The decision by Morgan Stanley and Goldman Sachs Group Inc. to convert from investment banks to more-regulated commercial banks, coupled with the proposed federal bailout of at least $700 billion in "troubled assets" and bad loans, ''could hurt, not help'' small- to midsized banks by making them confront the depressed value of their holdings," Merrill Lynch & Co. analysts wrote to investors.

Their assessment helped send the 24-company KBW Bank Index, whose members include Wells Fargo and Salt Lake City-based Zions, down 10.5 percent Monday, while the Nasdaq Bank Index of 497 small lenders slid 8.5 percent, the worst showing for that benchmark since the 1987 market crash.

"The problem we're facing right now is that we don't have a program yet. We only have the promise of a program," said Kelly Matthews, executive vice president and economist for Wells Fargo's intermountain region.

In general, regional bank stocks have held up better this year than larger rivals, which are hobbled by more than $521 billion in losses worldwide caused by the mortgage market collapse. Until now, smaller banks could resist larger markdowns on overdue loans because their value was hard to determine, the Merrill analysts argued.

''Most smaller banks are carrying problem real estate assets - namely residential construction - and we doubt the government will offer such attractive valuations,'' they wrote. ''They will likely still generate large credit losses when they sell assets'' to the government.

Matthews said once the federal government decides on a plan and begins buying troubled assets at a discount, that could be a problem for some regional banks and force them to find additional capital.

"You have to believe, though, that those banks that don't want to sell their [troubled] assets to the government will be able to keep them on their books," he said.

Matthews suggested many regional banks have been actively writing down the value of their troubled loans in recent quarters and now may be carrying those assets on their books at close to fair market value.

Clark Hinckley, Zions Bancorp senior vice president, agreed.

"We've been pretty aggressive" in writing down the value of Zions' troubled assets. "Obviously, the devil is going to be in the details, but from our perspective it doesn't look like it [the government's plan] is going to have much direct impact on regional banks."

Rather, it appears the government will be "trying to get to the core of the problem" by concentrating its efforts on buying troubled assets from large investment and money center banks rather than from smaller regional players, Hinckley contends.

Their arguments notwithstanding, the share prices of Zions and Wells Fargo, which has extensive operations in Utah, declined significantly Monday. Zions shares fell 10.6 percent, to close at $47.23, down $5.60, while Wells Fargo's stock gave up 11.6 percent, closing at $35.18, down $4.62. Zions peaked at $88.28 on Feb. 20, 2007.

Zions' and Wells Fargo's stock-price declines were in line with the performance of the 22 other leading regional banks that comprise the KBW Bank Index, but others performed far worse. Marshall & Illsley, Wisconsin's biggest bank, dropped as much as 27 percent, the most in almost three decades. Regions Financial Corp., Alabama's biggest bank, fell 19 percent.

Matthews at Wells Fargo speculated Monday's price declines were the result of the market "taking off some of the froth that was created [by the big run-ups in prices in the regional bank stocks] last Thursday and Friday."

But other developments on Wall Street surely had an effect. The government plan to buy up bad loans ''appears to offer little, if any, remedy for the steady rise in problem real estate inventories,'' Credit Suisse analysts said. They wrote the first to benefit from the rescue would be investment banks, which ''potentially leaves most commercial banks as the least likely to benefit.''

At the same time, the new competitors such as Goldman, Morgan and mutual funds will vie for deposits with regional banks, putting pressure on profit margins for loans, analysts said.

But Zions spokesman Rob Brough said that increased competition already is taking place. "It has been going on for months now and it doesn't show any sign of abating."

Last week, the U.S. said it would insure money-market mutual funds, which might drain more depositors from banks. The proposal will cover only investments made before Friday.