PaineWebber Group Inc.'s shares plummeted more than 7% on Monday as speculation that the company would be acquired cooled down.

On Friday, PaineWebber's shares skyrocketed 17% at the end of the day, convincing many that the country's fourth-largest brokerage firm was about to be snapped up by either a commercial bank or larger brokerage firm.

Market observers at the time postulated that possible bank acquirers were Chase Manhattan Corp. or J.P. Morgan & Co.

"When everyone knows about a prospective deal like the price and the acquirer, chances are nothing is going to happen," said one market expert on Friday, when PaineWebber's stock was hovering at a dizzying $41. "But no one knows anything at all, and the stock price is soaring in the secondary market, you got to wonder if it's true."

When no deal materialized, Paine Webber's stock fell $2.50, to $38.50 - on heavier trading than had swept it to its 52-week high on Friday.

No clear-cut explanation has emerged as to why investors believed a merger was so imminent, but market observers agreed that the intensity of the speculation came at a time when the brokerage firm rumor mill has been relatively quiet. The last rash of rumors occurred directly after Travelers Group Inc. agreed to buy Salomon Brothers Inc. in late September. Then, on Oct. 8, Paine Webber's shares surged 8.3%, as investors speculated that Goldman, Sachs was about to acquire it.

Economic turmoil in Asia and uncertainty about how it would affect trading revenues-particularly of brokerage firms-eventually muzzled most- rumor mongering, as investors focused on more bottom-line issues.

Market analysts pointed out that a number of converging factors have made the market ripe for such a spectacular rumor to occur.

Brokerage firm analyst Michael A. Flanagan of Financial Service Analytics said he was immediately doubtful when he heard the rumor, because "the firm has always issued statements that clearly point to being independent."

However, as nervousness about Asia seems to subside, investors also could be looking at how cheap brokerage firms are, relative to the market, he said.

Brokerage analyst Joan S. Solotar at Donaldson Lufkin & Jenrette Securities Corp. said that the themes fueling some of these rumors are "strong fundamentals, rising stock prices, good deal flow, low inflation" and the fact that "clearly there will be additional consolidation" in the sector.

Market experts said they doubted that the Paine Webber rumor is likely to create a wave of speculation in most brokerage stocks.

Most brokerage shares were either down or flat.

Two of the biggest gainers in the group included Jeffries Group Inc., Los Angeles, which was up 93.75 cents, to $45.25, on average volume, and Dain Rauscher Corp. (formerly Dain Bosworth), Minneapolis, up $1.25, to $59.875.

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