Though many believe rising interest rates no longer hurt banks, rate jitters can still knock bank stocks for a loop.

That was the case Friday after a Labor Department report that consumer prices surged 0.7% in April, the biggest jump in nearly nine years.

Investors stampeded, sending the Standard & Poor's bank stock index down 3.15%, to 705.70, while the Dow Jones industrial average lost 1.75%, to 10,913.32.

The news indicated that inflation may be worse than thought. Though few believe the Federal Reserve will respond with a rate hike at this week's meeting, some said the higher prices will become a factor in the Fed's thinking later in the year.

"Today's announcement raises the possibility they will raise rates. Whether they will do it is hard to say," said Joel Houck, a senior analyst of specialty finance at A.G. Edwards & Sons Inc.

Bank profits on loans can be squeezed when rates rise. What's more, high rates can hurt the profitability of banks' customers, leading to credit quality problems.

But analysts credit banks for hedging against potential interest fluctuations-such as an rise in rates-with tools such as interest rate swaps and futures. And they note that banks have diversified into businesses that generate fees rather than interest income.

The relationship between "interest rates and stock prices is overblown," said Michael Mayo, an analyst at Credit Suisse First Boston. "But renewed interest rate jitters have the potential to hurt revenues ranging from money management to trust, to venture capital, to trading."

"The stocks are very sensitive" even if "the companies are not," said Nancy Bush, an analyst for Ryan, Beck & Co. in Livingston, N.J.

Banks with those so-called capital-market-related revenues were all hit hard on Friday. Observers noted that their declines were exacerbated by the high liquidity of their issues, which are all household names held by a wide variety of investors.

Citigroup fell 3.32%, to $71; Bank of America Corp. 3.01%, to $68.5625; Chase Manhattan Corp. 5.95%, to $79; and Bank One Corp. 1.39%, to $62.25.

J.P. Morgan & Co., a subject of merger talk that helped boost its stock price 8.8% in five days of trading through last Thursday, to $146.75, fell 3.96%, to $140.9375. A report by Diane B. Glossman of Lehman Brothers Inc. on Friday said a takeover of Morgan is unlikely, given its strong performance.

Stocks fell across the board, muting a merger and takeover buzz that had been gathering steam after Milwaukee-based Firstar Corp.'s announcement two weeks ago to buy Mercantile Bancshares of St. Louis.

"On a day like (Friday), you get hammered by some piece of news totally unexpected," Ms. Bush said. "It is just going to be a manic market."

The mania carried over to the bond market, where U.S. Treasuries were pounded, leading to a spike in the interest rate on the long bond 30-year notes to 5.92%, up 17 basis points.

That may spell better interest margins for banks down the road, observers said.

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