Stock Exchange, the market value index closed at 251.55, up 5.29.