Merrill Lynch, the American bank, yesterday refused to rule out further losses after writing off $7.9 billion (£3.85 billion) of toxic sub-prime mortgage investments.

The world’s biggest brokerage still has $15 billion of investments on its books that are backed by mortgage debt in the United States.

Yesterday, the bank said that it would write down $7.9 billion during the third quarter of the year to cover the cost of bad investments it made, a sum far higher than the estimate it published last month of $4.5 billion. It was also almost $1 billion higher than the most pessimistic forecasts on Wall Street.

However, when grilled by Wall Street analysts yesterday, the bank said that while it had sought to value its mortgage-backed investments “conservatively”, it “could not tell you what the market trajectory is from here”. When questioned further by an analyst from Citigroup, Merrill Lynch would not say whether the new valuations it had made were low enough to be able to sell the investments in current market conditions.

Like most of the big banks on Wall Street, Merrill bought billions of dollars of bonds, called collateralised debt obligations, which were backed by pools of American mortgages.

Some of those mortgages were made to borrowers with low incomes and poor credit ratings. A number of those borrowers have fallen into arrears because the adjustable interest rates on the loans have soared and American house prices have plunged.

The value of bonds issued on the back of those mortgages has collapsed and in some cases the bonds are untradeable and effectively worthless.

Merrill Lynch shares tumbled almost 6 per cent to a two-year low. The stock, trading at $63.22 in New York, is down 32 per cent this year.

The $7.9 billion writedown has plunged the bank into its first loss since the dot-com boom, with the group announcing a quarterly net loss of $2.3 billion compared with a $2.2 billion profit for the same period the year before.

Stan O’Neal, chairman and chief executive, said: “We made a mistake. There were errors of judgment in the business itself and in risk management. That is the primary reason why the exposures exist. The bottom line is we got it wrong by being overexposed to sub-prime.”

Last month Mr O’Neal ousted two bond executives after estimating the first, smaller writedown. Yesterday’s bigger than expected writedown will raise pressure on Mr O’Neal as he seeks to reassure the bank’s board that its exposure to risk is under control.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive