Prudential Securities Inc. analyst George Salem lowered his industry rating on the banking sector Thursday to "hold" from "buy," citing deteriorating fundamentals and investor sentiment.

Mr. Salem is now recommending only six bank stocks. He rates 10 other stocks a hold, including Chemical Banking Corp., which was removed from the analyst's recommended list on Thursday.

Chemical fell 87.5 cents a share to close at $38 Thursday on volume of over one million shares.

Most bank stocks traded fractionally lower, while the bond market treaded water ahead of Friday's release of July employment data.

The Dow Jones industrial average fell 26.87 points to 3765.79.

Depending on what it signals on the inflation front, the jobs report could either ease or exacerbate market fears of another hike in interest rates by the Federal Reserve board.

The next meeting of the Fed's policymaking committee is set for Aug. 16.

Chemical was the third bank downgraded by Mr. Salem in recent days. Last Wednesday, he removed Chase Manhattan Corp. from his recommended list, citing concerns about higher interest rates.

And last Friday, he withdrew his buy rating on First Chicago Corp., based on worries that intense competition in the creditcard business will erode the banking company's earnings.

In the case of Chemical, though, Mr. Salem said the downgrade reflected his concerns about-money-centers in general, rather than any specific worries about Chemical.

The bank stocks still favored by Mr. Salem are Norwest, Bank of New York, Boatmen's Baneshares, Citicorp, First Interstate, and NationsBank.

All six banks, he said. have "strong, predictable earnings that can withstand the more difficult environment we envision."

In shifting into a neutral position on the banking sector, Mr. Salem said his biggest concern is that consumers seem more willing to take their money out of savings and money-market accounts in search of higher returns outside the banking system.

On the positive side, Mr. Salem said banks stocks still have good earnings growth, low price/ earnings ratios, high dividend yields, and rising dividends.

He expects the banking group to perform as well as, or slightly better, than the market as a whole over the next several months.

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