The health of the already-sick savings and loan industry is continuing to decline dramatically, and further deterioration of real estate markets or a recession will make it even worse, government officials and private analysts said yesterday.

In its latest quarterly review, the Office of Thrift Supervision (OTS), said it has lowered its rating of 232 associations based on their performance in the first three months of the year. As a result, fewer than half the nation's 2,505 S&Ls are officially classified as in top fiscal health.

"Given the slowdown in the economy and the real estate market in many sections of the country, we are not surprised by the slippage," said Timothy Ryan, director of OTS, the federal agency that replaced the Federal Home Loan Bank Board as regulator of the thrift industry.

"If we have a recession or if the real estate markets would continue to decline, that will affect the industry significantly," Ryan said. "It's very possible we will see additional deterioration."

That deterioration already is occuring, experts outside the government said.

"In all parts of the country -- with the possible exception of the Middle West -- real estate markets continue to deteriorate," said Reid Nagle, head of SNL Securities, a Charlottesville investment banking firm that tracks the stocks of savings and loan associations. The decline in real estate prices "obviously is having a big impact" on the profitability and health of thrifts.

Nagle said the second-quarter data now being reported to stockholders by thrifts show the downtrend has continued and worsened since March, the end of the period covered by the survey.

Ryan said OTS economists still are evaluating the health of thrifts in various regions of the nation, but private analysts said they see clear evidence that the crisis is spreading out of the Southwest and into California, the Middle Atlantic states and New England.

Nagle said reports that thrifts have sent to their shareholders in the past few weeks show the number of real estate loans that are not being paid on time and the amount of real estate that has been repossessed is growing faster in other parts of the country than in Texas, where the thrift crisis started. "The deterioration is much more evident in New England, the South East and the Middle Atlantic," he said.

The OTS report said seven thrifts in Virginia and six in Maryland are in the lowest of four rating categories used by the agency, which means they are expected to be taken over by the government. The institutions were not identified by name.

California remains the big question mark in determining the future health of the nation's real estate markets and their effect on thrifts and banks.

The health of California thrifts has started to slip, but their problem loans and repossessed property are not growing as fast as those in the Washington-to-Boston corridor.

"If the West Coast goes into the tank, it is going to be a nightmare," Nagle said.

The New York investment firm Salomon Brothers Inc. advised its clients this week that it is no longer recommending that they buy stock in California savings and loans. Analysts Bruce W. Harting and Susan Silverstein said they have been "consistently negative" about the prospects of California thrifts and warned that "the slowdown in the California real estate sector can only worsen."

The vast majority of California institutions remain healthy, but a few have conspicuous problems. Because of those few, the state trails only Texas and Florida in the number of thrifts whose health had deteriorated to the point where they were expected to fail, the OTS data released yesterday showed.

Based on its confidential examination of their books, the OTS classifies thrifts into four groups. All those in Group IV are so weak they are expected to fail, but Ryan said yesterday that in the first three months of the year, 34 members of that group managed to attract new investors who provided the capital to move them up in the ratings.

As of March 31, the OTS gave its highest rating of Group I to 1,175 thrifts -- 89 fewer than had qualified for that rating three months earlier. Another 620 thrifts that have problems but are considered likely to survive are classified as Group II.

In Group III are 311 associations that are officially described as "troubled with poor earnings and low capital" and likely to be taken over by the government.

Ultimately, the survival of many thrifts may hinge on the economy's performance in the months ahead. The prospect of a recession has been increased significantly by Iraq's invasion of Kuwait. Because of the economic uncertainty, Ryan said, it is not possible to predict whether there will be a further increase in the cost of keeping the government's promise to protect the savings of thrift depositors.

The failure of hundreds of thrift institutions already is ranked as the government's most expensive economic calamity -- projected to cost the taxpayers $300 billion to $500 billion over the next 10 years.