Out of the wreckage of the 1929 stock market crash came a tough law designed to keep the nation's surviving banks far away from what was perceived as the dangerous, speculative swamp of Wall Street.

But Wall Street's lure has proved irresistible to bankers, and recently the bankers and many of their regulators have come close to convincing Congress that the 54-year-old Glass-Steagall banking law was out of date.

Last week, industry leaders gathered in Dallas at the American Banking Association convention to forge their final push to kill the law and open the way for their entry into the securities business and investment underwriting.

Then came Monday's market collapse and a week of unprecedented turmoil. For bankers, the timing couldn't have been worse.

Now bankers and lawmakers worry that the campaign for banking deregulation could become as crumpled as the old stock tickets littering the stock market's trading floors.

"This is clearly a sobering event to be considered when members start to debate the advisability of confering securities powers on banks," said House Banking Committee Chairman Fernand J. St Germain (D-R.I.)

Bankers' worst fears are that Congress will extend indefinitely the limited freeze that it imposed last summer that restricts banks' entry into securities activities until March 1. Congress passed the temporary freeze to give itself more time to consider the deregulation issue.

A congressional aide on the Senate Banking Committee said that Proxmire is still willing to take up the banking deregulation issue and the amending of Glass-Steagall. But the aide said that Proxmire has decided to delay for several weeks the introduction of a bill to amend Glass-Steagall, saying "it would be a public relations problem" to actively consider such legislation so soon after the market plunge.

Said Richard Peterson, aide to Rep. Doug Barnard (D-Ga.), "We have to wait to see what the fallout is."

Even the staunchest backers of deregulation agree that, rightly or wrongly, the market plunge could easily renew long-standing fears concerning the potential conflicts of interest between those who lend money -- commercial banks -- and those who buy and sell securities on behalf of those borrowers -- investment bankers.

At the very least, the market collapse will be used by the securities industry to try to keep commercial banks out of their terrain. "Our opponents in the securities industry will use this," said Edward L. Yingling, lobbyist for the American Bankers Association. "They won't be specific but they'll say the timing isn't right for repeal of Glass-Steagall."

"When the smoke clears, people will see that Glass-Steagall has nothing to do with the stability of the markets and that, if anything, it makes the case for repealing Glass-Steagall a little stronger," he said.

Comptroller of the Currency Robert Clarke, chief regulator of nationally chartered banks, said, "Undoubtedly there are going to be more cries from opponents of deregulation. It will just make it harder to educate people.

"It seems there's a gremlin at work somewhere," Clarke said, noting the irony of the current setback to the banking industry's deregulation campaign. The only other time bankers got close to repealing the federal law was in 1984 -- but along came a banking crisis involving the giant Continental Illinois Bank & Trust Co., which the government had to rescue with a record $4.5 billion bailout.

Such events don't change the need for banks to be able to sell securities, Clarke said, but they intensify public fears that blending commercial and investment banking will add more risk to the financial system.

The underlying conditions of improved technology and increased competition that have forced banks to seek new powers remain unchanged, bankers argue. Many proponents of bank deregulation insist that in the long run the full effect of the market's plunge could prove a boon to their cause.

"{Last} week shows that a marriage between commercial banking and investment banking has nothing to do with the ups and downs of the market," said Richard M. Whiting, general counsel of the Association of Bank Holding Companies.

"Even if the combination of banking and underwriting were allowed {in the United States}," he said, "there are a lot of things that have been put in place since 1929 that would prevent many of the horror stories."

Federal insurance that guarantees the safety of bank deposits is chief among the safety nets that were put in place after the 1929 crash and the banking crisis that followed. These protections have gone a long way to calming public fears about the safety of the U.S. financial system, Whiting and others said. Some bank industry lobbyists say the market collapse will help deregulation because it will push Congress to scrutinize the securities industry. They said they believe such scrutiny will raise serious questions about the performance, and regulatory supervision of the securities industry.

Former lobbyist Karen D. Shaw, now a bank consultant at the Institute for Strategy Development in Washington, said that strategy could backfire, however. "If there's a look to reregulate the securities industry, banks aren't going to benefit," she said. "The argument that 'They're so bad we should be able to be like them' is one that never works with Congress."

The advantage bankers may get from last week's events is twofold. "It forces recognition of just how interrelated the financial markets are," Shaw said. "And it gives banks the opportunity to show that Glass-Steagall is no protection of financial markets."

Comptroller Clarke and Federal Deposit Insurance Corp. Chairman L. William Seidman have been pushing Congress to allow banks to own securities firms as subsidiaries or to allow companies that own banks -- so-called bank holding companies -- to own securities firms. They argue that through strict regulation and supervision a "Chinese Wall" can be built between banks and affiliated securities firms so that the problems of one don't hurt the other.

Regulators point to First Options of Chicago Inc., a major lender to stock options traders that suffered millions of dollars in losses from the crash and was on the brink of collapse this week. Regulators would not permit First Options to borrow the needed cash from its immediate parent, banking giant Continental Illinois National Bank & Trust Co., to stay afloat. Instead First Options had to borrow from Continental Illinois Corp., the parent of Continental bank.

If the holding company or some other company had not rescued First Options, the firm would have been allowed to fail rather than jeopardize the health of Continental bank, regulators said.

Not everyone believes in the strength of the Chinese Walls. "Thank God for Glass-Steagall," said Scott E. Pardee, vice chairman of Yamaichi International (America) Inc., one of Japan's largest securities firms, when asked about the market's gyrations last week.

"I don't buy the Chinese Wall theory," he said. "Chinese Walls could be very difficult to maintain given a fall like Monday's."

Because banks don't hold stocks, he said, banks did not suddenly "have a portfolio of equity that was going down in value" at the same time their foreign loans were forcing them to take huge writedowns.

Critics of the Chinese Wall theory also point out that a bank holding company that was forced to rescue a securities affiliate would be less able to shore up its banking subsidiary in a crisis. Much of the rationale for passing Glass-Steagall in 1933 rested on the assumption that the ties between investment banking and commercial banking helped cause the Depression.

Most economists no longer accept the link and instead blame the Depression that followed the crash of 1929 on the federal government's failure to pump enough cash into the economy.

Nonetheless, the market drop last week came in the midst of record bank and savings and loan failures, a trend that has shaken public confidence in the financial system, according to a recent survey by the American Banker, a trade publication.

Federal investigations have revealed that many bank failures have been caused by mismanagement and sometimes outright fraud. Opponents of bank deregulation say that combining commercial banking with investment banking would just increase the potential for self-dealing and abuse in the financial system. Regulators have seen that abuses in banks and savings and loan institutions often go undetected until an economic setback suddenly reveals risky and speculative practices. Abuses between banking and security affiliates might be similarly hard to detect, the critics argue.

Comptroller Clarke and other proponents of deregulation agree that there is potential for abuse.

But he argued, "You can't regulate with a system designed to supervise the lowest common denominator, the crooks. Most people are not crooks, and that wouldn't be fair."

Not until the dust settles in coming weeks and Congress and regulators can assess the damage will anyone know how much the stock market swings have hurt chances for deregulation.

"I'm just really encouraged that people are thinking about the issue of deregulation," Clarke said. "If nothing else this has got people thinking about the issues."