Merrill Lynch became the latest bank to succumb to the turmoil in the credit markets, as the US bank said today that it would post a surprise third-quarter loss after writing down about $5 billion (£2.45 billion) of sub-prime-related losses.

Merrill said that the loss for the quarter would be as much as 50 cents a share after writing down about $4.5 billion of loans linked to collaterallised debt obligations (CDOs) and sub-prime mortgages and about $463 million related to loan commitments to private equity firms.

Merrill had been expected to book a profit of $1.43 a share in the third quarter, according to Reuters Estimates.

Stan O’Neal, the chairman and chief executive of Merrill Lynch, said: “Despite solid underlying performances in most of our businesses in the third quarter, the impact of this difficult market was much more severe in certain of our ... businesses than we expected earlier in the quarter.”

Two of Merrill Lynch's most senior bankers were ousted from the firm this week as a result of the continuing turmoil in credit markets.

On Wednesday, Osman Semerci, the head of Merrill's fixed-income, commodities and currencies (FICC) division — where most of the sub-prime losses lie — left the bank along with Dale Lattanzio, the head of the division's US operations.

Merrill Lynch’s sub-prime mortgage unit, First Franklin Financial, has also cut jobs and closed branches this year, as defaults and foreclosures on loans to borrowers with weak credit histories have escalated throughout the industry.

Although Merrill said that it was "beginning to see signs of a return to more normal activity levels in a number of markets", analysts questioned whether the worst was over for the Wall Street bank.

“The core issue is whether or not it is going to be enough," Sean Egan, the managing director of the independent credit ratings firm Egan-Jones Ratings, said. "Merrill had huge exposures to the mortgage sector, the CDO sector and the collateralised loan sector.”

Merrill's problems echo similar statements from other investment banks, including Bear Sterns, Lehman, Morgan Stanley, Deutsche Bank and UBS, which in recent weeks have all been forced to announce writedowns and significant redundancies related to the sub-prime crunch.

However, Merrill's loss is by a wide margin the worst of any of the big banks so far.

As well as the $4.5 billion of losses linked to sub-prime, Merrill Lynch has also been one of the most active banks in the leveraged loan sector.

In the US it co-underwrote the $24 billion loan backing KKR's acquisition of First Data.

It was also part of a consortium of banks that lent more than $22 billion for the buyout of Harrah's Entertainment and is one of the banks that underwrote KKR's £11 billion acquisition of Alliance Boots.

Banks such as Merrill aggressively competed for private equity business during the M&A boom, lending money on ever-looser terms and often with no covenants.

But as the sub-prime crisis took hold, the same CDO funds that bought up the risky sub-prime mortgage loans refused to buy leveraged private equity loans, leaving the banks with more than $400 billion of underwritten but unsyndicated debt on their books.

Mr O'Neal said: "Although the outlook for fourth-quarter revenues remains difficult to predict, we continue to see evidence of strong long-term growth trends in each of our global businesses."

Merrill noted in its statement that it had promoted David Sobotka, a senior vice-president, to replace Mr Semerci as global head of FICC.

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