Major bank stocks sold off alongside other issues Monday as nervous investors reacted to another sharp drop in the Japanese stock market.

Hardest hit were the major West Coast and money-center institutions. But shares of most of the 50 largest U.S. banks registered declines.

BankAmerica Corp., San Francisco, was off 75 cents, to $43.125; Wells Fargo & Co., San Francisco, slipped 75 cents, to $70; and First Interstate Bancorp, Los Angeles, fell 62.5 cents, to $39.625.

The California banks had been down $1 or more before the market recovered in the last hour of trading.

Chase and Chemical Slip

Among New York money-centers, Chase Manhattan Corp. fell 62.5 cents, to $25.25, and Chemical Banking Corp. was off 37.5 cents, to $35.375.

Meanwhile, the Dow, off as much as 30.5 points during the day, closed at 3,280.80,down 4.55 points.

Shares of Union Bank, San Francisco, 77% owned by the Bank of Tokyo, fell 25 cents, to 23.625. KeyCorp, a superregional that is based in Albany, N.Y., but runs banks in Alaska and the Pacific Northwest, dropped 62.5 cents, to $30.125.

"The banks are caught in the middle," noted Lawrence R. Vitale, a bank analyst at Kemper Securities Group, Chicago.

Economic Dominoes

He said bank stocks were vulnerable to market fears of an "economic domino effect" from the slumping Japanese market.

In Tokyo, the Nikkei index of 225 stocks tumbled 598.65 points, or 3.6%, to 15,921.22, the lowest level in more than five years.

A slide of the same size in the American market would translate into a 118-point drop in the Dow.

Major European stock markets were weak in response to the developments in Japan. In London, the Financial Times index dropped 34.5 points, or 1.33%, to 2,550.3.

"The capital of Japanese banks is tied to their market capitalization," said Mr. Vitale. "The fear is that a need to protect their capital levels will cause the big banks there to make adjustments in their holdings here, damaging the economic recovery."

A Negative for U.S. Banks

That, in turn, would be bad for banks, whose shares have risen for a year and a half because they are seen as prime beneficiaries of a slow but steady economic recovery characterized by low inflationary expectations and low interest rates.

But John Robson, deputy secretary of the Treasury, said Monday that he was not worried that the Japanese stock market's decline would drag down U.S. markets.

Acknowledging "links" between the two markets, Mr. Robson said he did not think Tokyo's troubles would "slop over into our economic performance."

Mr. Robson was answering reporters' questions after giving a speech to the Savings and Community Bankers of America in Washington.

Industry analysts are optimistic that the long rally in U.S. banking stocks is not over. "With good earnings results in the offing, I think they will provide leadership for the market this year," said Frank J. Barkocy of Advest Inc.

A Caution from S&P

But a major credit-rating agency, Standard & Poor's Corp., offered a distinct note of caution on Monday.

Releasing a report by its financial institutions group, S&P said its bank ratings would likely not be revised upward in the near future despite improved financial results at banks over recent quarters. The agency cited asset-quality problems and competitive pressures.

A handful of the top 50 banks posted modest gains.

J.P. Morgan & Co. rose 25 cents, to $53.25. NBD Bancorp, Detroit, was ahead 12.5 cents, to $28.875, on brisk volume after a report in Barron's that it may soon raise its quarterly dividend, now 25 cents a share. Northern Trust Corp., Chicago, climbed 25 cents $57.25.Day's Big LosersSome bank stocks hit byMonday's selloff share Percentage price(*) changeWells Fargo $69.375 -1.60%ChaseManhattan 26.125 -1.42BankAmerica 43.125 -0.86Chemical 35.00 -1.75(*)As of 3 p.m. Sources: DB Technology Inc., Reuters

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