Operating on the flip side of the stock market, where bad news is always good news, investors known as short-sellers have had a field day with the shares of MNC Financial Inc., the region's largest bank holding company.

With a series of grim news reports coming from MNC Financial in recent months, as a sluggish commercial real estate market cut deeply into its profits, MNC's stock price has moved steadily downward. Selling at $22.50 on Jan. 2, MNC shares closed yesterday at $6.50, down 37 1/2 cents, following news reports about the company's handling of overnight investments involving customer accounts.

While the 71 percent drop in value was painful to MNC's long-term stockholders, it was a boon to short sellers who bet the stock would decline.

Instead of buying stocks and waiting for their price to rise, they follow strategies that count on the price to fall.

Short-sellers borrow stock and sell it, promising to return it at a later date. If the stock drops in price, the short-seller will buy the necessary shares, return them and pocket the difference between the two prices.

Just as an investor can buy stock at $10 and sell it at $15 for a $5 profit, a short-seller can sell borrowed shares at $10, buy them back at $5 if the price declines and make a $5 profit.

In the negative business climate for banks and thrifts in this region, short-sellers have used the decline in their stocks to make big profits. The sudden spurt in short-selling has highlighted a controversial investment practice that, while legal, often angers corporate executives who claim that short-selling invites the spreading of rumors and other efforts to depress share prices.

For example, MNC officials have complained for two weeks that their stock has been the target of a variety of rumors aimed at eroding confidence in the stock, bank sources said.

Among the rumors cited were that MNC would fail to pay its regular 29-cents-a-share quarterly dividend on Sept. 11 -- a rumor that proved to be false.

However, as that day approached, the price of MNC stock fell, dropping from $8.37 1/2 a share on Aug. 29 to $5.87 1/2 on Sept. 6, reflecting intensified short-seller activity, according to bank sources.

After the bank announced that the dividend would be paid, MNC volume rose to 1.2 million shares, compared with the daily average of 300,000, as investor confidence strengthened briefly. The buyers apparently included some short-sellers who fled the stock in the belief it would continue to rise and thus cost them money.

Another rumor that hurt the stock price, the sources said, was that financial mogul Alfred Lerner, MNC's biggest shareholder, would withdraw his offer to invest $180 million in the company, which urgently needed the additional cash.

Last week, the board of directors approved Lerner's offer, quashing the rumors and short-sellers' hopes for yet another drop in the stock.

The combination of MNC's financial troubles and widespread rumors turned the bank's stock into one of the most volatile performers on the New York Stock Exchange in recent weeks. MNC shares have been one of the top volume leaders five times during the past month. The shares also have made the top percentage gainers and losers list three times.

Brokerage firms that have beenmost active in recent trading of MNC stock, the sources said, were Bear, Stearns & Co., Shearson Lehman Brothers Inc., Smith Barney Inc., Salomon Brothers Inc. and Wagner, Stott & Co. One of the nation's biggest short-sellers, Feshbach Brothers of Palo Alto, Calif., said it holds a sizable short position in MNC and is holding on to it because it feels that the stock will decline further.

Tom Barton, a general partner in Feshbach, said his firm first established its position a year ago, then got out of it when the stock dropped about 60 percent.

The firm recently went short again in the belief that the MNC credit card operation would be hurt by the new credit cards offered by American Telephone & Telegraph Co. and by the possibility of a recession, he said.

Feshbach Brothers has $800 million invested in some 200 companies, including a number of banks and thrifts in the Washington area.