The major Manhattan law firms are engaged in a fierce bidding war for promising young lawyers that has driven starting salaries as high as $70,000, and will permit some in their third year of practice to earn $103,000 -- $24,000 more than federal judges.

A new, expensive round in the bidding was opened last month by Cravath, Swaine & Moore. The firm announced across-the-board housing allowances of $12,000 for its 195 associates, bringing pay for new law school graduates to $65,000. The firm also declared bonuses of $5,000 to $20,000 for associates with at least three years' experience.

Cravath decided earlier this year to pay young lawyers who join the firm after a judicial clerkship a one-time premium of $10,000; those signing up after clerking for two judges receive an extra $20,000 on top of regular pay of $79,000, including the $12,000 housing allowance.

By upping the ante, Cravath -- arguably the most prestigious law firm in the city, if not the country -- compelled law firms from Wall Street to midtown to rethink their "associate compensation." Worried that associates or potential associates would be lured away, many major firms -- including the city's five largest -- matched Cravath's new scale.

Some even outdid Cravath. Sullivan & Cromwell, for instance, increased starting salaries to $70,000, and offers clerkship bonuses of $15,000. Davis, Polk & Wardwell extended the bonuses to those joining the firm with an MBA and will pay $20,000 to those who clerk for the same judge for two years. Those who join after two years of clerking receive $103,000: the $20,000 clerkship premium, salaries of $78,000, and a third-year associate's bonus of $5,000.

"Competition is a wonderful motivator for anyone," said John J. O'Neil, chairman of the legal personnel committee at Paul, Weiss, Rifkind, Wharton & Garrison, which raised starting pay to $65,000. Still, he noted somewhat ruefully, "There aren't many professions outside of professional sports that pay people this much money at an entry level."

"One did not have the luxury of saying 'Nuts to you,' and hanging back," said David McCabe of Shearman & Sterling, which set starting pay at $67,000, and is paying its "summer associates" -- second-year law students -- $1,150 weekly plus a bonus calculated to come to $4,000 after taxes. "This is a highly competitive market."

In today's legal marketplace, the demand from rapidly growing law firms for well-trained new attorneys dwarfs the relatively fixed supply of graduates from top law schools. Cravath, for example, has doubled its hiring in the last decade, and hopes to hire about 50 new lawyers this year. The firm would gladly hire more if more qualified applicants accepted job offers.

Although their legal experience is likely limited to summer internships in which they may spend more time being taken to lunch than in the library, new law school graduates quickly become profit centers for their firms. At Cravath, for example, associates work an average of 2,100 "billable" hours annually at a starting rate of $75 hourly -- bringing in about $157,500 for the firm. More experienced associates -- who work more efficiently and at much higher hourly rates -- are even more profitable.

The marketplace for new lawyers is distorted by the major firms' conviction that only the best graduates of the best law schools can handle the complex corporate transactions and other sophisticated work they do. Consequently, although partners use words like "mind-boggling" and "outrageous" to describe the current salary levels, many say they are willing to pay what it takes to get the lawyers they want. At the same time, graduates of less-renowned law schools can find it difficult to obtain any job at all practicing law; it is a seller's market only for graduates in the top third or top half of a dozen law schools.

Cravath partners, who insist that the $3.7 million cost of the new raises will come out of their own pockets, say they felt they had to offer the new pay scale to avoid losing associates and potential associates to cities where the cost of living is lower.

"Our people were finding it more and more difficult living in a comfortable way in New York City," said former hiring partner John W. White.

"They were saying I can come out ahead after rent and taxes if I go to Washington or Houston or Chicago or Los Angeles," said managing partner David O. Brownwood.

In addition, they said, the firm hopes to diminish the allure of investment banking firms, which pay far more than law firms, by giving better remuneration to experienced associates, who generate the most revenue. Recently they had been leaving the firm after an average of less than four years; 10 years ago they stayed nearly five.

"Time after time people were leaving here at $60,000 and making over $200,000 within a year" at investment banks, Brownwood said.

