By Daliah Merzaban

Banks will need to raise capital and merge as the U.S. economy sinks into recession and the fallout from the credit crisis could last for years, John Thain said on Monday. The crisis forced Merrill into the arms of Bank of America Corp. in a $50 billion deal.

"It is likely to take multiple years to repair the damage that has been done," Thain said at a roundtable discussion in Dubai, part of the United Arab Emirates, and one of the Gulf Arab markets in which Merrill plans to expand its operations.

"This is not going to get better in three to six months," he said.

Governments around the world have pledged $3.3 trillion to remedy the worst financial crisis since the Great Depression, but volatile markets are also focused on the damage to the broader economy.

Washington this month launched a $700 billion market rescue plan, including measures to inject $250 billion of capital into U.S. banks in exchange for preferred shares.

"I do believe that the actions of the Fed, the Treasury and the FDIC (Federal Deposit Insurance Corp) have solved the concerns about the U.S. financial system," Thain said.

"Those actions ... will all start to unblock and unfreeze the credit markets."

Thain said his bank's merger was on track to conclude by the end of the year, with shareholders expected to vote on the deal in mid- to late-November.

Pressure is mounting on banks to fortify their capital bases as consolidation pressure intensifies in the U.S. financial sector, he said.

"There will be more consolidation in the banking industry in the United States ... There is no question that there will be many small and medium-sized institutions that need to be re-capitalized," Thain said.

REGIONAL EXPANSION

Fiscal actions by governments to alleviate the effects of the crisis will prove key in determining how much economies are suffering, Thain said, adding that even high-growth emerging economies in the Gulf region would not escape.

"There will be an impact on growth in all of the oil-exporting countries because world demand is going to fall," Thain said. "The only question is how deep the recession is and how long. All parts of the world are affected. There is no question of decoupling."

Merrill wanted to expand its presence in the world's biggest oil-exporting region, where its wealth management business has potential to grow, Thain added. It would open offices in Qatar and Kuwait by year-end, he said.

One major Merrill Lynch shareholder in the Gulf is the Kuwait Investment Authority, a sovereign wealth fund.

The region's state investors have "great opportunities" to make attractive investments in the global turmoil, which has depressed asset prices, Thain said.

(Editing by Paul Bolding)