Bank of America is to buy Merrill Lynch in a deal worth $50bn (£28bn) that will create a new financial giant.
The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection.
There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.
Merrill has written down more than $40bn of assets in the past year.
Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.
While that represents a 70% premium to the closing share price on Friday, Merrill's share price stood at $50 in May and was above $90 at the start of 2007.
"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," said Bank of America chairman and chief executive Ken Lewis said in a statement.
Shares in Merrill Lynch rose 26% at $4.44 in late morning trade, while Bank of America saw its stock fell 14.2% at $28.94.
"Together, our companies are more valuable because of the synergies in our businesses."
The deal will also see three Merrill Lynch directors join the board of Bank of America.
"Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms," said John Thain, Merrill's chairman and chief executive.
The deal - which is expected to be completed in the first quarter of 2009 - has been approved by directors of both companies, but now will need the approval of shareholders and regulators.
Merrill's share price had fallen last week as Lehman Brothers undertook its ultimately unsuccessful search for a buyer.
Analysts said the combination of Bank of America and Merrill Lynch would be a good fit.
"It catapults Bank of America into positions of strength in three businesses where they were weak," said James Ellman from hedge fund Seacliff Capital.
"Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world."