Partners said it is too soon to tell whether the new salaries will make the difference. But associates at firms that have not matched the new scale are amassing evidence about the firms that have to show to partners, and the raises are the talk of law review editors and judicial clerks from Cambridge to Palo Alto.

Some firms, whether motivated by economic self-interest or justifiable outrage at paying such salaries to 25-year-olds fresh from the classroom, have balked at further augmenting their associates' already comfortable incomes.

Rosenman Colin Freund Lewis & Cohen, a 220-lawyer firm, issued a remarkable statement calling the Cravath action "a sad commentary that so prestigious a firm . . . is apparently unable to attract and retain associates of superior capability without throwing money at them."

Rosenman Colin said in its statement that it was sticking with a starting salary of $54,000 for its new associates, although other firms "will, as a matter of 'pride' and nothing more, follow the Cravath lead in lemming-like pursuit of goals that cannot be secured at $65,000 -- or whatever high numbers will surely follow."

"It's risky business to be out there in front of a position," said Rosenman partner Peter F. Nadel. While the firm has received "a flood of congratulations" since issuing its statement, he said, "It's nice to hear all the applause. Whether it carries the day is another thing."

But Rosenman appears to be in the minority. Another firm, Milbank, Tweed, Hadley & McCloy, announced last month that it would not match Cravath, only to reverse itself a few weeks later.

"Frankly we were hoping that other firms would not follow Cravath," said Samuel S. Polk, who heads the firm's legal personnel committee. But, he added, "everybody else is doing it."

"If it was only Cravath I don't think firms would have followed," said a partner at another major New York firm. "The problem that we had was within 48 hours three or four other firms announced they would follow. Once they did, this was a Greek tragedy waiting to be played out."

Part of the response, this lawyer said, is attributable to "hubris. People want to believe they are big leaguers. People say, 'Damn it, if Cravath is going to pay that kind of money, we are too.' "

"The sense I have is that everybody is appalled at what Cravath has done," said Peter M. Fishbein, the managing partner of Kaye, Scholer, Fierman, Hayes & Handler, which has not yet decided what it will do. "There's a real concern that it's going to affect the legal practice and the kind of clients that we can continue to represent, and it's an unfortunate thing for the profession.

"It must be apparent that if you increase the salaries of associates you're going to increase the costs to your clients," Fishbein said. Although Cravath has said its 57 partners will not pass on the costs of the increases to their clients, the reaction among lawyers at other firms, he said, is, "If you believe that you probably believe in the tooth fairy."

The New York raises are having repercussions in other cities. Major firms in Washington, where starting pay has traditionally been about $10,000 behind New York, are watching warily to see if a larger gap will induce lawyers who would otherwise have worked in the District to choose New York.

"The New York move is bound to have some impact here," said William R. Perlik of Wilmer, Cutler & Pickering. "We're after top-quality people and it's shortsighted not to be in the market for them."

Washington firms are watching particularly closely to see whether New York firms who follow Cravath will also pay the higher wages at their branch offices here. Some firms, like Weil, Gotshal & Manges, haven't yet decided what to do about their Washington associates. Some, like Paul Weiss, which is paying a starting salary of $60,000 in Washington, are taking the middle road. And some, like Davis, Polk & Wardwell and Skadden, Arps, Slate, Meagher & Flom, are simply swallowing hard and paying more.

At least one Washington firm has already made plans to increase associates' salaries, at least in part in response to the New York moves.

On July 1, Arnold & Porter, the city's second-largest firm, will raise starting pay to $46,000 -- a $4,000 increase after a more normal $1,000 raise the year before. "Starting salaries generally do not go up anything like that $4,000 from year to year," said partner David R. Kentoff. "Certainly we were cognizant of what Cravath and other New York firms seem to be doing," he added.

Some partners in Washington firms said they did not expect the New York move to have a major impact.

"Our feeling is if someone wants to practice law in New York, they'll think in terms of New York City. If they're interested in regulatory practice, in living in a far nicer city, they'll come to Washington," said Edward Dunkelberger of Covington & Burling.

However, he said, "If when I get up to interview at Yale next fall and no one's signed up to inverview with Covington & Burling and there's a huge line around the block for Cravath, I guess we'll think twice about it."