The lawsuit, filed in New York State Supreme Court in Manhattan, seeks to void certain credit default swaps and related insurance contracts that MBIA, through a special purpose vehicle, wrote on the securities held by Merrill.
The insurer wrote $5.7 billion in guarantees on these securities, which were packages of mortgages known as collateralized debt obligations (CDOs), it said in a statement.
MBIA faces several hundred million dollars of losses on these contracts because Merrill misrepresented the credit quality of the CDOs, the insurer said.
MBIA believes that Merrill Lynch's effort to market the CDS contracts to MBIA was part of a deliberate strategy to offload billions of dollars in deteriorating U.S. subprime residential mortgages, the company said in a statement.
A spokesman for Merrill declined comment.
Bank of America Corp
Security Capital Assurance, another bond insurer, severed $3.1 billion in credit guarantee contracts with Merrill last year, after it claimed the bank gave rights promised to SCA under the contracts to at least one other party. A federal judge ruled in June that SCA had to stand by the guarantees.
(Reporting by Elinor Comlay, editing by Leslie Gevirtz)