NEW YORK -- After trading sharply higher much of the day, stocks fell steeply yesterday only minutes after a grim-faced Secretary of State James A. Baker III went before television cameras in Geneva to report on his talks with Tariq Aziz, Iraq's foreign minister.
"Traders looked at his face, and that's all they needed to know," said Peter G. Grennan, senior vice president of Shearson Lehman Brothers. "When he started to speak, the market fell apart."
Mr. Baker said at the news conference: "Regrettably, ladies and gentlemen, I heard nothing today that -- in over six hours -- I heard nothing that suggested to me any Iraqi flexibility whatsoever on complying with the United Nations Security Council resolutions."
Mr. Grennan said, "I can't remember an emotionally more tense moment since October 1987," when the Dow Jones industrial average plunged more than 500 points in one day.
"Stocks collapsed, bonds collapsed, and crude oil rallied," he said.
By the end of the day, the Dow Jones industrial average had dropped 39.11 points, or 1.6 percent, to 2,470.30, its lowest level since early November.
"Today should serve as a reminder to investors," said Abby Joseph Cohen, market strategist for Goldman, Sachs & Co., "that there are no easy solutions to geopolitical problems."
"If stock prices were cheap," Mrs. Cohen said, "they would be able to absorb bad news on the political front. But stocks are expensive relative to the outlook for corporate profits and are vulnerable to bad news."
Mrs. Cohen, who forecast last summer's decline, said she thought prices were heading lower.
After five consecutive days of market weakness, investors eagerly began buying as soon as the market opened yesterday, largely on the strength of government soundings from Geneva that the Baker-Aziz talks were "substantive."
Buying continued until 1:57 p.m., three minutes before Mr. Baker began his remarks. An hour before, the Dow had been up 45 points but then fell back a little. Within minutes of the Baker comments, the Dow plunged 50 points from its high, recovered momentarily, then slid 45 points.
The blue-chip index is now down 163 points, or 6.2 percent, this year, dropping in all six sessions of 1991.
The broader Standard & Poor's 500-stock index fell almost as much as the Dow yesterday in percentage terms.
On the Big Board, losers outnumbered gainers more than 8-to-5, and 57 fell to new lows during the day, including General Motors, which closed at 31 1/4 , down 1/4 , after sliding to a new low of 30 7/8 .
The smaller stocks, as represented in the American Stock Exchange's market-value index and the NASDAQ composite, held up better than the big stocks.