The London Stock Exchange's plan to merge with Deutsche Borse is almost unworkable, according to a report commissioned by executives at Merrill Lynch, one of the LSE's main advisers and shareholders.

The report says integration of the two exchanges and regulatory harmonisation will not be achieved for "a substantial period of time".

In addition, the combined group will have "exceptionally high" operating costs.

The report was commissioned by executives in Merrill's equity market group. Neither Mr Michael Marks, the bank's chairman who sits on the LSE board, nor the banking team advising the exchange knew it existed until contacted by the Financial Times.

Merrill is now likely to face demands from all LSE board members to make it available to them.

The two exchanges have been sharply criticised for not providing greater detail of how their proposed merger, known as iX, will operate and the report is likely to be seized upon by critics of the merger plan.

The critical conclusions of the report, compiled by the law firms Linklaters and Cleary Gottlieb Steen & Hamilton, are embarrassing for Merrill Lynch, which has been viewed as one of the prime movers behind the tie-up between London and Frankfurt. The bank is both a shareholder in and a large user of the LSE, with an estimated 20 per cent share of UK share trading.

Mr Sergio Ermotti, the bank's head of equities for Europe, said last night the report was purely internal and was commissioned to examine the regulatory and practical implications of iX.

Its conclusions were not necessarily the opinion of Merrill Lynch, he went on, adding that reports would be ordered on similar developments at other stock exchanges.

The reports conclusions reflect reservations held by many equity market specialists about the iX concept, which envisages several markets in London and Frankfurt regulated separately. They believe it is too complicated and will not provide the low-cost trading environment they seek. The report says iX will have to find additional savings of £170 million a year to achieve its stated aim of becoming a low-cost provider of trading services.