Stocks closed higher in heavy trading Friday, rebounding late in the session after losing an early rally tied to hopes for an interest rate cut reflecting good news from the government on the inflation front.

The Dow Jones industrial average, which jumped 30.95 Thursday, added 15.34 to close at 2920.79.Broader market gauges set record highs, and a key measure of the over-the-counter market cracked the 500 barrier for the first time.

The New York Stock Exchange composite index rose 1.44 to 208.08, and the Standard & Poor's 500-stock index gained 2.77 to 380.40. The price of an average share added 24 cents.

Advances led declines 927-612 among the 2,043 issues crossing the NYSE tape. Big Board volume totaled 198,610,000 shares, compared wtih 196,570,000 traded Thursday.

Right from the opening bell, stocks rallied, spurred by news that plunging food and energy costs pulled consumer prices down 0.1 percent in March.

For the first three months of the year, inflation rose at a 2.4 percent annual rate, the lowest such rate since 2.2 percent in the 1986 third quarter.

And excluding volatile food and energy costs, the government's consumer price index edged up a modest 0.1 percent.

"Traders were encouraged by the CPI numbers," said A.C. Moore, director of research at Argus Investment Management in Santa Barbara, Calif. The news was taken by investors to mean that the Federal Reserve could feel free to cut interest rates without reigniting inflation.

But prices soon backed off, and when the Fed signaled that it was draining funds from the banking system, which can have the effect of propping up rates, prices turned mixed.

Moore also said the midday drop was technical in nature, as was the recovery late in the session.

"We sold off at midday because the market had gone up 30 points yesterday and 20 more today," he said. "Then when there was no followthrough on the selling, the market went back up."

While noting traders, as they always do, would have a frustrating time trying to read the mind of the central bank, Moore said recent economic data point to lower rates.

"The Fed does what it does when it wants to. It's not on a timetable with what Wall Street analysts think it should do," he said. "But a tone has been set of disinflation. The benchmarks of that are the weak employment report (released last week) and the current inflation numbers. Within that framework, the Fed should be able to ease."

Moore said he feels the Fed will probably act within a week or 10 days, possibly with a discount rate cut. "The market is still in a positive mode," he said.

Other analysts also said weakness in IBM helped push the market down at midday. Big Blue closed down 21/8 to 1081/2, the most active issue.

The world's largest computer maker, suffering from sagging business, unfavorable exchange rates and a new accounting charge, reported a first-quarter net loss of $1.73 billion, its first-ever quarterly shortfall.

Elsewhere on the trading floor, Advanced Micro Devices followed, up 1 to 135/8, after reporting better-than-expected first-quarter profits Thursday.

The National Association of Securities Dealers composite index gained 2.31 to 501.62, its second-straight record high.