Bank stocks plunged Monday after unexpected economic news hinted that inflation could make a comeback, ending a weeklong market rally.

Some of the world's largest oil-producing nations-including Saudi Arabia, Mexico, Venezuela-said they would cut their petroleum exports in an attempt to drive up prices.

The Standard & Poor's bank index fell 1.58%, while the Dow Jones industrial average slid 1.01%. The Nasdaq bank index declined 0.06%, and the S&P 500 dropped 0.33%.

The biggest losers of the day included BankAmerica Corp., down $3.5625, to $83.375; Bankers Trust New York Corp., down $3.8125, to $119.75; and J.P. Morgan & Co., down $3.1875, to $135.

"Higher oil prices mean the inflation story is not as good as we thought it was," said economist Scott J. Brown of Raymond James & Associates Inc., St. Petersburg, Fla. "People expected some action down the line, but this took the market completely by surprise."

Mr. Brown, however, expects bank stocks to shrug off such inflation fears. "This drop today is not terrible considering how much we have been going up in the last couple weeks."

In fact, banks stocks have recently shrugged off a series of hints that inflation is alive and kicking. In the last two weeks, the S&P bank index galloped to 704.240.

"Banks will continue to charge over the long run," said bank analyst Eric E. Rothmann at Stephens Inc., Little Rock. "Once again, people are just looking (today) to sell them."

In a positive development, investors piled into shares of National City Corp., Cleveland, after J.P. Morgan Securities analyst Catherine L. Murray raised the stock's recommendation to "buy" from "market performer."

Ms. Murray raised the company's target price to $86 and lifted her 1999 earnings per share estimates a dime to $4.75. Ms. Murray said that National City's stock should get a boost in the second half of 1998 as the company integrates its bank acquisitions: First of America Corp., Kalamazoo, Mich., and Fort Wayne (Ind.) National Corp. National City's shares rose 62.5 cents, to $72.75.

Shares of Merrill Lynch & Co. surged more than 3% in midday trading once again on fresh speculation that Chase Manhattan Corp. is looking at the company. By the end of the day, however, Merrill's shares fell 43.75 cents, to $82.875.

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