Stocks closed lower in light trading Friday with traders rattled by news that a key measure of inflation posted an unexpected sharp rise in the first quarter.

The Dow Jones industrial average, which lost 28.46 Thursday, slid 8.66 to close at 2912.38.The New York Stock Exchange composite index lost 0.23 to 207.27 and the Standard & Poor's 500-stock index eased 0.23 to 379.02. The price of an average share slipped 4 cents.

Declines led advances 866-657 among the 2,022 issues crossing the NYSE tape. Big Board volume totaled 153,860,000 shares, down from 166, 940,000 traded Thursday.

The market fell from the start Friday, the opening preceded by news that an important inflation gauge rose sharply in the first three months of the year.

The number was reported in the government's initial estimate of quarterly gross national product. While the nation's total output of goods and services dropped by a higher-than-expected 2.8 percent in the first quarter, inflation, as measured by the GNP fixed weight index, climbed by 5.1 percent during the period.

That was more than many economists had predicted.

Traders felt the jump in inflation would just about finish off any chances for the Federal Reserve to engineer an immediate interest rate cut in an effort to pump up the economy.

"That's what it appeared to be," said Michael O'Connor, senior equity trader at C.L. King & Associates in Albany, N.Y. "Most of the activity came early in the day off of those numbers. The market got beat up pretty good initially."

Indeed, the Dow was down close to 20 points in the early going but recovered to unchanged levels a few times during the day before closing modestly lower.

On the bright side, O'Connor noted the market bounced back and said volume was pretty light. "It was a quiet day after this morning once the numbers came out, and the prospects for further rate declines became not very rosy," he said.

O'Connor said prospects for a rate cut were what had been driving the market.

"Buyers are basically heading for the sidelines," he said. "There's a lot more cautiousness out there from the buy side."

On the trading floor, Saatchi & Saatchi was the most active issue, unchanged at 11/8.

Compaq Computer followed, off 15/8 to 507/8, extending Thursday's plunge on news that it expected earnings below year-ago levels. Merrill Lynch was third, unchanged at 383/8.

Among the blue chips, AT&T gained 1/2 to 38, IBM lost 5/8 to 1073/8, Philip Morris eased 1/4 to 675/8, General Motors fell 5/8 to 363/8, and Boeing slid 11/2 to 461/8.

Exxon rose 3/8 to 591/2 after falling Thursday, when the criminal portion of its settlement in the Exxon valdez oil spill was thrown out of court.

Volume of NYSE-listed issues, including trades in stocks on regional exchanges and in the over-the-counter market, totaled 187,037,630 shares, compared with 204,007,790 shares traded Thursday.

Prices fell in moderate trading on the American Stock Exchange.

The Amex Market Value index eased 0.33 to 363.87. Declines led advances 295-242 among the 799 issues traded.