When Mellon Bank Corp. decided to buy Dreyfus Corp. four years ago, its top lawyer knew the deal was legal but nevertheless feared the bank-mutual fund combination would stir a negative reaction on Capitol Hill.

So he turned to Karen Shaw Petrou, a financial industry consultant and consummate Washington insider, for expert help.

"She provided some very good insights as to the political implication of the transaction and how you address some of those congressional concerns that it raised," Michael E. Bleier, Mellon's general counsel, says diplomatically.

Translation? Rep. "John D. Dingell had a screaming fit as anticipated," says the notoriously straight-talking Ms. Petrou, who advised Mellon on the best way to structure its deal and prepped top executives on how to answer the then-chairman of the House Commerce Committee.

That's the kind of no-nonsense appraisal that bank and nonbank clients alike have come to expect from Ms. Petrou, president of the consulting and information services firm ISD/Shaw Inc.

The 44-year-old former BankAmerica Corp. lobbyist opened her firm in 1985, initially providing clients with twice-weekly analyses of bank legislation and regulation.

ISD/Shaw has evolved into a small but omnipresent firm that advises clients on policy trends, guides their merger and acquisition plans around regulatory pitfalls, and instructs them on how to win government approval of new products.

It also churns out on-line alerts and written publications for clients to keep them abreast of events in Washington that affect their businesses.

"She is widely viewed as one of the leading lights on strategy and policy issues for the financial services industry in Washington," says F. Gregory Ahern, senior vice president in charge of government affairs for State Street Corp., Boston.

Mr. Bleier says Ms. Petrou prepared Mellon executives well for congressional testimony, which helped defuse the political furor over the mixing of banking and securities that could have blocked the Dreyfus deal.

"She was a very good sounding board," he says.

Above all, friends and associates praise Ms. Petrou's objectivity (she does not lobby anymore) and her knack for spotting trends and business opportunities.

"She can think things through in a broader fashion than some might in this town," says Anne C. Canfield, president of Canfield & Associates, an industry lobbying and consulting firm.

"If you think about every major banking policy issue over the last 10 years, she has taken a hard look at it and has an opinion on it," says James C. Sivon, a prominent banking attorney whose firm works for ISD/Shaw.

And does she ever have opinions.

Ms. Petrou pulls no punches on timely issues, using an analytical but also witty, entertaining writing style, which she credits to being the daughter of two English professors.

For instance, this summer she sarcastically described the U.S. Postal Service's plans to win commercial bill-processing business by reducing postage costs for the service.

"If the post office had thought of cutting the price of stamps a few years earlier, it might have cut that fax-machine thing off at the pass."

However, amid the levity, she delivered a serious message to financial services firms: The Postal Service could become a formidable government- backed competitor, as Fannie Mae did.

She warned banks and others to "think about their response before this government agency gets too big to bust."

Reporters know they can call Ms. Petrou when they need that zinger of a quote.

Asked in June about House Banking Committee fights over the size of investments, or "baskets," that bank holding companies should be allowed to make in commercial firms, she said:

"There will be so many baskets offered, it will look like a shop at a cheap seaside resort."

Growing up in Briarcliff, N.Y., Ms. Petrou never anticipated a career in the banking world.

In addition to their jobs as college professors, her father was a book publisher and her mother an artist.

As a teenager she belonged to a semi-professional dance company but quit after realizing "I would never be anything better than a third-rate dancer."

She embarked on a serious academic career, earning a joint degree in political science from Wellesley College and the Massachusetts Institute of Technology. She quit her doctoral studies at the University of California, Berkeley, to take a political analyst's position with BankAmerica in 1977.

"I knew nothing-nothing-about banking," she insists, but explains she was intrigued by the impact of hard economic times on banks and the fact that banking was a highly regulated industry on the brink of a transformation.

She was promoted to Washington to be BankAmerica's lobbyist two years later and became a vice president. She says she left to start her own business because of a distaste for lobbying and her chief executive's statement that he wouldn't promote a young woman to senior vice president.

Besides being a woman in a man's business, Ms. Petrou has faced other obstacles.

She was diagnosed at age 18 with retinitis pigmentosa, a degenerative disease of the retina that leads to blindness.

The condition did not become a disability until her mid-30s, and she uses a machine that scans text and reads to her as well as other technological aids.

Half of her clients do not know that she is legally blind, Ms. Petrou says.

"It is so much more a limiting factor in people's minds than it is," she says. "The biggest problem with having a disability is the limits other people put on the disabled."

Her achievements prove her point, friends and colleagues say.

ISD/Shaw has eight employees and uses outside consultants. It entered a strategic partnership with Ernst & Young last year to borrow each other's expertise as needed.

Uncertainty created by regulatory reforms, the House financial modernization bill, and rising competition from nonbanks have her business booming, she says. She declined to disclose the firm's financial performance.

The underpinning of Ms. Petrou's philosophy is that laws and regulations are something that should be analyzed and exploited for maximum gain. She scolds bankers for being too defensive and fatalistic in their approach to Washington.

Instead, executives should analyze why something is happening in Washington, who is causing it, and how the outcome can be shaped in the most beneficial way.

A prime example, she says, is the controversy over bank fees. Banks can avoid adverse legislation on such matters by anticipating opponents' demands and preempting them with a palatable compromise, she says.

Ms. Petrou, however, probably will never give clients advice on naming their companies.

Her firm began as the Institute for Strategy Development, which she now considers a "stupid name." She abbreviated that to ISD, and then switched to ISD/Shaw in 1994-a year before she married mortgage finance consultant Basil Petrou.

She says she wants to update the firm's moniker, but it is difficult because so many people are attached to "Shaw."

"I seem to be spending so much time in the office with my husband on joint projects, maybe Petrou & Petrou is the answer," she says. "Either that or Mom and Pop's Bank Shop."

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