A US power company has reportedly filed a lawsuit accusing giant investment bank Merrill Lynch of fraud in its handling of accounts at an energy trading firm.

Allegheny Energy is accusing Merrill Lynch of inflating sales revenue at Global Energy Markets (GEM) and has asked for $600m in compensation, the Wall Street Journal reported.

In its filing with the Supreme Court of New York, Allegheny said Merrill had "painted a false portrait of the GEM business and its ongoing prospects, and have saddled Allegheny with tarnished goods".

The filing comes a day after Merrill Lynch sued the power firm for failing to pay $115m of the purchase price for GEM.

Growth plan sours

Allegheny agreed to buy GEM from Merrill Lynch for for $490m.

The purchase was part of its strategy to become a major player in the energy trading market and compete with Enron, the sector leader that has since collapsed after an accounting scandal.

Allegheny has reportedly accused Merill Lynch of misleadingly booking revenue on trades that involved Enron, among others.

The dispute centres on complex trades known as "wash trades" that do not result in profit or loss.

Merrill Lynch has insisted that all its dealings with Enron were legitimate and that it was not aware of any improper dealings by its staff.

Earlier this month, it fired two senior executives for failing to answer questions about their dealings with Enron from US law-enforcement agencies.

In a written statement, Merrill Lynch said "while it regretted the action, it was enforcing its policy requiring employees to fully co-operate with regulatory and law enforcement investigations".

Both men had declined to testify in an investigation by the Securities and Exchange Commission (SEC) and the US Department of Justice into financial transactions initiated by Enron in 1999.