Temasek bought $600 million Merrill shares in February

SINGAPORE (Reuters) - Singapore state investor Temasek TEM.UL exercised an option to buy an additional $600 million worth of Merrill Lynch MER.N shares in February, raising its investment in the U.S. bank to $5 billion, the sovereign wealth fund said on Tuesday.

Temasek bought the additional 12.5 million Merrill shares in February at $48 each, the same price it paid when it made its initial investment, a Temasek spokeswoman confirmed.

The information was contained in a Merrill Lynch filing with the Securities and Exchange Commission on February 25.

Temasek joined other state funds from the Middle East and Asia to provide lifelines to U.S. and European banks hit by the collapse of the U.S. subprime property market.

But Temasek is potentially sitting on losses of around $540 million as Merrill shares have fallen 11 percent below its purchase price.

Late last year, Temasek agreed to buy $4.4 billion worth of Merrill shares at $48 each as part of a capital injection by the Singapore fund and asset manager Davis Selected Advisers. That deal gave Temasek the option to buy an additional $600 million worth of Merrill shares by end-March.

Merrill raised more capital from Middle East and Japanese investors in January.

Merrill Chief Executive John Thain said earlier this month in Tokyo that the U.S. investment bank does not plan to raise more capital and will continue to shrink its balance sheet amid the global credit crunch.

Merrill has written down $24 billion worth of investments related to the troubled U.S. mortgage market, which pushed the bank to report a loss of more than $8 billion in 2007.

Analysts expect Merrill to write down a further $3-$5 billion when it reports first-quarter earnings later this month.

Credit Suisse said in a report last week that the U.S. banking crisis could potentially result in $650 billion in total credit-related losses, of which only 40 percent has been revealed so far.

Of that $650 billion, $390 billion could pertain to lending institutions which may need to raise capital against it, the brokerage said in a global equity strategy note.

It noted banks have so far raised about $160 billion.

(Reporting by Saeed Azhar; Editing by Ian Geoghegan and Quentin Bryar)