Merrill Lynch admitted today that it had uncovered a possible rogue currency trader in its London offices, in another blow to the reputation of the bank that was rescued from near-oblivion last year.

Authorities in the UK and Ireland are investigating the foreign exchange trader Alexis Stenfors (right), who worked in the Merrill offices near St Paul's cathedral. He is still on the Merrill payroll but listed as inactive on the Financial Services Authority register, meaning he cannot work as a trader.

The Irish Financial Regulator said it had been made aware of "matters relating to the mispricing of trades" in London on 18 February and had authorised investigators to go into the offices in the days that followed. Merrill Lynch International is registered in Ireland, with the London office operating as a branch.

As well as co-ordinating the investigation with the FSA in London, the Irish regulator is in dialogue with US authorities, including the Federal Reserve. An independent law firm has been hired and the audit office of Merrill's parent company, Bank of America (BoA), is also involved. "We are receiving daily updates on the investigation," a spokeswoman for the Irish regulator said.

It was not immediately clear what kind of sums were involved, although one report, in the New York Times, suggested that Stenfors had recorded a trading profit of $120m (£85m) last year and taken a "handsome bonus". The report appeared to suggest his losses could have reached as much as $120m, but that could not be verified last night.

In a brief statement, Merrill said: "During a recent evaluation of certain trading positions, we discovered an irregularity. We informed regulators immediately and are working closely with authorities to thoroughly investigate the matter. Senior managers of the business are focused on the issue and believe the risks surrounding possible losses are under control."

Stenfors, who is understood to have worked at the bank since 1995, told the New York Times that the allegations were a "misunderstanding". His lawyer, Ian Ryan at the firm Finers Stephens Innocent, said that Stenfors was co-operating with the investigation.

More than half the world's currency trading takes place in London and the volatility in the markets has provided a welcome revenue stream for banks hit by the credit crunch. The discovery of the "irregularity" is likely to cause further tension between Merrill and BoA, which rescued the bank in a takeover in September. BoA is said to be investigating whether Merrill delayed booking trading losses until large bonuses were approved and the takeover sealed. BoA risk officers are said to have uncovered the irregular trades allegedly made by Stenfors.

Relations between BoA and Merrill have become strained since the brokerage slumped to a $15.3bn loss for the final quarter of 2008. Merrill said last month that it had understated its losses for 2008 by $500m because of ineffective internal controls.

Merrill's boss, John Thain, was ousted in January amid a whispering campaign over his management style. BoA executives privately criticised him for spending $1.2m refurbishing his office with antiques and for planning "inappropriate" parties at this year's Davos economic summit.BoA's chief executive, Ken Lewis, has complained that he was left in the dark about Merrill's mounting liabilities and that Merrill paid $3.6bn in bonuses to its senior executives against his wishes.

Insiders feel that buying Merrill undermined BoA's reputation and created a perception of weakness. Lewis admitted this week that he made a "tactical mistake" in accepting $20bn of US government money to support the deal, saying this put BoA in a similar category to strugglers such as Citigroup.

The New York attorney general, Andrew Cuomo, is conducting an investigation into the executive bonuses awarded by Merrill just before the BoA deal was finalised.

Cuomo's office issued subpoenas this week to seven Merrill executives who each banked bonuses of more than $10m, including David Gu, the head of the currency division.