The selloff in bank stocks continued Tuesday, and further losses loom in anticipation of higher interest rates and a weakening economy.

For the second straight day, the American Banker index of bank stocks performed worse than the overall market. The index fell 0.73%, compared with a 0.12% gain -- to 3,232.22 -- in the Dow Jones industrial average.

On Monday, the bank index fell 2.2%, and over the past five trading days it has fallen 4.76%.

"The people who are in bank stocks are looking for the door," said Felice Gelman, bank analyst for Dillon Read & Co.

Diane B. Glossman of Salomon Brothers predicted that her firm's 35-bank index could fall another 5% to 7% before stabilizing.

A further drop in the dollar and a week consumer confidence report were the main factors in Tuesday's drop. The dollar's plunge leaves little hope of a further interest rate cut. Many fear it could cause the Federal Reserve to boost rates to curb inflation.

The specter of a rate rise and Tuesday's report by the Conference Board that consumer confidence fell in August bode ill for an increase in loan demand.

All but a handful of the largest banks closed lower on Tuesday, although the declines were less sharp than on Monday. Chase Manhattan Corp. lost 87.5 cents to $22.625; Chemical Banking Corp. was off 62.5 cents to $31.50; Bankers Trust New York Corp. slid $1 to $59; and Norwest Corp. fell $1.125 to $35.625.

"We've been saying for some time that the group at this valuation looked a little heavy," said Livia Asher, a regional bank analyst for Merrill Lynch & Co. "The market seems to have discounted credit costs, but real estate has a long tail. We still think banks have sizable real estate losses to recognize."

Broad Range of Losers

There was scant evidence that investors were differentiating between banks on Tuesday. Others losers included Fifth Third Bancorp, off $1.125 to $49.50; National City Corp., off $1.375 to $41.875; and Comerica, off $1.75 to $56.25.

Midlantic Corp. shares, down about 9% Monday, fell another 5% Tuesday. The company, in a filing with the Securities and Exchange Commission, revealed that it had been informed by the Comptroller of the Currency that it failed to comply with its agreement with the regulator.

Midlantic said the Comptroller's office questioned its methodology for determining loan-loss reserves; its backlog of real estate appraisals, and other issues. Midlantic closed at $13.375.

The handful of gainers included Banc One Corp., up 67.5 cents to $43.125; First Bank System, up 50 cents to $24; and Mellon Bank Corp., up 37.5 cents to $40.625.

Analysts said a fundamental change in investor strategy would emerge once the smoke clears.

"The whole euphoria in the market has been based on the sustainability of large margins, on credit costs coming down, and consolidation," said Ms. Asher.

Now, she said, the best criterion for selecting bank stocks is a strong franchise that would give a bank a pricing advantage over its competitors.

Some |Buy' Signals

Merrill is recommending Bankers Trust, BankAmerica Corp., First Union Corp., Fleet Financial Group, and Mellon.

Salomon is advising clients to be "a little more opportunistic," seeking out issues such as Chase that are underpriced, Ms. Glossman said. Beyond that, she said, "We're looking for stories that have earnings potential even if loan demand is weak," including Bancorp Hawaii and U.S. Bancorp.

Companies that had a takeover premium built into their share price in the recent rally could be especially vulnerable as the selloff continues.

"With stocks lower, the currency of the acquirers is less valuable," said Ms. Gelman, at Dillon Read. "It could limit takeover prospects or limit the price."

|Too Cheap to Ignore'

Ms. Glossman noted Salomon Tuesday put out buy recommendations on First Union Corp. and NationsBank Corp., calling them "too cheap to ignore."

NationsBank rose 50 cents to $43.50 and First Union gained 12.5 cents to $36.75. Their competitors in the hurricane-ravaged southern Florida market, SunTrust Banks Inc. and Barnett Banks Inc., were off only a fraction.

Analysts have begun to focus on potential benefits from rebuilding after Hurricane Andrew's devastation of southern Florida.

AmSouth Bancorp., of Birmingham, Ala., slipped $1.125 to $26.125.

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