After a prolonged reluctance to short-sell bank stocks, traders- expecting banks to retreat from their peak performance-may be returning to the market.

Though the total amount of short interest in the sector's stocks fell 8.8% in February, short sales of shares in several banks on the New York and American stock exchanges jumped significantly.

Short-selling of stocks for the conventional reason has been uncommon on Wall Street since 1991, when traders who maintained their bets from the previous year against banks' damaged real estate portfolios were seriously burned as the stocks staged a big recovery.

Classic short-sellers typically borrow shares and sell them, counting on replacing them at a profit with cheaper ones when the stock price falls. But if the share price goes up instead of down, the short players in a stock can be squeezed, with losses mounting while they scramble to cover their positions.

"Its difficult to win a game like this when you're dealing with stocks that are so strong," said banking industry analyst Anthony A. Lombardi of Dean Witter Reynolds Inc.

Nevertheless, short players anticipating tighter business conditions for banks-and arbitragers hoping to profit from merger and acquisition activity-have been more active.

Indeed, opportunity seemed to beckon short players last week, when Federal Reserve Chairman Alan Greenspan's bearish comments sent both bonds and bank stocks plunging. The American Banker 225-bank index fell 1.5% in one trading session.

Mr. Lombardi said that while short-term swings may jar financial stocks, banks will continue to do well in the long term-as they have over the past six interest rate cycles. He said he expects interest rates to move up 75 basis points over the next 12 to 18 months.

Speculation about higher rates and the unsustainability of bank stock valuations are the most likely reason that short interest in a host of banks has almost doubled since January.

Some observers suggested that increased short-selling activity was also related to President Clinton's proposal to impose tax consequences on profits made from some short-selling activities.

From mid-January through mid-February, the largest increase in short interest was the 419.6% jump at Star Banc Corp.

The Cincinnati bank's stock price has nearly doubled in less than a year.

"Given the rapid rise in the stock price, it may have attracted the attention of short-sellers," agreed bank analyst Fred Cummings of McDonald & Company Securities, Cleveland. "But I think short-sellers will be disappointed."

Meanwhile, short interest rose 373.2% at Banc One Corp., which is acquiring First USA, the credit card issuer. Observers attributed much of the short activity to arbitragers, who bought First USA long and shorted Banc One to lock in the profitable spread while the two stocks trade in tandem.

"This is pretty typical," said analyst Tom Maier of Everen Securities, Chicago. "Over time, once the acquisition is completed in six months, that spread will evaporate."

Short-sellers were also interested in shares of North Fork Bancorp. Short-interest rose 343% at the Mattituck, N.Y.-based bank, which has seen its stock price more than double in under a year.

Some sources attributed the North Fork activity to major shareholders with their eye on the Clinton administration's tax proposals.

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