FINANCIAL MARKETS : Dow Takes 3rd Straight Loss; Bond Yields Up

A government employment report fueled inflation fears Friday, erasing a morning rally in stocks and handing the Dow Jones industrial average its third consecutive loss.

The Dow fell 15.86 points to 3,885.58 after having risen 18 points early on. Despite losses that began Wednesday, the widely followed blue chip average still managed a 4.53-point gain for the week, extending a 125-point run-up last week.

Declining issues outnumbered advancers by 1,072 to 952 on the New York Stock Exchange. Volume was only 216.15 million shares, down from 282.84 million on Thursday, as many investors beat an early exit ahead of Monday’s Labor Day and Tuesday’s Rosh Hashanah holidays.

Small-company stocks outperformed the blue chip market, and broad market indexes ended mixed. The NYSE’s composite index fell 1.05 points to 259.93. But the Nasdaq index rose 0.28 to 759.23, and the American Stock Exchange’s market value index rose 1.52 points to 455.54. The Standard & Poor’s 500 list fell 2.18 points to 470.99.

The yield of the Treasury’s main 30-year bond rose to 7.49% from 7.45% on Thursday.

Initially, stocks rose and yields dropped after the Labor Department said the nation’s unemployment rate held steady at 6.1% in August.

But the report also said non-farm payrolls increased by 179,000 jobs, the smallest gain since January.

Traders also said rumors began to circulate that an index created at Columbia’s Center for International Business Cycle Research would show much higher inflation in August. The index, released midmorning, was 111.4, up two points from July and at a five-year high.

Market participants have been looking in every corner for signs of inflation. Some traders saw hints of it in the jobs report, which showed higher hourly wages and healthy gains in manufacturing employment. But the Columbia report was the biggest factor in the selloff because it is said to be closely watched by Federal Reserve Board Chairman Alan Greenspan.

Greenspan was a statistics student of the center’s director, Geoffrey H. Moore.

But some said the fade in stocks and bonds was simply due to traders squaring positions before leaving for the long holiday weekend.

Currency dealers, who have been following American securities markets lately to gauge demand for dollars, responded by dumping the U.S. currency.

Some dealers had taken large dollar positions as the currency rose earlier this week on expectations for an employment report that would bolster the bond market. When yields ended higher, they had to get out.

In late New York trading, the dollar was quoted at 1.5561 marks, down from 1.5750 on Thursday.

The dollar was also changing hands in New York at 99.12 Japanese yen, down from 99.63.

Among Friday’s market highlights:

* Takeover rumors boosted some issues. American Express rose 1/2 to 29 after a Business Week report that the credit card unit of General Electric had approached the finance company about a buyout. GE denied the story.

Warner-Lambert rose 1 1/2 to 83 5/8 amid continued speculation that the company is on the auction block.

Quaker Oats, which has been in the takeover rumor mill for months, rose 5/8 to 79 7/8.

* Technology stocks were mixed after a steep drop in that sector Thursday. AST, which led computer stocks lower Thursday, rose 3/16 to 13 1/4. But IBM fell 5/8 to 67 1/4 on the Big Board.

Nextel Communications led the action in Nasdaq trading, falling 2 3/4 to 22 1/2 after MCI withdrew from talks to invest in the telecommunications concern. MCI rose 1/4 to 24 1/4.

Overseas, Frankfurt’s 30-share DAX ended bourse trading just above 2,200. The DAX closed 3.91 points higher at 2,204.71, a rise of 43.17 from last Friday. In post-bourse trading, the index slid slightly to 2,197.38.

Hong Kong and Tokyo markets changed little in light trading.

Mexico’s Bolsa market fell to 2674.15, it’s seventh consecutive loss.