The Health Insurance Plan of New York is negotiating to move its headquarters and 1,600 employees to Lower Manhattan from Midtown in one of the biggest office deals in the past two years.

HIP's potential move to an office building on the East River, at 55 Water Street, would be a boost for the downtown economy, where thousands of layoffs in the financial industry and corporate relocations have left a lot of office space vacant. HIP's offices are now at 7 West 34th Street and 132 West 31st Street.

HIP's move would be a rare bit of good news for Lower Manhattan. Pillsbury Winthrop, a law firm whose roots downtown date to the mid-1800's, announced yesterday that it was moving to the Bertelsmann Building in Times Square from its home on State Street.

Another downtown law firm, Cadwalader, Wickersham & Taft, is considering selling the building it owns on Maiden Lane and moving to Midtown, or elsewhere in Lower Manhattan, according to real estate brokers. There are already many other large blocks of vacant office space left behind by departing banks and other companies, from the World Financial Center on the Hudson River to Water Street on the East River.

"The market is weak," said Barry Gosin, chief executive of Newmark & Company, a real estate firm. "The financial services industry has taken the great hit on jobs, and downtown has been impacted more than Midtown. As long as there are no new jobs created, demand will be slow."

If HIP completes its deal, it would have a considerable effect downtown. It is negotiating to lease about 500,000 square feet at 55 Water Street, one of the largest office buildings in the world.

The last new commercial deal of that size was two years ago, when Bloomberg L.P., the financial information company founded by Mayor Michael R. Bloomberg, signed a lease to move to a tower now being built at Lexington Avenue and 59th Street.

According to state and city officials and real estate executives, HIP would move 1,600 employees downtown and expects to add another 400 in the coming years. The company has also negotiated with the state and the city for a cash grant worth about $10 million, part of the federal money used to attract or retain companies in Lower Manhattan in the wake of the terrorist attack of Sept. 11, 2001.

Brian Given, a real estate broker at GVA Williams, the company that represents HIP, did not return calls requesting comment.

Ronald Maiorana, a spokesman for HIP, said a final decision had not been made. "For over a year," he said "we've been exploring a lot of options about relocation. We haven't signed anything."

The vacancy rate downtown has climbed to 16.8 percent, with about 15.4 million square feet of space available, according to Newmark, and a few companies have sought to take advantage of the resulting lower rents. Some real estate executives say the situation is even bleaker when you consider "shadow space" that investment banks like Goldman Sachs want to shed but have not officially put on the market. Another real estate company, Tenantwise, issued a report this week putting the vacancy rate including that "shadow space" at 23.9 percent, or nearly one out of every four floors.

Mr. Gosin of Newmark said one bright spot in Lower Manhattan was the continuing development of residential buildings, which many planners say is the key to the area's revival.

The Albanese Development Corporation is completing a 27-story tower at the north end of Battery Park City with 293 apartments, Glenwood Management is building a 287-unit building at 10 Liberty Street, and Rockrose Development has started work on a 50-story tower with 600 apartments at the corner of Gold and Platt Streets.

The Midtown office market has also been affected by the economic slowdown. Indeed, tenants have tens of millions of square feet to choose from, and rents are falling.

Pillsbury Winthrop was negotiating in July to move from its longtime home on State Street in the financial district to Times Square Tower, a 47-story building under construction on 42nd Street, between Broadway and Seventh Avenue. The building, which is owned by Boston Properties, had recently lost its anchor tenant, Arthur Andersen, after the accounting firm collapsed.

But just as Pillsbury was about to sign a deal, Bertelsmann, the German media company, decided to put nearly half the space in its nearby building on the market for an even lower rent. Yesterday, Mitchell Steir, chairman of Julien J. Studley, Pillsbury's broker, announced that the law firm had leased six floors in the Bertelsmann Building.