FINANCIAL MARKETS : Dow Soars 55 on Rosy GDP-Inflation Report : Markets: The third-quarter figures also help push bond rates back below the 8% level. The dollar rebounds.

Stocks rallied Friday while long-term bond interest rates fell below the crucial 8% level for the first time in a week, after a government report on third-quarter economic activity contained no disturbing signs of inflation.

The Dow Jones industrial average surged 55.51 points to 3,930.66, its best level since Oct. 19 and its biggest one-day gain since Oct. 11.

The New York Stock Exchange activated its limit on program trading when the index gained 50 points. Friday’s gain pushed the Dow up 39.36 for the week.

In the bond market, the Treasury’s main 30-year bond yield retreated to 7.95% from 8.05% on Thursday, pushing its price up 1 1/16 points, or $10.63 per $1,000 in face value. The yield and the price move in opposite directions.

The catalyst for the gains in both markets was a Commerce Department report on the nation’s third-quarter gross domestic product, which surged 3.4%, while the implicit price deflator--an inflation gauge that measures price changes in a basket of goods--rose at a 1.6% annual rate compared to 2.9% in the second quarter.

“We’re seeing evidence that the economy is expanding at a reasonably strong pace, but inflation . . . is still very low,” said Hugh Johnson, First Albany Corp.’s market strategist.

Johnson said the report may not dissuade the Federal Reserve Board from raising interest rates at its policy-making meeting in mid-November, as had been widely expected. Most analysts expect a tightening of 0.50 percentage points at that time.

But the data called into question whether the central bank would have to tighten credit a second time before the first of next year.

Market analysts said the news of moderate inflation increased the allure of long-term bonds, particularly after yields punched through 8% earlier this week for the first time in about 2 1/2 years. Investors were encouraged that bond returns would not be sacrificed to higher consumer prices in coming years.

Also lifting the mood of both stock and bond investors was the fact that a large portion of the gain in the GDP was in inventories. Economists expect U.S. companies to throttle back on production while these are worked off.

Stocks also got a lift from a recovering dollar. Advancing strongly against the German mark, the greenback closed in New York at 1.509 marks, up from 1.499 on Thursday. It rose to 97.28 Japanese yen, up from 96.98.

The recent surge in interest rates in the inflation-wary bond market had sent the Dow average on a five-session losing streak of nearly 88 points. But the downturn in stocks ended Thursday with a 27-point rebound in the industrials.

Investors focused on strong third-quarter earnings that continued to flow in Friday from companies such as oil services firm Halliburton Co.

“It’s letting the earnings power start to show through,” said Ron Hill, investment strategist at Brown Bros. Harriman, of the drop in the long bond yield.

In the broader market, meanwhile, rising stocks outnumbered decliners by nearly 8 to 3 on the New York Stock Exchange, where volume totaled a hefty 381.58 million shares, up from 327.78 million the day before.

Relieved investors went on a buying spree, pushing broad-market indexes sharply higher as well.

The NYSE’s composite index rose 3.86 points to 259.43, while the Standard & Poor’s 500-stock index rose 7.92 points to 473.77. The Nasdaq composite index of mostly smaller companies rose 8.68 points to 776.15.

“This is part of an equity celebration,” said Thomas McManus, equity strategist at Morgan Stanley & Co., who said the GDP data showed “the best of both worlds: solid growth, low inflation and expanding profits.”

“We’ve just come through a third-quarter reporting period where earnings surprised even the optimists,” McManus said. “There doesn’t seem to be any negative impact on the economic growth rate of higher interest rates.”

Among the market highlights:

* Halliburton posted third-quarter earnings that were well above analysts’ forecasts, sparking a rally in the oil service group. Halliburton surged 4 1/8 to 36 1/4, Baker Hughes jumped 1 3/8 to 20 3/4 and Schlumberger rose 2 5/8 to 58 5/8.

* McDonnell Douglas gained 15 5/8 to 141. It said it was boosting its quarterly dividend 71% and splitting its stock 3-for-1.

* Hercules soared 10 1/2 to 117 3/8. Hercules and Alliant Techsystems Inc. said they expect to sign an agreement Monday in which Alliant will acquire the aerospace operations of Hercules for $412 million. Alliant rose 4 3/4 to 34 1/4.

* Ventritex, a maker of implantable defibrillators, leaped 3 3/4 to 27 1/2 after receiving a key labeling approval from the Food and Drug Administration.

* Technology stocks extended their rally, with IBM up 2 to 76 1/8.

* Airlines rose as well, based on attractive earnings reports released earlier this week. UAL surged 6 to 95.

* Financial stocks also rose as the imminent threat of higher interest rates receded. BankAmerica rose 1 1/8 to 43 3/4. Merrill Lynch added 1 7/8 to 39 7/8. The Federal National Mortgage Assn. climbed 2 1/4 to 77 3/8.

Stocks were mixed in overseas trading. London’s FTSE 100-share average soared 54.2 points to 3,083.8. In Frankfurt, the DAX average gained 27.12 points to end at 2,040.32. Tokyo’s 225-share Nikkei average edged up 8.80 points to 19,805.16. In Mexico City, the Bolsa index ended 20.77 points lower at 2,571.52.

* STRONG GROWTH

The economy grew at a surprising 3.4% rate but inflation was in check. A1