NEW YORK (AP) _ Stocks and bonds staged a strong recovery today after diving in reaction to House rejection of President Bush's plan to reduce the budget deficit.

The Dow Jones average of 30 industrial stocks, the best-known measurement of the stock market, tumbled nearly 70 points when trading began but recovered. By early afternoon, it was up 25 points to the 2,540 level.

Traders said stocks received a boost when Britain announced that the pound will enter Europe's exchange rate mechanism, effective Monday. That lifted share prices in London, and the enthusiasm transferred to New York.

The opening plunge triggered an NYSE restraint on computerized selling strategies aimed at helping stabilize the market, an outgrowth of the stock market crash nearly three years ago.

Concern over rising oil prices and persistent turmoil in the Persian Gulf contributed to the drop.

But traders apparently decided to place concern over the budget crisis on hold.

''Everybody's disappointed by the (budget pact failure) but in the end I think people have decided not to let it bother them for awhile,'' said Dudley Eppel, a strategist with Donaldson, Lufkin & Jenrette Securities Corp.

In the bond market, a sensitive barometer of the economy and interest rates, the key 30-year Treasury bond was down about $2 per $1,000 face amount, after falling close to $6 earlier in the day. Its yield, which rises when the price falls, rose to 8.81 percent from 8.79 percent late Thursday.

The House voted 254-179 early today to spurn Bush's plan aimed at trimming $500 billion from the staggering federal deficit that is keeping interest rates high.

The rejection doused investor hopes that the Federal Reserve would take quick action to lower interest rates, which would have tended to make stocks and bonds more valuable.

Economists said investors also remained anxious about a possible outbreak of war in the 2-month-old Persian Gulf crisis, which has doubled the price of oil since early this summer and raised the threat of acute inflation.