Bank stocks plunged Tuesday as concern over the sharp decline in the value of the dollar continued to plague the stock and bond markets.

The dollar dropped to a new post-World War II low against the Japanese yen during midday trading, and fell sharply against the German mark.

This fueled fears that later this month, when the Federal Reserve Board next meets, it will hike interest rates again in an attempt to halt the dollar's free-fall. Higher interest rates are commonly viewed as a negative for banks.

The Standard & Poor's Corp. index of banks fell 1.71%, after sliding roughly half as far the previous day.

Banks' tumble easily outpaced the slippage in the Dow Jones industrial average. The blue chip index fell 0.87%, or 34.93 points, to settle at 3962.63.

"Its another fun day in bankland," sighed Carole S. Berger of Salomon Brothers. "Banks are getting slaughtered out there."

Among the largest banks, First Interstate Bancorp fell $2.25 to $79.625, Chemical Banking Corp. fell $1 to $38.125, NationsBank Corp fell 87.5 cents to $48.875, and BayBanks Inc. fell $1.125 to $62.875.

J.P. Morgan & Co. slipped 87.5 cents to $64. SunTrust Banks Inc. fell 87.5 cents to $52.625, Banc One Corp. declined 62.5 cents to $27.875, Mellon Bank Corp. dropped 50 cents to $37.50, and Keycorp was off 62.5 cents at $28.375.

Smaller banks, which are not as directly affected by currency considerations and usually lag major market movements by at least a day, were not down nearly as much. Over-the-counter bank stocks declined 0.66%.

Analysts, pointing to the bank sector's 12% rise the last two months, also blamed profit taking for bank equities' decline.

"The bank rally is over," declared Lawrence Vitale of Bear, Stearns & Co. "Fund managers are looking for someplace else to hide now.

"The timing is interesting because in the next two weeks we will get a feel for how the first quarter is going, and it could be tough," he added.

Fourth-quarter bank profits were merely average, he said, and nothing has occurred in the last two months to indicate any change.

Just 10 days ago bank stocks looked like an investor's dream, with interest rates at bay and the Fed predicting a soft landing, Ms. Berger said.

Now the economy is apparently slowing and the Fed may still have to hike rates, she said. The bank sector is also ripe for profit taking, she added.

Concerns over the economies of Mexico and Latin America also took a toll on shares of money-centers and Bank of Boston Corp., added Scott Edgar, an analyst with SIFE Trust Fund, which invests in U.S. banks and thrifts.

Bank of Boston fell $1.125 to $26.50. Citicorp also fell, by $1.125 to $41.

Washington lawmakers emphasized the dollar's fall in hearings Tuesday, and expressed worry that the fall was linked to the decline in the Mexican peso.

But Lawrence Summers, Treasury under secretary for international affairs, repeatedly refused in testimony before the House International Relations Committee to explain the administration's views regarding the dollar's decline.

Later in the day, as the dollar fell past the 90-yen threshold, some buyers emerged and buttressed the U.S. currency somewhat.

White House Press Secretary Mike McCurry assured reporters that a strong dollar is in the best interest of the country, but added little beyond that.

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