Major bank stocks rallied with the overall market late Wednesday afternoon, reversing early losses.

Investors, at least for an afternoon, dismissed fears of renewed inflation and rising interest rates.

Big gains were tallied by nearly all banks, paced by Barnett Banks Inc., up $2.25 to $45.125, and First Interstate Bancorp, up $2.125 to $57.375, in late trading.

Also enjoying sharp rises were Norwest Corp., up $1.75 to $50.75; Mellon Bank Corp., up $1.875 to $55.25; J.P. Morgan & Co., up $1.50 to $66.75; Bankers Trust New York Corp., up $1.50 to $71.25; and Chemical Banking Corp., up $1.25 to $37.25.

Inflation Jitters Eased

Improving commodity prices calmed inflationary fears and caused the stock and bond markets to rally.

Bank stocks have been buffeted by general economic fears in recent weeks.

In particular, last week's reports showing greater-than-expected rises in consumer and producer prices have raised the specter of a Federal Reserve tightening of credit, which would squeeze bank margins.

After an extremely strong first quarter, many bank stocks have since lost 15% or more in value despite reporting excellent earnings last month.

"We've seen economic fears coalescing in the bank stocks, as we did in 1989-90," said Nancy A. Bush of Brown Brothers Harriman & Co. "But if it was justifiable then, it hasn't seemed justifiable now." Ms. Bush said Brown Brothers' chief economist, Edward J. Campbell, believes the inflation fears "will be forgotten two months from now."

Most analysts said a rebound in bank issues had been overdue.

"The fears have been overstated, and the reaction overdone," said Frank J. Barkocy of Advest Inc.

With an economic outlook somewhere "between dreary and uninspired," William B. Hummer of Wayne Hummer & Co., Chicago, expects no significant change in the levels or structure of interest rates in the next several months.

"The yield curve should remain steeply positive, which will aid margins of liability-sensitive banks," he said in his regular report titled Bank Bond Comment.

Manageable Rate Rise

Lawrence W. Cohn of Paine-Webber Inc. termed it a "mistaken belief' that a rise in short rates would have "a significantly detrimental impact on ban

He said banks have significant control over the gap between interest-sensitive assets and liabilities. If they suspect rising rates, "they can move to offset most and perhaps all of the adverse impact."

As evidence, Mr. Cohn offered an unlikely worst-case scenario for major banks from the fallout of a sudden and sustained rise in rates.

Morgan Most Vulnerable

J.P. Morgan would be the most affected over six months by a two-percentage-point instantaneous move in short rates. The impact on earnings could build to $1.23 a share, he said.

A dividend increase was announced Wednesday by Fleet Financial Group, Providence, R.I. Its quarterly payout was raised 11% to 25 cents a share, payable July 1 to shareholders of record on June 3.

It is the second increase in six months for Fleet, totaling 25%. The dividend was raised in January to 22.5 cents from 20 cents. On Wednesday, Fleet's shares were up 50 cents to $30.625.

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