Bank of America today grabbed a $138 billion (£95 billion) lifeline from the US government and finally admitted the vast scale of losses racked up by newly acquired Merrill Lynch.

The bank was handed a $118 billion guarantee to underwrite toxic assets held by Merrill and a $20 billion cash injection to cover the shocking extent of Merrill's losses — $15.31 billion in the fourth quarter alone.

It was a major embarrassment for BoA, whose shareholders have accused chief executive Kenneth Lewis of failing to do due diligence before buying the failed securities firm.

BoA rescued Merrill in a shotgun deal at the time of the Lehman Brothers collapse in September and today blamed “severe capital market dislocations” for the decline. BoA also posted losses of its own of $1.79 billion in the fourth quarter, its first negative result for 17 years and a far cry from the $268 million profit it made a year earlier. It cut its dividend from 32 cents a share to just one cent.

The $20 billion lifeline, on top of the $25 billion BoA has already received, was more than the $15 billion expected but many fear it will not be the last needed to cope with Merrill's massive portfolio of troubled assets.

The losses at Merrill included writedowns of $1.9 billion on leveraged loans, $1.2 billion in investment securities and $1.1 billion on commercial property.

Analysts raised fresh doubts over the future of Lewis, who engineered the takeovers of Merrill and ailing mortgage lender Countrywide Financial during the worst market slump since the Great Depression.

Lewis insisted the decision to buy out Merrill and Countrywide was essential for stability in the market place and the country at a time of unprecedented turmoil. He said “you will see the benefits” when the economy improves but investors are not so sure. BoA shares crashed 18% last night but were up nearly 8% in early trading today. The grim figures also fuelled fears of further job losses in London. Merrill employs 4500 staff in the City and BoA has 1700 in Canary Wharf. Some 1900 face the axe at the combined bank as the firm cuts 30,000 jobs worldwide.

For the full year, profits at BoA fell to $4.01 billion from $14.98 billion, highlighting the extent of the crisis crippling once-stable banks in America and around the world.