Bank stocks continued their fall Thursday, pushed by government reports that could lead to higher interest rates.

The government announced that unit labor costs rose at a 3.8% annual rate in the second quarter, the steepest climb since the fourth quarter of 1997. Economists had expected a 2.2% rise.

Also, the government reported that nonfarm productivity rose more slowly than had been expected. Economists had been predicting a 1.9% rate, but it came in at only 1.3%.

Both reports bode poorly for inflation, which could prompt the Federal Reserve to increase interest rates.

Concern about emerging inflation generally makes investors bearish about bank stocks. Catherine Murray, a bank stock analyst at J.P. Morgan & Co. said Thursday's decline "continues the trend of people being nervous" about bank stocks.

For the day, the Standard & Poor's bank index dropped 1.78%, and the Nasdaq bank index fell 5.04%. The Dow Jones industrial average gained 1.12%, and the S&P 500 was up 0.64%.

Even Pittsburgh's Mellon Bank Corp. fell 50 cents a share, to $33.3125, despite praise from Wall Street after its Wednesday announcement that it would sell its mortgage business to Chase Manhattan Corp.

Mellon's mortgage business was generating losses for the company, sapping gains from other divestitures, said Joseph Duwan, a banking analyst at Keefe, Bruyette & Woods Inc.

Chase has the economies of scale to make the mortgage operation profitable, analysts said. Its stock rose 18.75 cents Thursday, to $78.625.

Mellon's portfolio was said to be worth $620 million to $900 million. The sale was part of its strategy to divest units that fail to meet corporate goals.

"The divestitures have reduced the balance sheet, freed up capital, and allowed Mellon to focus on its higher growth businesses," Mr. Duwan said.

Other financial service companies touted by analysts rose in Thursday's markets. Dime Bancorp gained 12.5 cents, to $19.3125.

Kevin Timmons, a banking analyst at First Albany Corp., said Dime is underpriced. The downside to Dime is the misperception that its "mortgage banking operation is so huge it could cast a shadow over other businesses."

Mortgage banking accounts for only 24% of the New York thrift's revenues, said Salvatore J. Martino, a banking analyst at Advest.

"The market has unduly penalized the stock for its relatively minor exposure to the mortgage banking business and given it little credit for the strides it has made in becoming more like a bank," Mr. Martino said.

"Dime is successfully building its commercial and consumer businesses," he said. "We see tremendous opportunities here."

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