Banker index of the 50 largest U.S. banks and the American Banker 225 index dropped about 1%.
That was in sharp contrast to Friday's 3.6% rise in the American Banker 50, and the 4.2% rise in the American Banker 225.
Friday's ebullience reflected the market's excitement about reports that the White House and Congress had agreed on financial modernization legislation.
Big banks, which were the biggest gainers Friday, were the biggest losers Monday. Chase Manhattan Corp. dropped $2.625, or 3.26%, to $78; FleetBoston $2.0625, or 5.16%, to $37.875; and J.P. Morgan $5.4375, or 4.33%, to $120.1875;.
Financial modernization became yesterday's story and investor attention on Monday focused once again on fears of inflation and higher interest rates.
European Central Bank chief economist Otmar Issing warned of greater inflation risks because European economies are improving, triggering the U.S. market's downturn.
Last week's gains by bank stocks "just weren't sustainable," said Arun Kumar, senior equities strategist with Lehman Brothers in New York. "There were too many other forces at work."
Mr. Kumar said Wall Street was looking ahead to Thursday's release of two key economic yardsticks -- gross domestic product and the employment cost index.
Both reports are expected to come in strong, economists said, giving the Federal Reserve reason to raise interest rates as a way of slowing down the economy. "While third-quarter earnings were good, there is still a fear of what the Fed will do," Mr. Kumar said.
In addition to a worsening outlook for interest rates, investors were becoming less enthusiastic about the possible impact of the bill that would allow mergers among most financial companies.
"Does financial modernization change the outlook for financial stocks? I think not," said Steve Berman, financial services analyst at Stein Roe & Farnham of New York.
"It doesn't seem like a lot of banks will be running out and buying insurance companies," Mr. Berman said.
Mr. Berman said banks might do well to limit themselves to acquisitions of insurance agencies and avoid insurance companies themselves, whose returns usually are much lower than banks. A typical bank earns an 18% return on equity, while insurance companies come in around 14%, he said.
Optimists still exist, however. Some market watchers said bank stocks will pull out of the doldrums in November.
"October will represent the lows for bank stocks," said Mark Davis, research director at Banc Stock Group in Columbus, Ohio. "Banks will lead the way back up."
Mr. Davis said foreign investors will help banks bounce back.
"I'm looking for a tremendous amount of investment coming in the last two months of the year," he said. "Wealthy people from all over the world will put their money in U.S. markets."
The United States "is seen as a site of stability," he said. "There will be a flood of liquidity into short-term Treasuries, and that will create an excellent interest rate backdrop."