512 DOWNFALL; BEAR MARKET WIPES OUT YEAR'S GAIN.

Byline: Edward Wyatt The New York Times

Waves of selling by investors large and small engulfed the stock market Monday.

They erased the last of the market's gains this year and sent stock prices down more than 19 percent from their peak just six weeks ago, the sharpest decline in eight years.

The frenzied selling dashed the hopes of investors who had expected the fundamental strength of the American economy to hold off the stock market's recent slump, which began with worries over economic conditions in Asia and accelerated as financial troubles ensnared Russia.

The Dow Jones industrial average fell 512.61 points, or 6.4 percent, to 7,539.07, leaving the bellwether index 4.7 percent below where it started the year. The decline was the second-largest in the index's history in point terms, trailing the 554-point drop on Oct. 27, 1997, but did not rank in the top 20 when measured in percentage.

The Standard & Poor's 500 index, a broader measure of the market, fell more than 69 points, or nearly 7 percent, to 957.28, down 1.3 percent since the beginning of 1998. The declines were the greatest among technology stocks, which until recently have been the market leaders.

The cumulative effect of the past few weeks is nearly as great as the one-day market plunge in October 1987, when stock prices fell 22.6 percent. But a market rebound soon followed and the national economy did not stray into recession.

While there were few signs Monday of panic among individual investors, market participants said that heavy selling by mutual fund companies, responding to withdrawals by individual investors that began over the weekend, played a significant role in Monday's decline, including the stampede that sent the Dow average down 250 points in the last half hour of trading alone.

The sell-off in stocks accompanied a big rally in the bond market, where everyone seemed to be seeking shelter in securities that are backed by the American government. As its price rose with demand, the yield on the 30-year Treasury bond fell to a record low of 5.24 percent.

Economists and financial analysts said the market rout is almost certain to put intense pressure on the Federal Reserve to lower short-term interest rates. For more than a week, the rates on some short-term securities have been higher than on some long-term bonds, a situation that is a classic precursor to a recession.

In Washington, Treasury Secretary Robert Rubin said the economy remains sound, although he acknowledged that ``the world is currently working its way through a difficult period.'' Rubin and Federal Reserve Chairman Alan Greenspan, who is on vacation but who was in touch with Rubin on Monday, are scheduled to meet Friday with Japanese Finance Minister Kiichi Miyazawa in California.

Whatever the cause of the financial difficulties that have plagued Asia and Russia over the past year, economists say, the stock market's recent activity indicates that those troubles have begun to wash up on America's shores.

``This is the first time in a long time where the future of the American economy hinges so much on what happens to American stock prices,'' said Henry Kaufman, a New York economist.

``Consumers have much more than usual invested in stocks, and it has influenced their spending. That has benefited businesses enormously.'' With the decline in stock prices, he said, ``we could begin to see the reverse.''

He suggested the situation calls for a government response. ``We are having a global financial problem,'' Kaufman said, ``and it is a problem that cannot go away quickly. If there are further declines in the equity market, there should be an orchestrated reduction in interest rates by the major industrial countries,'' including the United States, Germany, Britain, France, Italy and Japan.

The scope of the market decline and the lurking economic threats seem to have sunk in with individual investors, who have been the stalwart supporters of the bull market in stocks for the past few years. Mutual fund companies, including Fidelity Investments, the country's largest fund company, reported withdrawals from stock funds over the weekend and Monday, with most of those investors moving into money market or bond funds.

Bearing the brunt of Monday's sell-off were many of the technology stocks that have been the most popular with individual investors and the mutual funds in which they invest. The Nasdaq composite index, the major market index most heavily populated with technology issues, fell 140 points, or 8.6 percent, to 1,499.25 - its second-worst daily decline in points and the fourth-worst in percentage terms. The Nasdaq index is now 4.5 percent below its year-opening level.

Volume on the New York Stock Exchange measured 914.7 million shares, the third-busiest day ever on the Big Board, and the number of stocks that declined exceeded those that advanced by a ratio of more than 7-to-1. Exceptionally heavy volume on the Chicago Board Options Exchange caused a computer problem near the end of trading. But despite that glitch, Rubin said the financial market's mechanisms worked ``effectively.''

The Dow industrial average has declined nearly 1,799 points, or 19.2 percent, from its highest-ever closing price of 9,337.97 on July 17. That is slightly less, in percentage terms, than the 21.2 percent loss in the index's value in the bear market of 1990, which lasted from mid-June through early October.

Most other stock markets around the world posted losses Monday, partly in response to last week's decline in the American stock market. Germany's leading market index fell 2.3 percent, while stock prices in Great Britain fell 2.2 percent. In Hong Kong, the stock market plummeted, falling more than 7 percent after the government, which intervened to help prop up share prices last week, failed to do so again. Virtually alone among the world's major equity markets, Japanese share prices rose 1.4 percent Monday, bouncing off its lowest level in more than a decade last week.

CAPTION(S):

2 Photos, chart, box

PHOTO (1 -- color) A trader in the Dow Jones futures pit at the Chicago Board of Trade displays a weary reaction Monday after the stock market's steep plunge.

Charles Bennett/Associated Press

(2) A trader frantically works the floor of the New York Stock Exchange just before the closing bell Monday, when the Dow fell 512 points.

Marty Lederhandler/Associated Press

Chart: Minute by minute

Daily News

Box: Indexes at a glance

NASDAQ down 140, closed at 1,499.25

S & P 500 down 69, closed at 957.28