A rotational instability is observed in a field-reversed configuration plasma. Onset time, growth rate and modal frequency of the instability are measured in connection with the ion diamagnetic drift frequency over a wide range of plasma parameters. When the plasma is stabilized by a quadrupole field, it shrinks axially with time and its particle confinement time becomes shorter than that of a nonstabilized plasma. A numerical calculation of the field profile reveals that the distortion of the confinement field by the quadrupole field at the ends of the separatrix is responsible for the degradation of particle confinement. However, the multipole field with a higher pole number than the quadrupole can stabilize the plasma without degradation of the particle confinement.