Merrill Lynch & Co.'s move to on-line discount brokerage last week touched off a wave of selling of brokerage shares that has yet to subside.

But by week's end other brokerages, and some analysts, were saying the selloff was an overreaction.

Merrill's shares and those of its peers plummeted 5% or more Tuesday alone on the uncertainty created by what analyst Joan S. Solotar, brokerage analyst at Donaldson, Lufkin & Jenrette Inc., called a "revolutionary" move.

Analysts reduced earnings targets across the sector, suggesting that other brokerages would have to follow Merrill's lead on price. And some said they do not expect the shares to recover their lost ground in the near term.

But "Wall Street shouldn't have been shocked," Ms. Solotar said. "Merrill Lynch had been fairly open about adopting an Internet strategy" in addition to keeping its other services.

Some brokerages, meanwhile, argued that the competition from Merrill's on-line discount brokerage would have little impact on their business niches.

A spokesman for Citigroup, which owns Salomon Smith Barney, said Friday that full-service brokerages are designed for customers who are willing to pay for advice.

And PaineWebber Inc. said at a press conference Thursday that on-line brokerage is "not going to be the centerpiece" of its own offerings to affluent clients.

Analysts said that, in making its strategic move, Merrill was responding to competitive pressures from smaller brokers, like Charles Schwab & Co., that have begun similar services.

Merrill would become the first major brokerage to offer discounted on- line trading as a primary product.

The brokerage giant said it would give its five million customers access to the service by yearend. In a separate initiative, it said it will offer, by next month, unlimited on-line trading, with fees based on a percentage of the assets being bought or sold.

After Merrill's announcement Tuesday, brokerage shares plummeted as much as 10% before recovering some ground by the close of trading.

Merrill and the other publicly traded brokerage firms continued to slip as investors worried about the impact of Merrill's pricing strategy on the sector at large. On Friday the stocks showed some stability, with Merrill adding $2.3125 to $72.25, PaineWebber down $1.3125 to $41.4375, and Morgan Stanley Dean Witter & Co. rising $3 to $91.

"The brokerage group is now one big question mark," said Steven Eisman, an analyst at CIBC World Markets. "We've never been more uncertain about it."

The market was reacting sharply to what amounted to a 180-degree turn in the strategy of the largest full-service distributor, said DLJ's Ms. Solotar.

Michael A. Flanagan, a senior researcher at Financial Service Analytics in Philadelphia, said investors were being cautious as they faced "the advent of a new, significant form of competition that threatens the cost structure of the industry."

Merrill has "fundamentally changed the way the brokerage industry does business," he said. "What comes with it is a significant uncertainty about who the clear winners will be."

But Ms. Solotar said that when it is launched the service could help Merrill's shares. "Hopefully, the product will be robust enough to trade off it."

Still, most analysts said the move by Merrill and the announcement that the on-line brokerage E-Trade Group Inc. would buy on-line banker Telebanc Financial Corp. would pressure banks and other brokerages to play catch-up.

Like Merrill, E-Trade is taking a big step beyond conventional trading by moving to broaden its Internet financial services.

Analysts said that among banking companies First Union Corp. may be best positioned to develop a similar product through its ambitious Internet strategy.

Merrill Lynch "views the service as a substantial way of appealing to the next generation of investors," said Guy Moszkowski, a brokerage analyst at Salomon Smith Barney.

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