Shares of Alabama and Tennessee banks far outperformed those of money- centers and superregionals Tuesday as merger speculation focused on the South.

Shares of SouthTrust Corp., Birmingham, Ala., rose $2.125, to $61.375 on heavy volume. Regions Financial Corp., also of Birmingham, gained $1.875, to $44.75; and Union Planters Corp. of Memphis was up 81.25 cents, to $64.8125.

Meanwhile the Standard & Poor's bank index fell 1.13%, while the Dow Jones industrial average climbed 0.68%. The Nasdaq bank index surged 0.51% and the S&P 500 0.49%.

As merger activity heats up in the South, certain bank stocks are likely to rise because of speculation, said bank analyst Michael L. Mayo at Credit Suisse First Boston.

Mr. Mayo said that speculation in southeastern bank stocks is a relatively new phenomenon because there hasn't been that much activity in Alabama.

The analyst recommends SouthTrust because it has "strong fundamentals" and is benefiting from NationsBank Corp.'s recent foray into Florida.

"Recent expansion in the area-which would include the purchase of Florida branches from Ahmanson-has increased the attractiveness of SouthTrust's franchise," said Mr. Mayo.

However, he said the "possibility of a takeover is longer term.

"We don't lose too much sleep worrying about that company," said Mr. Mayo. "The CEO owns $80 million worth of stock in the company, so his interests are aligned with the rest of the shareholders."

Bank analyst John Moore at Morgan Keegan & Co. agreed that the South is indeed a hotbed for consolidation.

"The Southeast has a good economy-better than most," said Mr. Moore. "If you want to make money in banking, you go where the growth is. And as merger activity becomes more visible, more investors will be looking at these companies."

Elsewhere in the market, thrift stocks also surged on Tuesday as skittish investors continue to search for safe havens from the turmoil in Southeast Asia.

"Thrift stocks are really cheap compared to the rest of the market," said thrift analyst Thomas O'Donnell of Salomon Smith Barney. "They have been one of the best-performing high-flying stocks of the year. The economic housing market is quite strong. We could be at the beginning of a refinancing boomlet."

The gainers included Long Island Savings Bank, up $3.125, to $49.125; H.F. Ahmanson & Co., up $1.25, to $65.0625; and Washington Mutual Inc., up 62.5 cents, to $68.

Bank of New York Co. shares fell 6.25 cents Tuesday, to $55.625, on news of a plan to buy back up to 15 million of common shares through the end of 1998. The company has almost completed the repurchase of 30 million shares from a buyback program announced in December 1996.

Bank stocks slipped lower after the Federal Reserve Board disclosed that it would leave the federal funds rate unchanged.

"Maybe there is a sentiment that the Fed did need to raise rates," said one trader, who asked not to be named.

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