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NEW YORK (Reuters) - Bank of America Corp's $50 billion (28 billion pound) acquisition of Merrill Lynch & Co marks the end of a storied name in American finance, but also creates the nation's biggest bank by far.

The purchase would end the 94-year independence of Merrill, Wall Street's third-largest bank, and pair it with a banking behemoth that has announced more than $150 billion of acquisitions in the last five years. Bank of America would pass Citigroup, the largest bank by assets, in size.

In Monday afternoon trading, Bank of America tumbled 19 percent, wiping out about one-fifth of its $153.9 billion market value, while Merrill rose 12 percent. The merger values Merrill at 70 percent above its Friday closing price.

Analysts said the merger magnifies potential credit risks for Bank of America, given that it is already digesting mortgage giant Countrywide Financial Corp, which it bought in July, in a troubled U.S. economy.

"There's some concern they might have bit more than they could chew," said Marc Pado, U.S. market strategist at Cantor Fitzgerald in San Francisco."

Monday's merger deal came together in less than two days -- after Merrill Chief Executive John Thain called Kenneth Lewis, his counterpart at Bank of America, to propose a combination.

This came as Thain, other top industry executives and officials from the U.S. Federal Reserve had huddled in emergency meetings in downtown Manhattan over the weekend to mull the fate of Lehman Brothers Holdings Inc.

The shotgun merger was similar to JPMorgan Chase's agreement to buy Bear Stearns in March, except that the Bear purchase had the financial backing of the Fed. There was no such backing this time, and Lewis said there was "absolutely no pressure" from the Fed to buy Merrill.

"This was the strategic opportunity of a lifetime," Lewis, 61, said at a news conference with Thain in Bank of America's new offices in New York. The bank's headquarters will remain in Charlotte, North Carolina, Lewis said.

Merrill shares had fallen precipitously in the last week as worries grew that it could become Wall Street's next casualty. Lehman, the fourth-largest Wall Street investment bank, filed for bankruptcy protection on Monday.

Adding Merrill would more than double the size of Bank of America's investment banking unit, and give it the largest retail brokerage and a dominant position in wealth management. It also would get Merrill's 45 percent stake in the asset manager BlackRock.
Bank of America was already the nation's largest retail bank, credit card issuer and mortgage provider.

"This creates the company it would have taken a decade to build," Lewis said.

'INTEGRATION RISK'
The disappearance of Merrill would remove the third major New York-based financial services company in less than a year, after Lehman and Bear. A fourth, insurer American International Group, is scrambling for capital because of losses on its mortgage-related debt.

New York Gov. David Paterson said Wall Street might lay off 30,000 workers in a worst-case scenario.
Standard & Poor's cut Bank of America's long-term credit rating one notch to "AA-minus." Moody's Investors Service said it may cut its "Aa2" rating, its third highest grade. Fitch Ratings affirmed its "A-plus" rating, its fifth highest.

"The deal offers large upside over time, but comes with a lot of risk in the near term," wrote UBS analyst Matthew O'Connor, who rates Bank of America "neutral."

Thain took over Merrill last December, barely a month after the ouster of his predecessor, Stanley O'Neal. Merrill had a $19.2 billion net loss in the last year, and taken more than $40 billion in write-downs.

"This isn't necessarily the outcome I would have expected when I took this job," Thain, 53, said.

But as Lehman talks proceeded, he said, it became clear that "the funding of independent investment banks was going to come under pressure."

Just two big Wall Street investment banks would remain after a merger -- Goldman Sachs Group and Morgan Stanley.

Thain said "we haven't had time" to discuss what role he might take at Bank of America after the merger.

Following heavy trading losses, Bank of America's Lewis said last October he "had all of the fun I can stand in investment banking."

But by Monday, he changed his tune, saying Merrill "causes us in an immediate fashion to be a world-class investment bank and not have to build these things out slowly. I actually do like the business at this scale."

Lewis plans to cut $7 billion in costs by 2012, but said no decisions have been made about staffing. Bank of America employs more than 250,000 people, while Merrill employed about 61,900 at mid-year. Merrill has nearly 17,000 brokers.

Bank of America plans to keep the Merrill name for the retail brokerage, calling the operation "the crown jewel."

DARK CLOUDS AHEAD
Lewis acknowledged that market conditions will remain tough for financial services companies, with charge-offs unlikely to head lower before 2010. "I don't see the clouds parting, as I would like them to, in 2009," he said.

Bank of America agreed to pay 0.8595 of a share for each Merrill share. That valued Merrill at $29 per share, roughly where it traded as recently as September 8. Merrill shares peaked near $99 in January 2007.

The bank is buying about $44 billion of Merrill common shares, as well as $6 billion of options, convertible securities and restricted shares.

"Given the highly skittish market, this stabilizes Merrill's prospects," said David Hendler, an analyst at CreditSights Inc in New York.

In afternoon trading on the New York Stock Exchange, Bank of America stock dropped $6.48 to $27.26, while Merrill was up $2.06 to $19.12.

Bank of America expects the purchase to reduce earnings per share by 3 percent in 2009, but have no effect in 2010. It expects a closing in the first quarter of 2009. Three Merrill directors will join Bank of America's board.

Bank of America has put mergers together quickly before. In June 2005, it agreed to buy credit card issuer MBNA Corp for $34.6 billion after less than a week of talks.
Bank of America's own bankers, Fox-Pitt Kelton Cochran Caronia Waller, private equity firm JC Flowers & Co and the law firm Wachtell Lipton Rosen & Katz advised the bank on the merger. The law firm Shearman & Sterling LLP advised Merrill.

(Additional reporting by Paritosh Bansal, Ellis Mnyandu, John Poirier and Dan Wilchins; editing by Jeffrey Benkoe)