In one of the most volatile trading sessions in recent memory, bargain hunters began to snap up shares in banks on Friday, lifting the industry's stock out of a weeklong slide.

The Standard & Poor's bank index closed up 0.77% at 456.83, while broader indexes crept closer to positive territory after a brutal morning selloff.

Big gainers included Bank of Boston Corp., whose shares rose $1.875 to $66.375; NationsBank Corp., up $1.75 to $97.625, and Citicorp up $1.875 to $103.50.

But analysts suggested that the industry's rough ride could continue in the months ahead, as investors turn more selective.

Analyst Nancy Bush of Brown Brothers Harriman & Co. said investors riding the momentum of the bank stock rally this year haven't differentiated between those banks that have invested in technology and those that have not.

She argued that a different group of investors will dominate the bank market next year, putting their money on companies, such as Banc One Corp. and NationsBank Corp, that have made such investments. She said 1997 will be a "tough, competitive year" for banks.

Friday's action came on the heels of a five-day slide for banks, during which the S&P bank index slipped 5%. From Friday to Friday, the decline was 3.5%

In the first 20 minutes of trading, the Dow Jones industrial average fell more than 140 points, and the S&P bank index fell more than 11 points.

The selloff was attributed to investors' fear of interest rate hikes after a comment Thursday evening by Federal Reserve Chairman Alan Greenspan that the market was at an "uncertain" stage.

Selling was so strong that trading had to be halted in shares of BankAmerica Corp., Citicorp, PNC Bank Corp., and Bank of New York Co.

But stocks staged a recovery after analysts and strategists on Wall Street declared the selloff unwarranted.

The selloff created "a great buying opportunity," said analyst Harold Schroeder of Keefe, Bruyette & Woods Inc. "Greenspan was trying to let a little air out the balloon - the response was really irrational."

Chief economist Thomas Carpenter of ASB Capital Management said he was not surprised to see banks leading the rebound. The industry has several factors in its favor, he said, including consolidation, new earning opportunities, and comfortable capital levels.

Bank stocks are still inexpensive compared to the rest of the market, have strong earnings and good credit quality, said Mr. Schroeder.

Investors, he argued, should use bank stocks to hedge their portfolios, because they are "steady and consistent earners."

Mr. Schroeder pointed out that the same weakness occurred in bank stocks in trading last December, causing some analyst to go negative on the stocks. "They were saying the party was over," he said. "They were wrong."

Ms. Bush of Brown Brothers saw the Friday morning decline in banks stocks as "predictable."

"There was too much euphoria about the bank group. This is a healthy development," she said when the sector was at its nadir early in the day.

Ms. Bush added that the volatility in bank stocks was the result of momentum investors who tend to "throw money" at hot stocks and do not focus on fundamentals.

Investors ought to pay more attention to bank revenues and less attention to interest rates, said Robert Albertson, banking analyst at Goldman, Sachs & Co. "We don't think interest rates are the ultimate variable; late-comers to bank stocks do," he said.

Mr. Albertson said he is still "cautious on the group," but predicted a strong 1997 for BankAmerica and Citicorp.

Former Vanguard Fund portfolio manager John Neff said Friday morning's sharp decline in bank stocks "was overdue."

"The market has gone up 16% a year and that is just not sustainable," said Mr. Neff. "A 15% correction would not surprise me, and I would consider it cathartic."

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