UPDATE 5-Lawmaker accuses Fed of "cover-up" in BofA deal

* Republican accuses Fed of "cover-up" over Merrill deal

* Fed's Bernanke to testify Thursday at panel hearing

* Democrat says Republicans distorting picture

* Ex-Treasury Sec Paulson to testify in July (Adds details from Wall Street Journal article)

By Kim Dixon

WASHINGTON, June 24 (Reuters) - The Federal Reserve sought to hide its involvement in Bank of America Corp's (BAC.N) acquisition of Merrill Lynch as Merrill's financial condition worsened, the top Republican on the House Oversight and Government Reform Committee said on Wednesday.

The Fed "engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies," Representative Darrell Issa said in a statement released to Reuters.

Bernanke has in the past denied any inappropriate pressure on Bank of America. Fed spokeswoman Michelle Smith on Wednesday referred to a letter Bernanke sent Representative Dennis Kucinich on April 30 and later testimony in which he offered an "unconditional assertion" that he did not ask Bank of America CEO Ken Lewis to withhold information regarding Merrill.

"The Federal Reserve acted with the highest integrity throughout its discussions with Bank of America," Bernanke wrote to the Ohio Democrat, who chairs a subcommittee on the Oversight panel.

The Democrat who heads the committee, Edolphus Towns of New York, has called Bernanke to testify on Thursday. "I am not going to prejudge these issues. We are not even close to finishing the Bank of America-Merrill Lynch investigation at this point," Towns said in a statement.

Former U.S. Treasury Secretary Henry Paulson has also been called to testify before Congress next month about the Bank of America-Merrill Lynch transaction. His planned appearance was confirmed in an e-mail from Jenny Rosenberg, an aide to Towns, who said no date had been set for Paulson's testimony.

After rescuing Bank of America in January, U.S. regulators tightened their grip on the bank with a secret agreement that contributed to the ongoing shakeup of its directors and executives, the Wall Street Journal said, citing people familiar with the matter.

At least some of the bank's ratings also were lowered by regulators earlier in the year, the people told the paper.

Bank of America could not be immediately reached for comment on the Journal report. The paper, citing internal documents, added that Federal Deposit Insurance Corp. Chairman Sheila Bair wrote to Bernanke before the aid to the bank was unveiled to express the FDIC's "discomfort" with the deal.

POLITICAL FOOTBALL

Democrats on the panel have focused on whether Bank of America's Lewis illegally misled investors about Merrill's finances, while Republicans have zeroed in on whether the Fed and former Treasury Secretary Henry Paulson inappropriately pressured Lewis to seal the deal.