Bank stocks sold off sharply Tuesday, with Wall Street analysts citing both a recent dearth of merger deals and an uptick in market interest rates as reasons.

J.P. Morgan & Co. was off $1.25 to $80, First Chicago NBD Corp. $1.12 to $40.50, and Fleet Financial Group Inc. $1.12 to $40.

The Standard & Poor's bank index was off about 1%, in contrast to a 0.5% decline in the S&P 500 index, which is the benchmark of the overall stock market.

"Some of it may be general disappointment that more deals aren't happening," said Linda Stromberg of M.R. Beal & Co., New York. "After last year, everybody has been geared up for massive consolidation."

She suggested some money managers may be second-guessing themselves in the wake of the explosive price gains in the bank stocks earlier this month.

"After the run-up in the stocks it's now gotten quiet," she said. "There's no news, and some portfolio managers are probably thinking they're sitting on dead money."

Another bank analyst, Katrina Blecher of Gruntal & Co., New York, said she felt the slippage in the banks was largely due to some profit taking after the recent run and new weakness in the bond market.

"Rates have gone back up and so the interest-sensitive stocks have gone back down," Ms. Blecher said. But she sees the trend as temporary, saying, "I think the banks still have a lot of upside left."

"I think we are still in a cyclical down phase in rates," she said. "I think the Fed is going to see weakness in the economy and make another (rate) cut, and that will help the banks."

Ms. Blecher remains bullish on banks despite the downgrades of the sector this year by a number of other analysts. She believes the industry's fundamentals remain strong.

"Credit quality has not fallen off a cliff," she said. "Among the 28 companies I follow, credit quality was better for half and worse for half. ln addition, loan growth has not dropped off tremendously, margins have been fairly steady."

She sees no looming problems for an industry "that in my opinion is still over-reserved (against loan losses), as well as overcapitalized."

In other developments, industry analyst Diane Merdian of Montgomery Securities, San Francisco, initiated coverage of Citicorp, Chemical Banking Corp., and First Chicago NBD with "buy" ratings.

Ms. Merdian opened coverage of Barnett Banks Inc. and First Union Corp. with "hold" ratings, and she reinstated coverage of First Bank System Inc. with a "buy" rating.

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