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

The government’s report on August employment reignited 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 the previous week.

Declining issues outnumbered advancers by 1,072 to 952 on the New York Stock Exchange. But volume was only 216 million shares, as many traders beat an early exit ahead of Monday’s Labor Day and Tuesday’s Rosh Hashanah holidays.

Smaller stocks outperformed the blue chip market. The Nasdaq composite index inched up 0.28 point to 759.23.

In the bond market, the yield on the Treasury’s main 30-year bond rose to 7.49% from 7.45% on Thursday, and shorter-term yields also closed marginally higher.

Initially, stocks rose and bond yields dropped after the Labor Department said the nation’s unemployment rate held steady at 6.1% in August. The report also said non-farm payrolls increased by just 179,000 jobs.

But then, some investors fretted over other aspects of the report--such as higher wage rates--that suggested inflation pressures.

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. The Columbia report in particular worried bond traders because it is said to be closely watched by Federal Reserve Board Chairman Alan Greenspan.

Still, some analysts said the fade in stocks and bonds Friday 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 to the weakness in stocks and bonds by dumping the U.S. currency.

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

In late New York trading, the dollar was quoted at 1.5561 German marks, down from 1.5750 on Thursday, and at 99.12 Japanese yen, down from 99.63.

Among Friday’s highlights:

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

Elsewhere, drug giant 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, added 5/8 to 79 7/8.

* Tech 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 Texas Instruments fell 1 3/8 to 75 3/4 and IBM eased 5/8 to 67 1/4.

* Wireless communications stocks tumbled, led by Nextel Communications, off 2 3/4 to 22 1/2 after MCI withdrew from talks to invest in Nextel. MCI rose 1/4 to 24 1/4.

Overseas, Frankfurt’s DAX index added 3.91 points to 2,204.71, a rise of 43.17 from last Friday. London’s FTSE-100 index was up 6.2 points to 3,222.7 and Tokyo’s Nikkei index gained 10.90 points to 20,653.83.

In Mexico City, the Bolsa index lost 18.59 points to 2,675.02, its seventh consecutive drop.