About 400 jobs will go in London, mainly in the emerging markets and fixed-income businesses headed by Seth Waugh, where the biggest pain has been felt. It is thought one in six will go in the debt business in Europe.
The company's chairman, David Komansky, said the redundancies and other savings measures in response to what he described as "unprecedented" market conditions will result in annual savings of $500m.
Profits before the charges were $124m, a fall of 78 per cent on the previous quarter.
"As the world's leading underwriter in the debt markets, our operating performance was severely affected by the turmoil in global financial markets in August and September, marked by historically unprecedented increases in credit risk premiums and a virtual disappearance of liquidity for emerging markets and other debt securities," Mr Komansky said.
The firm anticipated a "much more challenging environment ahead. That is why we are implementing an energetic programme to reduce expenses and selectively resize certain businesses," he said
Michael Marks, who heads the London operation, said the job losses would start taking affect immediately in the US. However in London, because of new rules introduced after the Government signed the European Social Chapter last year, the bank had to undertake a formal consultation with staff before finalising job losses. The process is expected to take up to five weeks. Mr Marks said that it was the first time Merrill Lynch had laid off staff since 1989.
Merrill has expanded in London, having bought Smith New Court stockbrokers in 1995 and Mercury Asset Management earlier this year.
Mr Marks said these businesses were still doing well and would be largely unaffected by the cuts. He said Merrill had decided to act swiftly in order to be better placed to weather the downturn.