Citigroup (NYSE: C - News) and Merrill Lynch warned of growing economic problems in the US on Thursday as they revealed a total of $8bn in losses during the third quarter.

John Thain, chairman and chief executive of Merrill, said: "I believe we arebeginning to see a significant contraction in economic activity in the US that will also impact economic growth around the world."

Citi reported a net loss of $2.8bn, or 60 cents per share, stemming largely from weakness in the US economy and declining performance in the bank's credit card division.

The bank also reported writedowns associated with the remnants of itsmortgage-backed asset holdings, which have been a drag on earnings for the past year.

For its global cards division, Citi reported a $902m loss for the quarter compared with a profit of $1.44bn for the same quarter last year. Card revenues dropped 40 per cent to $3.8bn from $6.3bn.

Gary Crittenden, Citi's chief financial officer, said the bank's card business in the US correlated strongly with the nation's unemployment rate, which has been rising in recent months. As people lose their jobs, the rate of delinquent payments spikes upwards.

Mr Crittenden said the bank had not yet decided whether to access thegovernment's $750bn tarnished asset bailout programme.

As for the $25bn capital infusion that Citi received this week, Mr Crittenden said it was possible that the bank could use the funds to acquire distressed assets.

Among the highlights for the quarter, according to Mr Crittenden, was Citi's ability to reduce expenses by $1.2bn from the previous quarter and to reduce headcount by 11,000 in the period. For the first nine months of 2008, Citi has shed approximately 23,000 jobs.

Merrill, which agreed to be bought by Bank of America in a hastily brokered deal last month, reported a third-quarter net loss of $5.2bn, due largely to writedowns and credit losses on complex debt securities.

Total writedowns amounted to $9.5bn, including losses on a heavily discounted sale of complex mortgage-backed securities in July, as well as losses related to holdings of securities issued by Fannie Mae, Freddie Mac and Lehman Brothers. The losses were mitigated by Merrill's $4.4bn sale of its stake in Bloom-berg, the news and dataprovider.

Merrill, which has posted some $40bn in mortgage-related writedowns, has been cleaning up its balance sheet aggressively in recent months.

The bank said it had made "significant progress in balance sheet and risk reduction", having cut 98 per cent of its exposures to US Alt-A mortgages.

"We continue to reduce exposures and deleverage the balance sheet prior to the closing of the Bank of America deal," said Mr Thain, who has agreed to remain at Merrill after the deal with BofA closes, probably early next year.

The deal was agreed during a frantic weekend of negotiations that culminated in BofA abandoning talks with Lehman to tie up with Merrill.

The sale offered Merrill the stability of BofA's large deposit base and left Lehman to file for bankruptcy.

Merrill is set to issue $10bn of preferred stock and related warrants to the government as part of the Treasury's bail-out of the banking system.

Mr Thain said he believed the capital injection, together with other initiatives to guarantee new bank debt and unfreeze short-term lending markets, would alleviate the strain in credit markets.

However, he added the markets were now focused on the real economy.