In the latest repercussion of the merger talk surrounding Bank of Boston Corp., Morgan Stanley & Co. downgraded Mellon Bank Corp., after a futile attempt by Mellon management to explain its bid for the New England bank.

Analyst Dennis F. Shea lowered his rating to "outperform" from "strong buy," and removed Mellon from his list of top three bank stocks.

After a private meeting with bank management Tuesday, Mr. Shea concluded it is likely that Mellon will actively seek banking acquisitions or merger partners, limiting the potential for stock price appreciation.

On a day when the broader S&P bank stock index rose TKTK, Mellon Bank's stock price was down throughout the day, falling TKTK to close at TKTK.

Mr. Shea said that an acquisition would lower the revenue and earnings contribution from the asset management business, and would decrease the likelihood of an aggressive stock repurchase program.

"Asset management companies typically trade at meaningful premiums to banks, and a dilution of the relative contribution of asset management stemming from a bank acquisition would limit the upward valuation potential," said Mr. Shea.

Additionally, a large merger would likely involve an exchange of stock, which would "push out the stock buyback many expected in August of 1996," he said.

According to Mr. Shea, Mellon officials said they need to maintain a certain size relative to other banks to preserve their position in the industry and to make sure they are relevant in all their business lines.

"They are not willing to go the route of a State Street or a Northern Trust," said Mr. Shea.

Other analysts have taken similar action recently, with Diane Glossman of Salomon Brothers Inc. downgrading the bank to "hold" from "strong buy" on Friday.

Separately, Chase Manhattan Corp.'s stock remained volatile, rising TKTK to TKTK in heavy volume Wednesday because of a combination of a Thursday deadline for dividend eligibility and renewed merger speculation.

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