It’s a $7 trillion industry, now on tenderhooks waiting to see how far the probe headed by aggressive New York Attorney General Eliot Spitzer may go. The number of big-name companies engulfed in the scandal grew on Friday. The previously scandal-free mutual fund industry looks like being snared in the same scandal of improper trading practices that have soured the taste of investors and tarnished fund and brokerage firms.

Spitzer’s probe drew in investment bank and brokerage powerhouse Merrill Lynch & Co MER.N and money management firm Fred Alger Management Inc. on Friday.

Merrill fired three brokers linked to controversial market timing trades, according to a source familiar with the situation, while Alger said in a statement it suspended three mutual fund sales employees in connection with improper after-hours trading.

The widening fallout has prompted comparisons with the last big investigation that Spitzer led: A probe into Wall Street analysts that led to a $1.4 billion settlement with major investment banks.

But fund experts do not expect a broad settlement with fund groups, in part because they do not think the improper trading of mutual fund shares badly hurt investors’ returns. Also, the rebounding stock market is giving investors their first gains in three years, helping take the pressure off fund firms.

“My suspicion is because this happened in a good market climate, people will not en masse use it as an excuse to head for the hills,” said Don Cassidy, senior analyst at research firm Lipper Inc., a division of Reuters Group Plc.

However, industry experts said it is still too early to tell what will happen and that the growing scandal could do serious damage to funds’ reputations.

“I don’t think at this point that this is going to be a scandal about monetary damages, so when you think about Enron or WorldCom shareholders who lost all of their money, it’s not going to be like that,” said Brian Portnoy, an analyst at research firm Morningstar. But “it’s forcing a lot of people to revisit the fundamentals of what this industry is all about.”

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