SAN FRANCISCO — Latham & Watkins said Tuesday it will freeze associate salaries in response to “challenging economic times,” a move that could signal the rest of the industry to follow suit, observers said.

“Everybody’s been waiting for some kind of signal from the market leader,” said consultant Peter Zeughauser, founder of The Zeughauser Group. “This will be a profound signal to the market about what to do.”

Firms have responded in a variety of ways to slackening demand for legal services, a trend expected to continue well into 2009. Orrick, Herrington & Sutcliffe last month laid off 40 associates who worked in slowing practice areas like real estate and structured finance. DLA Piper asked its non-equity partners to contribute capital to the firm, up to $150,000 each. Other firms that have cut associate head count have attributed the cuts to performance reasons.

A survey released Monday by legal consulting firm Altman Weil showed several firms with more than 250 lawyers are considering decreasing partner draws, reducing associate and staff salaries, or even firing partners, associates and staff.

Latham was the No. 2 grossing firm in the country last year, according to Recorder affiliate The American Lawyer magazine, with $2 billion in revenues and $1 billion in profits.

The firm’s Web site states that the firm has 2,300 lawyers, and lists about 1,300 associates.

“All associates moving to the next class year on January 1, 2009, will continue to receive the same base compensation as they received in 2008,” Chairman Robert Dell said in a statement released by the firm.

Most associates would have seen their pay go up by $10,000 to $25,000 on Jan. 1, depending on their class. Now, both first- and second-years will receive $160,000 in 2009.

In any other economic environment, Latham might risk exposing itself to associate poaching, said consultant Richard Gary. But not now, in a market with so much uncertainty. “This is a very safe time for Latham to make a move like that,” he said.

Clients have been complaining for years about high associate salaries, but the concern has become more “acute” lately, said Bradford Hildebrandt, founder of legal consulting firm Hildebrandt International.

“Firms are grappling with uncertainty and client pressure on cost, particularly at the associate level,” Hildebrandt said. “Clients are particularly concerned about the constant rise in associate salaries.”

He expects similar moves from other firms in the coming months.

Gary said Latham’s move is “major” and recognizes that associate pay has become a large component of firm overhead.

“It’s major for two reasons. First of all, Latham is a market leader, so all other firms will watch that move very carefully. Secondly, it’s a landmark move in and of itself, regardless of the firm that’s doing it.”

He also expects other firms to follow suit soon.

“This move by Latham is a sign of how difficult the times are going to be. Latham is at the very top of the U.S. legal services industry. For them to be taking a step like that says to me that no one is going to escape the effects of the economic downturn,” Gary said.