The third-quarter decline in bank stocks continued at a moderate pace into the first day of the fourth quarter as investors reacted to economic indicators that pointed to a continuing buoyant economy that portends higher interest rates.

The Standard & Poor's bank index fell 0.55%; the Dow Jones industrial average dropped 0.62%. The Nasdaq Bank index fell 0.40%, and the S&P 500 rose 0.01%.

The biggest losers included Bank of New York Co., which fell 93.75 cents, or 2.80%, to $32.50; Citigroup Inc. 87.5 cents, or 1.99%, to $43.125; and Chase Manhattan Corp. $1.3125, or 1.74%, to $74.0625.

After the S&P bank index rose 2.5% Thursday, James Ellman, senior portfolio manager at Merrill Lynch Asset Management, said Friday that he was "not surprised to see that bank stocks are down again today."

"We probably will not see a resurgence until several weeks from now," Mr. Ellman said. "By that time the market will be looking past the Y2K problem and rising interest rates and toward more profitable first-quarter earnings."

Nancy Bush, a bank analyst at Ryan, Beck & Co. in Livingston, N.J., said a sustainable rally in bank stocks might be longer in coming.

"I definitely don't see any blowups in our bank stocks," said Ms. Bush. "But it is hard to say when a rally will actually be coming. Right now, the market is looking at bank stocks and is saying, 'Kill them.' It's not even saying, 'Round up the usual subjects and kill them.' It's saying, 'Kill them all.' "

Investors fled the group Friday after the National Association of Purchasing Management's factory index rose far more than expected, to 57.8 in September, from 54.2 in August. "The surge in factory orders indicates that the impact of the Asian crisis is behind us and that manufacturing and the economy are getting back to normal," said Scott J. Brown, an economist at Raymond James & Associates in St. Petersburg, Fla.

"But now," he said, "many people who expected the Federal Reserve to stay on hold are concerned that it might raise interest rates because inflationary flames are beginning to pick up."

Investors were also rattled by a Commerce Department report showing an increase in consumer spending. Personal incomes grew 0.5% in August after a 0.2% gain in July, and consumer spending rose 0.9% in August after rising 0.4% in July. Such pessimism and skittishness are unlikely to go away soon.

"Until I see some evidence that interest rates are going to decline, I think it is far too early to go back into the market and buy bank stocks," said Alexander Colby, senior vice president at Beacon Fiduciary Advisors in Boston. In the last year, Mr. Colby, whose firm has about $300 million of stocks under management, has cut his allocation of bank stocks in half.

But Noel Dedora, senior portfolio manager at Global Alliance Value Investors Ltd. in Lafayette, Calif., said bank stock valuations are too cheap to ignore.

"There is nothing wrong with the group," said Mr. Dedora, whose firm has $150 million under management, of which 17% is in bank stocks. "Banks have excellent returns on equity, their efficiency ratios are coming down, and some are taking advantage of new technology. But the market is a fickle creature, which sometimes ignores sound long-term fundamentals."

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