Drexel Burnham Lambert Inc.'s rejection of the government's latest offer to settle criminal charges could turn into a dangerous game of legal chicken, with the investment banker risking indictment as it tried to obtain a better deal from federal prosecutors.

Legal experts and Wall Street traders say it is unclear if talks have broken down between Drexel and the government and an indictment was imminent. Some felt Drexel's rejection constituted putting the ball back in the prosecutors' court and that a last-minute agreement could still be reached if more lenient terms were offered.Drexel has been negotiating with government lawyers for weeks to avoid a far-reaching indictment that could include securities fraud and racketeering charges. Drexel has particularly wanted to avoid racketeering charges that would have allowed the government to freeze a significant amount of the investment banker's assets.

On Monday Fred Joseph, Drexel's chief executive, told employees that negotiations had not been progressing and that the company could be indicted. A source close to the investigation told Reuters that the announcement followed a vote by Drexel's board rejecting the settlement offer.

Securities lawyers said that while it was difficult to determine the status of any talks, Drexel had turned down previous government offers, knowing it risked indictment.

"In any negotiation there are a lot of on-again off-again situations," said Paul Fischer, a prominent Washington securities lawyer who previously worked for the Securities and Exchange Commission.

He said the latest rejection could be part of Drexel's strategy to get the best bargain it can. "Walking away from the table can result in a better deal."

However, one New York securities lawyer said he felt that U.S. Attorney Rudolph Giuliani had made his last offer and that Drexel will be indicted if a last-minute agreement is not reached soon.

"If this is their strategy, it's a very dangerous one," he said of Drexel's rejection. "My guess is it's not part of a strategy. My guess is they won't get a better offer."

On Monday Wall Street traders said they felt that Drexel's rejection of the latest offer was posturing and that the investment banker expected a more lenient offer would be made. However, the mood was more gloomy Tuesday, and traders said they felt an indictment could be imminent, possibly this week.

Although there has been some speculation that the government has held off indicting Drexel because evidence in the case is lacking, Fischer said he did not think this was true.

"Drexel would not even even be at the table unless it had some real concern," Fischer said.

He said the government's biggest incentive to reach a settlement with Drexel is to obtain the investment banker's cooperation and to "drive a wedge between the defendants."

Indeed the government's last offer excluded Michael Milken, the head of Drexel's junk bond department, who does not want to plead guilty. He has maintained that Drexel is not guilty of any felonies.

The last offer also required Drexel to plead guilty to at least five felony charges and pay as much as $750 million in fines and penalities.