Bank of America Corp. and Merrill Lynch & Co. are in talks about a possible combination of the two financial companies, according to an official with direct knowledge of the talks.

The person was not authorized to speak publicly because the discussions were ongoing. Spokesmen for Bank of America and Merrill Lynch did not return calls seeking comment.

Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination of the two would create a global banking giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.

However, the deal would not come without risks. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.

And Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.

Major banks and brokerages met this weekend with government officials to try to formulate a rescue of Lehman Brothers Holdings Inc. The withdrawal of Bank of America, along with the pullout of Barclays PLC from the talks, raised the worry that Lehman might be forced to file for bankruptcy protection.

Many market participants believe Merrill Lynch _ the first of the major financial services firms to oust its CEO after the credit markets seized up last year _ might have been the next firm to lose the confidence of its investors, counterparties clients.

Lehman's shares fell a stunning 77 percent last week to $3.65 a share, but Merrill's also performed poorly, dropping 36 percent to $17.05.

Merrill Lynch, whose current CEO is John Thain, is a more attractive takeover candidate to Bank of America than Lehman is, however, given its size, scope, and foothold in the retail market.

"This is the ultimate New York institution," said Jim Wilcox, professor of financial institutions at the University of California, Berkeley's Haas Business School. "Bank of America has had designs on Manhattan one way or another for some time."

And while Merrill's books are far from clean, there is less uncertainty about its financial health.

"It's awfully difficult to get anyone to take on a fundamentally insolvent instution. And if that's the concern that people had about Lehman, it's a much tougher sale," Wilcox said.

In July, Merrill sold its stake in financial news and data provider Bloomberg LP for $4.43 billion to raise capital, and then sold a huge chunk of its toxic asset-backed securities and issued new stock to raise another $8.5 billion.

Bank of America has tried many times to build a strong investment bank, pouring hundreds of millions of dollars into the business only to see it underperform.

"At Bank of America, their investment bank never really dominated any product area. Merrill Lynch is stronger," said Len Blum, managing director at Westwood Capital LLC and former managing director of Prudential Securities Inc.'s investment banking group.

After a massive drop in the investment bank's earnings in last year's third quarter, Bank of America's CEO Ken Lewis said during a conference call: "I never say never. But I've had all of the fun I can stand in investment banking at the moment. So to get bigger in it is not something I really want to do."

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AP Business Writer Joe Bel Bruno contributed to this report.