Tokyo stocks fell sharply as the dollar remained strong despite Wednesday's half-point discount rate increase by the Bank of Japan. London shares recovered some lost ground, largely on technical factors as Chancellor Nigel Lawson's speech to the Conservative Party conference was viewed as basically neutral for the market. Tokyo's Nikkei Index of 225 issues, which fell 136.28 points Wednesday, closed at 34795.05, down 445.02. The decline of nearly 1.3% left the index below 35000 for the first time since Sept. 25. In the first hour of trading in Tokyo Friday, the Nikkei Index rose 145.96 points to 34941.01. Thursday's volume on the first section was estimated at 650 million shares, compared with 751 million Wednesday. Declining issues outpaced advancers 857-161, with 110 unchanged. The Tokyo Stock Price Index of all issues in the first section, which lost 13.07 Wednesday, was down 36.89, or 1.4%, to 2623.60. The market opened at what proved to be its high and continued to slip toward the end of the day. Traders said the reason its drop was larger than Wednesday's moderate loss was that investors began selling their holdings when they saw that Wednesday's rise to 3.75% in the discount rate -- the central bank's base rate on loans to commercial banks -- failed to curb the dollar's rise against the yen. A stronger dollar concerns Japanese stock investors because it contributes to Japanese inflation, particularly by raising oil and other energy and natural resource prices, which are denominated in dollars. In addition, higher prices for imports allow domestic manufacturers to increase their own prices. Moreover, the current high level of the U.S. stock market, and the possibility of U.S. interest rates being cut or Japanese rates being raised again to keep the dollar down, might draw funds currently invested in Japanese equities into the U.S. market, some investors fear. Masami Okuma, senior trader at UBS Phillips & Drew International, said expectations of another increase in the discount rate already are causing some investors not only to stop buying but also to dump some of their recently acquired shares. Yoshiaki Mitsuoka, manager of the investment information department at Daiwa Investment Trust & Management Co., said the market had been sustained recently by smaller issues with relatively low price-earnings ratios. Prices of such shares, he said, now have risen an average of 57% in the past six months, making them less attractive for fresh buying. Yukio Itagaki, director of the fund management department at Kokusai Investment Trust Management Co., said the discount rate increase didn't have much effect on the actual market environment, as short-term interest rates already had been above 5%. And as the rate on newly issued three-month certificates of deposit went up to 6.2% Wednesday, institutions and corporations had little incentive to invest new funds in stocks. The higher discount rate discouraged institutions from holding steel and construction shares, traders said. Nippon Steel fell 10 to 698 yen ($4.83) a share, Sumitomo Metal lost 19 to 677, and Kobe Steel was down 9 at 690. Kajima was down 100 at 1,900, while Ohbayashi lost 60 to 1,500. Shipbuilding issues also were sold off. Kawasaki Heavy Industries fell 37 to 903, and Mitsubishi Heavy Industries was down 30 at 1,010. Among housing issues, Misawa Homes lost 140 to 2,830, Sekisui House declined 70 to 2,400, and Daiwa House lost 100 to 2,470. Retail issues, which advanced in September on speculation about mergers and acquisitions in the sector, were sold on profit-taking, traders said. Seiyu was down 240 at 2,710, Daiei fell 70 to 2,980, and Isetan lost 170 to 4,720. Some of the blue-chip issues that had gained in the previous couple of days were lower as investors retreated quickly. Hitachi lost 10 to 1,510, Toshiba was down 40 at 1,130, and Toyota Motor lost 30 to 2,820. Among the few winners was Sharp, which attracted investors because of growing demand for its liquid crystal projectors, traders said. Sharp gained 20 to 1,550. Other gainers included Nippon Shokubai, which rose 70 to 2,270, Nikon, up 30 to 1,620, and Aiwa, which gained 120 to 2,000. In London, the Financial Times-Stock Exchange 100-share index finished 19 points higher at 2237.8. The Financial Times 30-share index rose 20.4 to 1817.7. Volume was 437.4 million shares, down from 503.2 million Wednesday. Chancellor Lawson, who has been under political fire for his decision a week ago to force U.K. banks' base lending rates up to 15%, an eight-year high, addressed the governing Conservatives' annual conference on current economic issues, and dealers said the speech was exactly what the market had expected. ``It was a good party political conference speech,'' a dealer with a large U.K. market-making operation said. ``He didn't calm any fears or anxieties, but at least he didn't create any new ones.'' Dealers attributed the day's advances largely to a technical rebound from the sharp declines that followed last week's base-rate increase. They also cited markdowns by market-makers seeking to generate some business and a general absence of active selling. There was also some speculative energy that helped to support the FT-SE 100 later in the session, when Wall Street showed signs of weakness early in its trading day. That energy came in part from renewed rumors that U.S. takeover specialists Kohlberg Kravis Roberts are preparing to make a takeover bid for industrial concern BTR rather than simply take a 15% stake in it. Dealers also pointed to active options dealing in the stock recently and said some of the options had been exercised. BTR ended 7 higher at 437 pence ($6.76) a share. Ferranti International Signal rose 1 1/2 to 58 on 8.5 million shares. British Aerospace said earlier in the week that it was considering making a joint bid with France's Thomson-CSF for Ferranti. ASDA Group, a U.K. food retailer, closed 4 higher at 163 after holders approved the company's acquisition of 61 stores from Isosceles. ASDA was relatively active at 6.3 million shares. Other companies in the food sector also firmed on active volume, with Argyll Group gaining 8 to 223, Tesco up 1/2 to 194 1/2 and J. Sainsbury advancing 3 to 255. Blue-chip issues attracted institutions looking for defensive positions amid the current doubts about the future of the U.K. economy, dealers said. British Steel edged 2 higher to 126 1/2 on 8.3 million shares, British Telecommuncations settled 6 higher at 268, and British Petroleum gained 1 to 307 1/2. In other European markets, share prices ended higher in Frankfurt, lower in Paris, Brussels and Amsterdam and mixed in Stockholm, Milan and Zurich. South African gold stocks were slightly firmer. Elsewhere, stocks rose in Taipei, Singapore, Seoul and Manila and were lower in Hong Kong, Wellington and Sydney. Here are price trends on the world's major stock markets, as calculated by Morgan Stanley Capital International Perspective, Geneva. To make them directly comparable, each index is based on the close of 1969 equaling 100. The percentage change is since year-end.