Much of the decline represented buyers pulling back in fear that other counties might have similar problems. It seems unlikely that any county invested quite as recklessly as did Robert L. Citron, who was forced to resign as the Orange County treasurer on Monday, but other governments took lesser risks.

"More losses will come out," said Joe Mysak, editor of Grant's Municipal Bond Observer, a New York publication that follows the municipal market. "The municipalities will blame Wall Street and the tight financial situation they are in."

The Wall Street exposure stems from billions of dollars in loans that firms made to Orange County's investment fund and to the possibility of lawsuits from the county stemming from the risky investments it made. It used those investments to bet on lower interest rates, both through conventional bonds and more esoteric investments, including derivative securities, whose rates fall when market interest rates rise. No such suits have yet been filed, and Wall Street firms have said they have no liability.

Still, there is a risk of suits. "The more complicated and the fancier these so-called investments are, the more the question of appropriateness comes to the fore," said Felix Rohatyn, a partner in the investment banking firm of Lazard Freres and a former chairman of the Municipal Assistance Corporation, which was formed in 1975 to help New York City after it was unable to pay its bills. "How can you allow taxpayer funds to be gambled with in this manner?" Mr. Rohatyn asked. "That is just inconceivable to me."

The largest of the investment banks to deal with Orange County was Merrill Lynch, whose shares fell $1.25, to $35, on the New York Stock Exchange yesterday. Merrill Lynch said its $2 billion in loans to the county were fully collateralized.

The restrictions on local investment policies have often dealt with the credit quality of the investments. But in this case, that was not a problem. The issue was losses stemming from changes in interest rates.

J. Chester Johnson, president of Government Financial Associates, an adviser to local governments, noted that cities and states were forced to disclose more financial information after the New York crisis. Now, he said, investment policies would have to be disclosed, and rules would be adopted to limit the riskiness of investments.