After a week of trying unsuccessfully to break through the magic 3000-point mark, stock prices skidded backwards yesterday, with the Dow Jones industrial average plummeting 108 points in 90 minutes before regaining its footing. The Dow closed the day with a 56-point loss.

The market plunge, although sparked by a sharp drop in the Japanese stock market, was fueled by widely held fears about the failing health of the U.S. economy. The prospect of rising long-term interest rates, an acceleration of inflation and a drop in corporate profits have recently combined to create a new mood of pessimism on Wall Street, even as the blue-chip Dow huffed and puffed last week to surpass its all-time high. Traders had taken to calling it the most unloved bull market in memory.

Yesterday's free fall began shortly after 10 a.m. as wave after wave of computerized program selling hammered the prices of stocks in New York and temporarily halted trading in the stock-related futures pits in Chicago.

Investors, already alarmed by the spiraling costs of the savings and loan crisis, were also frightened yesterday by a story in the Wall Street Journal reporting that one of the corporations that guarantees student loans might be facing financial collapse -- with an uncertain impact on Sallie Mae, the Washington-based Student Loan Marketing Association. Sallie Mae, which later said it did not anticipate a problem, nonetheless saw its shares fall $4.12 1/2 to $49.87 1/2. {Details on Page A5.}

In many ways, the stock market, like the economy generally, is going through a painful process of adjusting to a financial world without the free-flowing debt -- corporate and personal -- that was the fuel for economic expansion during the 1980s.

"A rising tide of debt, even if unsound, immoral or fattening, is bullish," James Grant, editor of Grant's Interest Rate Observer, wrote this week. "Having borrowed money, people spend it." Now, he said, "A shrinkage of debt is bearish. Denied new credit, people don't buy things."

"This was the day the chickens came home to roost," said Newton Zinder, a market analyst at Shearson Lehman Hutton. "The so-called strength in the Dow was masking a lot of internal deterioration," he said, noting that the price of many stocks had been beaten down recently, even as the Dow continued to rally. Even among the 30 industrial stocks measured by the Dow, only half were higher when the market closed last Friday than they were when the year began.

Yesterday's 1.9 percent decline in the Dow was the biggest one-day drop since January, and left the index at 2904.70, down 56.44. Declining stocks outnumbered advancers by about 6 to 1 on heavy New York Stock Exchange volume of 209 million shares.

Trading opened in New York yesterday in the face of a downturn in the Japanese stock market, which has seen the Nikkei average drop almost 4 percent since last Tuesday, and a rise in Japanese interest rates. As interest rates rise around the world, it puts pressure on U.S. markets to boost rates here in order to compete for investors' money. Rising interest rates, in turn, often cause stock prices to decline.

Meanwhile, an unexpectedly weak earnings report from McDonald's, the fast-food giant, was published after the market closed Friday and seemed to confirm suspicions that the economy was weakening, particularly at the consumer level that has provided much of the strength in the economy in the last several years. McDonald's, the most heavily traded issue of the day, dropped $3 to $33.

Last week, a number of other highly visible companies reported second-quarter profits that were below the projection of stock analysts who set Wall Street's expectations, and those stocks dropped sharply into what traders have come to refer to as "black holes." Among the casualties were Texas Instruments, the giant computer chipmaker; Lotus, the software pioneer; and First Interstate, the California banking giant that is beginning to feel the first effects of a downturn in California's once-booming real estate market.

Ironically, most companies are meeting or exceeding their profit projections. Analyst Hugh Johnson of First Albany Corp. said that 60 percent of the corporations reporting second-quarter profits have been better than expected, not worse.

"The market has not reacted to the good earnings reports, only to the bad," Johnson said.

As the market opens today, traders were expected to pay particular attention to the testimony of Federal Reserve Chairman Alan Greenspan, who is scheduled to testify before the House Banking Committee. Greenspan's comments last week that the Fed might lower short-term interest rates raised fears among bond market investors that the Fed was retreating in its fight against inflation -- a key concern for bondholders.

In yesterday's trading, the bellwether 30-year Treasury bond opened with a heavy loss but quickly turned around as investors dumped stocks and fled to the safety of Treasury bonds. At the close, however, the bond was off $2.50 per $1,000, to yield 8.55 percent, up from 8.53 percent on Friday.

On the stock market, meanwhile, yesterday's sell-off was seen by many as merely a continuation of one that began in the final hour of trading on Friday, when the market, which looked all day as if it would end the session on an up note, suddenly turned around and fell 32.67 to close at 2961.14.

One key factor in the market action, according to traders, was the scheduled expiration of large number of contracts for stock options and stock futures traded on the Chicago commodities market -- a time known in the business as a "double witching hour," when traders close the books on these largely speculative instruments tied to the price of stocks.

The New York Stock Exchange said yesterday that because of an enormous change in market positions between 3 and 4 p.m. on Friday, a surveillance team would look for any evidence of market manipulation.

Blue-chip stocks declined across the board yesterday. IBM fell 1 3/4 to 115 7/8, Philip Morris lost 1 1/8 to 49, General Electric dipped 1 1/2 to 72 1/2, Boeing lost 2 1/8 to 55 7/8 and Upjohn declined 1 7/8 to 41 1/4.

The NYSE's composite index of all its listed common stocks fell 3.43 to 194.22. Standard & Poor's industrial index fell 7.90 to 420.79, and S&P's 500-stock composite index dropped 6.30 to 355.31. The Nasdaq composite index for the over-the-counter market declined 10.63 to 444.66. At the American Stock Exchange, the market value index closed at 354.92, down 5.53.