Investors leery about the prospects of Citibank, the nation's largest bank, forced its parent, Citicorp, to pay a whopping 12.5 percent dividend rate at an auction yesterday on about $100 million worth of its preferred stock.

The rate, which is reset every 49 days based on bids by investors, was dramatically higher than a 9.4 percent the rate set on another portion of the stock at an auction last week. The 12.5 percent rate was also more than 4.5 percentage points higher than yields being paid by some other financial institutions on similar securities.

Nancy Newcomb, chief funding officer for Citicorp, said the unusual nature of the securities contributed to the big jump in the dividend rate but that "turmoil in the market" for all bank stocks and other types of securities was also a factor.

"We view this as a temporary aberration. What is going on is very unusual," Newcomb said.

"The market is very concerned about banks ... and that concern is most acute for larger banks," said James McDermott, president of Keefe, Bruyette & Woods Inc., a New York firm specializing in analyzing bank stocks.

"Citibank is very exposed to loan losses," McDermott explained. "The third-quarter report did not assuage the marketplace."

Citibank has been shaken by a cascade of problems, first with loans to Third World countries and more recently with shakiness in real estate and leveraged buyouts.

In the third-quarter report issued last week, Citicorp said it earned $221 million in the quarter, down from $358 million in the same period last year. But it also said it added $1.1 billion to its portfolio of nonperforming assets -- mostly loans on which interest is not being paid on time or real estate taken over for nonpayment of a loan -- raising the total to $9.2 billion.

Citicorp, however, did not boost the size of its reserve for bad loans by a comparable amount and many analysts believe it will soon have to make a further large addition, perhaps as much as $1.5 billion. This would likely wipe out the bank's earnings for a while and also could eat into the bank's $17 billion capital base, which regulators already believe to be low.

The stock that was auctioned yesterday is part of that capital base, albeit a small one. The securities involved is an issue of "perpetual" preferred stock on which the dividend rate is reset periodically.

When the preferred stock was first issued years ago, Citicorp placed a cap on the dividend rate it would pay at a forthcoming auction at a figure equal to 120 percent of the average rate being paid in the market on comparably rated commercial paper.

At last week's auction, the rate was so close to the 120 percent cap that it worried investors that the cap might be reached at yesterday's auction. Fearing the same thing, Citicorp announced at the last minute that it was raising the cap to 200 percent.

Citicorp's funding chief Newcomb said the late announcement about raising the cap contributed to the difficulties at the auction.

"The cap had a lot of investors concerned," she said.

With the cap now set much higher, Newcomb believes there will be an "orderly repricing on a 49-day basis" in the future.

An indication could come as soon as tomorrow whether the high rate set this week was due more to the broader troubles facing Citicorp or the peculiar problems associated with the nature of perpetual preferred stock on which dividend rates are regularly reset.

Tomorrow, an auction of stock on which the rate is reset every seven days will be held, and Citicorp yesterday raised that cap to 200 percent of the commercial paper rate, too -- giving investors plenty of warning.

"We will have to see if that brings rates back to more normal levels," Newcomb said. "We will watch it very carefully. We will keep our options open."

Meanwhile, Standard & Poor's Corp., one of the nation's two major credit-rating agencies, said it has downgraded its rating of $5 billion worth of debt of Chemical Banking Corp., another major New York bank holding company. The downgrade of the nation's sixth-largest banking company followed a similar rating reduction last month by S&P affecting No. 2 Chase Manhattan Corp.