Oil prices continued to surge yesterday in the wake of the Iraqi invasion of Kuwait, jarring world financial markets and increasing the danger that the U.S. economy will drop into a recession.

That danger was underscored yesterday by a Labor Department report that the nation's civilian unemployment rate rose from 5.2 percent to 5.5 percent last month, the highest level in two years. The weakening job market shown by the report was an indication that the United States has no economic momentum to cushion it from an oil price shock, analysts said. {Details on Page C1.}

On the New York Stock Exchange, the Dow Jones average of 30 industrial stocks plunged 123 points before bouncing back to close at 2809.65, a 54.95 point drop. {Details on Page C1.}

The stock rebound came after Soviet Foreign Minister Eduard Shevardnadze said Baghdad had assured Moscow that it would pull out the troops "very shortly." Crude oil prices also fell back somewhat after the statement. But the day's decline dropped the Dow nearly 90 points below the level before the Iraqi invasion.

Crude oil prices took another jump of $1.50 to $2 a barrel on commodity markets to about $24.50, and if such price levels persist, they would represent roughly a one-third increase in the cost of a 42-gallon barrel. That would translate into a 15 cent-per-gallon increase in gasoline prices at the pump, and similar increases in home heating oil prices, feeding a powerful current of inflation into the economy.

At the White House, spokesman Marlin Fitzwater said that, despite the increase in unemployment, the administration believes "the economy continues to grow, albeit slowly" and that "we don't see a recession."

But he added that the administration's outlook is based on its assumption that the increase in oil prices will be moderate. "The possibility of extreme change and damage is very great," Fitzwater noted. "It's a large concern and a growing concern," he said.

The impact of higher oil prices will be felt not only private motorists but by many businesses as well. The trucking and airline industries will have a larger fuel bill while some electric utilities that burn oil and the chemical industry, which uses petroleum as the basic raw material for plastics and many other products, will face rising costs, too.

As those costs rise, people paying more for gasoline, heating oil, electricity and transportation -- some airlines announced they were adding fuel surcharges to ticket prices -- have less cash left with which to buy other things, which could add up to an economic slump.

Short-term interest rates fell by about 0.16 percentage points as investors decided the weak employment report and the depressing effect of higher oil prices likely meant that the Federal Reserve would soon cut interest rates again by at least a quarter of a percentage point. Long-term rates, which normally would have dropped as well following such a signal of economic weakness, rose about 0.1 percentage points because of investors' worry about higher inflation rates, analysts said.

Allen Sinai of the Boston Co., a financial advisory firm, said the employment report indicated the economy already was sliding before oil prices shot up. "It clearly was recession-like," he said. "It represents a caving of the economy toward or into a recession. In my opinion we are in a recession."

The Labor Department report yesterday indicated that economic growth was already so slow that many people joining the work force for the first time, or seeking a job after having dropped out of the work force for a while, are having difficulty finding employment. There was little sign, however, that the slow growth had sparked widespread layoffs.

The department's survey of business and government payrolls showed a drop of 219,000 in July, with 160,000 represented by temporary workers hired by the Census Bureau to help take the decennial census. Falling employment in the construction industry accounted for another 50,000 of the decline. There was also a further small drop in manufacturing payrolls, which are down nearly 300,000 compared to July 1989.

Equally important, there was no net gain in payrolls of industries producing services, including governments, even if the layoffs of census workers is not counted. Until recently, payrolls in those industries had been growing at a healthy clip and last month were 2.3 million higher than they were a year earlier.

In addition to the employment decline, the length of the average workweek in manufacturing and the amount of weekly overtime both fell by one-tenth of an hour, another sign of a weak outlook for that part of the economy.

The Boston Co.'s Sinai noted that the unemployment rate rose significantly despite a decline in the size of the labor force for the second month in a row. If the temporary hiring of census workers is excluded, he said, "the employment pattern over the last five months is very similar to what happened before the last two recessions."

His conclusion about the economy's state was based on more than just the weak employment picture, Sinai said. He cited second-quarter declines in consumer spending, business investment and net exports, a drop in new orders for manufactured goods and now the "negative impact on consumer spending from higher oil prices and the loss of jobs."

"The economy's slide is there regardless of the {invasion}," he said.