Merrill Lynch & Co. Inc. , the No. 1 U.S. full-service brokerage,Thursday posted a 52 percent drop in net income in the third quarter, its worst since 1998, and said it had cut 2,300 jobs in the period to reduce costs in the economic downturn. The company also said it would keep reviewing staffing levels.

Stock markets stumbled through the third quarter, posting some of their worst performances since the Great Depression and closing for four days after the Sept. 11 attacks. The sour markets kept Merrill's customers from trading stocks and slashed equity trading revenue.

The company, hit by after-tax expenses of $53 million after being forced from its headquarter following the World Trade Center attack, said they will continue to cut costs and jobs. Executives were downbeat in their short-term outlook.

"We are accelerating actions throughout all of our businesses to improve profit margins," chief executive David Komansky and president Stan O'Neal said in a joint statement. "The near-term environment remains extremely weak, leading to overcapacity throughout the industry."

Merrill reported third-quarter net income of $422 million million, or 44 cents a share, compared with $885 million, or 94 cents a share, last year. The costs from the attack amounted to 6 cents a share.

Analysts expected Merrill to earn between 34 cents and 50 cents a share, with an average of 41 cents, according to market research firm Thomson Financial/First Call.

"(The profit) was mildly ahead of expectations, which were clearly not super-tough to beat," said Diane Glossman, an analyst at UBS Warburg. "The company appears to have been more aggressive on cost control."

Merrill shares jumped $1.39, or 3.1 percent, to $45.62 Thursday on the New York Stock Exchange. In the past 52 weeks, the shares have traded in a range of $80 and $33.50.

Merrill executives said they expect insurance to cover losses stemming from business disruptions in the wake of the Sept. 11 attacks. Negotiations with their insurers are ongoing, they said.

2,300 CUTS IN THIRD QUARTER; MORE TO MORE

Merrill said it cut 2,300 jobs in the third quarter, reducing its staff to 65,900. The company also shed 3,800 jobs in the first half of 2001 and will keep swinging the ax.

"We are not sized appropriately for the times we see ahead," Komansky told investors on a conference call. The company is reviewing its business units for ways to reduce costs, but hasn't targeted a specific number of job cuts.

The review should be complete by the end of the year, Chief Financial Officer Tom Patrick said on the conference call.

Merrill paid out $152 million in severance packages during the third quarter, boosting its compensation-to-net revenue ratio to 53.6 percent from 51.2 percent a year ago. Most securities firms target a ratio of about 50 percent.

"They've been at the lesser end" of relative efficiency levels than their Wall Street peers, Glossman said. "The discussions in recent days would indicate that they are quite cognizant of it and are likely to take action."

Merrill's rivals have also been cutting jobs to cope with profit declines. Bear Stearns Cos. Inc. on Thursday said it would shed 800 jobs, or 7 percent of its total work force. Credit Suisse First Boston last week said it was cutting 2,000 jobs, or 7 percent of its staff.

TRADING, COMMISSION REVENUES FALL

The third-quarter profit was Merrill's worst since the fourth quarter of 1998, when it was hit by slumping bond trading revenue. That year, the firm also dealt with aftershocks from the failure of hedge fund Long-Term Capital Management and global financial turmoil.

Total net revenues fell to $5.1 billion in the quarter from $6.1 billion a year ago, as trading revenues fell 35 percent. Merrill is more dependent on stock trading than rivals such as Bear Stearns and Lehman Bros. Holdings Inc. , which benefited more from a strong fixed income environment.

Merrill, which has 15,000 U.S. brokers, posted commission revenues of $1.2 billion, down 26 percent from a year ago. Clients avoided stocks as markets headed south, and the threat of a U.S. recession loomed.

The firm managed to pull in $13 billion in net new assets globally, despite the weak stock markets. But total client assets fell to $1.5 trillion from $1.8 trillion a year ago as portfolio values were battered by slumping share prices.

Merrill's asset management and portfolio service fees were $1.3 billion, down slightly from a year ago. Its underwriting revenues fell 8 percent, to $543 million, as companies were averse to selling shares at giveaway prices in a weak stock market.

Mergers dropped as companies were loath to use their beaten-down shares as currency in deals, and Merrill's advisory revenues fell 10 percent to $294 million.

Merrill's O'Neal, who was appointed to the vacant position of president in July and became the front-runner to replace Komansky when he retires in 2004, has been asserting himself of late. Since his promotion, Merrill has replaced the head of U.S., foreign brokerage and asset management units. It also plans to replace its head of investment banking, according to a company source.

Merrill shares fell 39 percent in the first nine months of 2001, underperforming the Amex Broker-Dealer Index , which dropped 31 percent in the same period.