According to the deal, Bank of America will pay US$29 per share for the 94-year-old Merrill Lynch, which is 70 percent premium above Merrill's Friday close at US$17.05 per share. However, the offer is only two-thirds of Merrill's value of one year ago, and half its all-time peak value of early 2007.

There was a general worry inside the Federal Reserve that Merrill could be the next to fall after Lehman. Merrill was forced to sell itself by the Fed, people familiar with the matter said.

On Friday, Bank of America was pushing for a deal with Lehman Brothers, but the negotiation broke down and Lehman was preparing to file for bankruptcy. Just 48 hours later, they reached the agreement with Merrill. Merrill reportedly approached Morgan Stanley about a possible purchase before Bank of America. But Morgan Stanley wanted more time to review it, while Merrill wanted it quickly.

Three of five largest US investment banks failed within six months, including Bear Stearns, Lehman Brothers and Merrill Lynch. The fate of both Morgan Stanley and Goldman Sachs will be closely watched this morning.

After the deal between Merrill and Bank of America, the US dollar dropped sharply, as the market pondered whether the Fed would lower the interest rates next week.