Merrill Lynch, the Wall Street investment bank, managed to seal a $50 billion (£27.9 billion) all-share deal to secure its long-term future just as its smaller rival Lehman Brothers filed for bankruptcy.

The Merrill Lynch board, led by John Thain, has agreed to be bought by Bank of America, the mortgage provider, for $29 a share, well above the $17.05 that Merrill Lynch stock closed at on Friday evening but below the $97 they fetched in January 2007. It is understood that both boards have approved the deal.

The deal will mean that Merrill Lynch, which has been dogged by questions over its mortgage-backed securities, is protected by Bank of America's substantial current account, credit card and lending businesses.

However, the prospect of a collapse of Lehman Brothers overshadowed proceedings in London and in New York. Workers from banks in both financial centres were ordered back to their desks on Sunday to try to calculate their groups' exposure to a possible failed Lehman.

US authorities had tried to secure a rescue deal for Lehman Brothers over the weekend. Henry Paulson, US Treasury Secretary, and Tim Geithner, president of the New York Federal Reserve Bank, had convened an emergency meeting in New York on Friday evening to try to convince other banks to bail out Lehman.

They had hoped to ring-fence $85 billion worth of Lehman's real estate assets into one company, which they wanted banks, such as Citigroup and JPMorgan Chase, to prop up with $35 billion of new capital.

Mr Paulson had hoped to persuade the banks to inject new money to prevent a fire sale of Lehman's assets, a move which could have triggered a fall in the value of their own securities.

At the same time, Mr Paulson had tried to sell Lehman's investment bank to either Bank of America or Barclays. However, both walked away at the weekend after Mr Paulson refused to bankroll a possible bailout of Lehman with taxpayer funds.

On Sunday evening, Lehman Brothers, whose shares have fallen about 94 per cent over the year, was left in a vulnerable position.

Over the weekend, the bank hired bankruptcy specialists in the event that all other funding routes failed. The Federal Reserve is expected to try to help banks exposed to Lehman to use a wider range of collateral to borrow funds from the central bank.

In addition, 10 major banks said they would pool $70 billion of their own money to create a borrowing facility. The 10 institutions, which include Citigroup, Credit Suisse and Deutsche Bank, could tap the pool to help them ride out the crisis.

At Lehman's New York headquarters in midtown Manhattan, employees were seen removing their belongings from the building ahead of the expected collapse of the bank.

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