John Thain replaced Merrill's former boss Stan O'Neal

As part of the deal, Temasek Holdings also has the option to buy a further $600m of stock in the US bank stricken by the credit crisis by 28 March.

Separately, Merrill will get a further $1.2bn cash injection from US fund manager Davis Selected Advisors.

It is hoped the investments will shore up the company's balance sheet.

"One of my first priorities at Merrill Lynch was to strengthen the firm's balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments," said Merrill's new chief executive officer and chairman John Thain.

He insisted that neither Temasek or Davis Selected Advisors would have any control over Merrill's management or daily operations.

Shares in Merrill rose more than 5% after the announcement but gave up most of these gains to trade up 36 cents, or 0.65%, at $55.90.

Eastern promise

Foreign investors have been buying shares in major US banks, which have fallen on the back of billions of dollars of declared losses linked to the US sub-prime home loans crisis and fears of more losses to come.

Merrill Lynch and Citigroup both lost their chief executives after unveiling vast write-downs on investments in complex packages of debt tied to mortgages taken out by people on low incomes or with patchy credit records who can no longer afford the repayments.