Continued merger speculation prompted an upgrade for J.P. Morgan & Co., but its shares dipped anyway, along with broader markets.

Morgan shares fell $2.0625, to $134.8125, after Carla A. D'Arista of Friedman, Billings, Ramsey & Co. in Arlington, Va., issued an upgrade to "accumulate" from "hold" and increased her 18-month price target by $38, to $168.

"It is our understanding that J.P. Morgan actually had at least preliminary discussions with Travelers Group and Deutsche Bank," Ms. D'Arista said in a note to clients.

Market sentiment about a possible deal involving Morgan was initially fueled earlier this year when Morgan released lackluster earnings.

Ms. D'Arista made it very clear that her recommendation was based on Morgan's prospects as a takeover target, not because the company is positioned to thrive on its own.

"Expense growth and continued turbulence in Asian markets" will continue to act as a drag on results, she said in reducing her 1998 first-quarter earnings estimate for Morgan by 30 cents, to $1.70.

She also listed severance payments in connection with recently announced layoffs and a lag in core investment banking business as additional contributors to earnings softness.

Shares of First Union Corp. fell 37.5 cents, to $56.75, and NationsBank Corp. $1.1875, to $73.25, after David C. Stumpf of A.G. Edwards & Sons in St. Louis reiterated "buy" recommendations for both institutions, which are based in Charlotte, N.C.

In raising his 12-month price target for First Union by $10, to $75, Mr. Stumpf cited expectations for bank shares in general to go higher and First Union to successfully complete all its pending acquisitions.

NationsBank shares also have "plenty of room on the upside" as the integration of Barnett Banks Inc. kicks in later this year, Mr. Stumpf said.

The analyst said Wells Fargo & Co., San Francisco, is the only target deal that would interest acquisitive NationsBank in the near term. But he also noted that "Wells will not likely throw in the towel easily" and NationsBank probably could not outbid U.S. Bancorp, Minneapolis, if that company also chose to target Wells.

For the day, the Standard & Poor's bank index was off 1.28% and the Dow Jones industrial average slipped 0.35%. The Nasdaq bank index edged up 0.12% and the S&P 500 shed 0.33%

Among notable gainers was First Empire State Corp., Buffalo, which sprinted past $500 per share for the first time, reaching $504 before falling back to $498, up $4 for the day.

Analysts credited the anticipation of a smooth transition as First Empire expands its upstate New York presence through next week's planned purchase of Onbancorp, Syracuse.

Webster Financial Co., Waterbury, Conn., also rose, by $1.375, to $69.875. The thrift company is positioning itself for expansion in Connecticut through the pending purchase of Eagle Financial Corp., Bristol, Conn.

Meanwhile shares of Eagle Bancshares of Tucker, Ga., near Atlanta, jumped $2.75, to $24.125, after a shareholder proposed that management try to sell it off.

In a resolution he wants considered at the annual meeting, J.C. Serrato Jr. expressed dissatisfaction with the thrift company's earnings growth.

"Management has demonstrated its inability to implement any effective business plan," said Mr. Serrato, who holds a 4.79% stake. "The obvious solution is the sale of the company."

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