WASHINGTON -- The United States favors a stronger dollar as a means of boosting financial markets and helping sustain growth in the world economy, the Treasury Department said yesterday.

Lawrence Summers, the Treasury's undersecretary for international affairs, delivered the message in support of the dollar in testimony to a Senate Banking subcommittee. "The administration believes that a strengthening of the dollar against the yen and mark would have important economic benefits for the United States," he said.

Summers told the panel that a stronger dollar would restore the confidence of investors in bonds and other financial markets. "It would boost the attractiveness of U.S. assets and the incentive for longer-term investment in the economy, and help to keep inflation low."

A further deterioration in the dollar, Summers added, "would be counterproductive to global recovery."

An identical statement on the dollar was contained in the Treasury's semiannual report to Congress on international economic issues and exchange rate policy, which was released yesterday.

The dollar rallied in foreign exchange markets in reaction as traders saw that the Treasury seemed to be in tune with the Federal Reserve. In late afternoon trading, the dollar was up sharply against the German mark at 1.5900 from 1.5624, and was quoted at 98.93 yen.

On Wednesday, Fed chairman Alan Greenspan warned the Senate Banking Committee that the-drop in the dollar was "bad for the economy" and should be reversed to prevent upward price pressures in the United States. Greenspan's repeated references to a weak dollar made it clear that Fed officials were more worried about the U.S. currency than was widely believed.

Summers called the recent weakness in the dollar "a complicated phenomenon" that reflected expectations of higher interest rates in Europe and worries that the Japanese trade surplus would not be dealt with effectively by Japan's new government.

U.S. authorities, working in cooperation with foreign central bank authorities, intervened in exchange markets on April 29, May 4, and June 24 in an effort to prop up the dollar. Despite the intervention, which was accompanied by statements of support from Treasury Secretary Lloyd Bentsen, the dollar continued to weaken.

Summers stressed the administration's view that the economy's strength in an environment of low inflation should eventually "be reflected in a strong and stable U.S. dollar." He also issued an upbeat outlook for the global economy and said the trade deficit is likely to stabilize as U.S. trading partners experience up-turns in growth and buy more U.S. exports.

While fielding questions from the committee, Summers said a weak dollar "has potentially adverse consequences for the dollar's central role in the [world] monetary system." He also acknowledged that the persistent U.S. trade deficit with Japan has played a role in the dollar's recent decline against the yen.

Summers also said he believes recent gains in long-term interest rates in the United States are more a function of rising credit demand from strong economic growth, not rising inflationary expectations. "I would not assign a high weight to inflationary expectations at this time," he said.

Also yesterday, senior finance officials from the United States, Japan, and Germany responded to recommendations from the Bretton Woods Commission to establish stronger international measures to stabilize exchange rates. "In time, this system might include commitments to flexible exchange rate bands," said the report, called "Bretton Woods: Looking to the Future."

The commission is a private group of international financial experts assembled to consider the future roles of the International Monetary Fund and the World Bank. The report was one of several released recently to commemorate the 50th anniversary of the original Bretton Woods conference, where U.S. and British officials created the IMF and World Bank.

The officials yesterday, including Treasury Secretary Lloyd Bentsen, said a more stable system of exchange rates would be desirable but hard to bring about.

"Some say a more instltutionalized approach to policy coordination is necessary," Bentsen said. "In theory, not a bad idea. In practice, it's much more difficult than it might first appear."

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