Updated from 1:48 p.m.

Charles Schwab

( SCH), the leading discount and online brokerage firm, said Thursday that seasonal factors were weighing on customer trading activity in May, continuing a slowdown that began in March.

But some analysts saw the drop as a sign of flagging investor enthusiasm following a bout of stock market volatility.

"After starting this year with four very active months, overall market volumes have declined recently and we are once again experiencing the seasonal pattern that we've seen in the past two years -- our customers' trading activity thus far in May is down from April levels," David Pottruck, Schwab's president and co-chief executive, said in a statement.

But Henry McVey, an analyst at

Morgan Stanley Dean Witter

, attributed some of the

drop in activity to waning interest following a steep 15.6% tumble in the

Nasdaq Composite

index in April, the biggest drop since August 1998. The

Standard & Poor's 500

stock index fell 3.1% during the month.

"The seasonal slowdown begins in May but the tumultuous market and the pullback of the Nasdaq clearly affects investors' appetites for trading stocks," said McVey, who rates Schwab an outperform. His firm has not done any underwriting for Schwab.

Schwab said it added $7.9 billion in new money in April. However, it ended the month with $774.9 billion in client assets, down 6% from March 31.

Schwab attributed a 56% decline in net new assets from March to "customer tax-related disbursements."

Total customer daily average trades totaled 386.8 million in April, down 8% from March. Daily average revenue trades were 317.3 million in April, off 9% from the previous month.

Chris Dodds, Schwab's chief financial officer, said the firm had not modified its strategy as a result of the downturn in activity, but noted that he was keeping a watchful eye on potential negative influences on customer activity.

"There is some concern that sentiment may be changing especially given what the

Fed

might do," Dodds said in an interview, referring to wide expectations that the Federal Reserve will continue to raise interest rates at its May 16 meeting.

"Schwab has not changed its spending and investment plans, but we are watching to see if this goes beyond seasonability," Dodds added.

The Fed has raised rates five times in quarter percentage point increments since last June in an attempt to slow economic growth.

Mark Constant, an analyst with

Lehman Brothers

, said he was unconcerned by Schwab's announcement, noting that investors, who have been trained to buy on the dips, might see the recent decline as a buying opportunity.

"The question is how long this correction lasts," Constant said. "In third-quarter 1998, the pullback was a little scary, but it was short lived and there was a sharp rebound a couple of months later."

"Buying on the dip is a behavior that has been reinforced," he added. Constant rates Schwab a neutral and has not done any underwriting for the company. He said his rating reflected valuation concerns rather than fears of a slide in activity.

Schwab is the first firm to report a drop in activity in May and the

third to signal a decline in April. Trading fell 10% at

Datek Online Holdings

and 12% at leading Nasdaq market maker

Knight/Trimark Group

.

Schwab finished Thursday regular trading down 1/2, or 1%, at 39 13/16.