Financial stocks took a hit Wednesday, with Firstar Corp. posting a sharp decline after it announced a $21 billion deal to buy U.S. Bancorp.

The American Banker index of the top 50 banks closed down 1.4%, and the index of 225 banks was down 0.8%. The Nasdaq rose 2.0%, and the Dow Jones Industrial Average was up 0.6%. Firstar shares fell 10.1%; U.S. Bancorp edged up 7.8%.

Sung Won Sohn, chief economist at Wells Fargo & Co., said Wall Street’s wariness regarding mergers kept the news of Firstar’s acquisition from helping financial stocks.

He suggested that the main reason for the negative momentum lay in the undertones of the Federal Open Market Committee’s statement on Tuesday warning of a possible rise in inflation, which could force the Fed to further tighten interest rates. Investors might have been too optimistic that rates would remain stable or even move down, he said, and now such hopes are diminished.

The market’s outlook on interest rates remains far from uniform.

Francois Trahan, a sector strategist at Brown Brothers Harriman & Co., said that Wednesday’s market reaction was within the usual range of trading and predicted that financials in general would rally, based on his expectation that the Fed’s next change in policy will be an easing. He said that financial stocks are still in the early stages of a longer rally.

“It is perfectly normal that the market trades down on some days,” he said, particularly since financial stocks had already priced in Tuesday’s decision not to alter interest rates.

Mike Seiler, senior vice president at Capital Resources and a portfolio manager of Aldie-Partners, its hedge fund, agreed that the Fed’s rhetoric might have disappointed investors but said that as soon as the inflation concerns have settled again, the market psychology might improve and send financials up.

Meanwhile, Andrew Collins of ING Barings reduced his earnings estimate for Knight Trading Group Inc. after the company’s announcement of a shortfall in earnings. Knight Trading, Nasdaq’s biggest market maker, said on Wednesday that it would post third-quarter profits as much as 58% below Wall Street forecasts because of a weak stock market and the cost of building up its European operations.

Mr. Collins said that this “may put the company into play as an acquisition candidate” and named Morgan Stanley Dean Witter & Co. and Citigroup Inc. as possible acquirers.

Knight was down $3.6875, or 11.5%, to $28.50.

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