Saudi Arabia plans world's largest SWF

This developed as the ailing investment bank Temasek of Singapore held "preliminary talks" with Merrill Lynch, a global financial management and advisory firm, regarding a multibillion-dollar stake in the bank, the report said quoting "a person familiar with the matter".

But the person said there were "no indications" that a deal was "imminent".

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Temasek had struck deals with Government of Singapore Investment Corp and China Investment Corp, although it was also considered as an investor in global financial services firms UBS and Morgan Stanley, the report said.

Acting as a country's investment arm, SWFs have been investing money gained through export receipts or from sales of commodities such as oil. Merrill Lynch has said the funds, found in the oil-rich Middle East as well as Russia and Singapore, are seen to reach Dh29 trillion ($7.9 trillion) over the next three years from Dh7 trillion ($1.9 trillion).

Saudi Arabia's Public Investment Fund would likely spearhead the stakes despite a mandate for internal investment, the report said. While the stakes had avoided serious political backlash, any investments from the oil-rich kingdom would be greatly scrutinised.

Part of the kingdom's oil revenues had in the past gone to its central bank, the Saudi Arabian Monetary Authority (SAMA) and into the private wealth of the ruling family, whose investment vehicles are never made public. And while SAMA's balance sheet is public information, its investment has been constrained mostly in US Treasury bonds and shares.

Last month Abu Dhabi's state investment fund injected Dh27.6 billion ($7.5 billion) into US financial giant Citigroup, a move which could pave the way for other symbolic American conglomerates being owned by foreign governments due to the subprime mortgage crisis.

The appetites of SWFs, whose investment vehicle used to be government debt such as the US Treasuries, have become complex as they searched for greater returns, said Jay Bryson, global economist at financial consultant Wachovia Corp, as quoted by CNNMoney.com.

This year SWFs have gobbled up a number of US firms including the Dh3.5-billion ($942 million) purchase of Barneys by Istithmar, a UAE financing arm, in August and the Dh2.3 billion ($622-million) stake acquired by Mubadala Development Co, a separate investment arm of the Abu Dhabi government, in global integrated circuits supplier AMD.

In their October G-7 meeting, leaders of high-industrialised nations called for more transparency in SWF investments lest the funds be used as leverage in diplomatic negotiations.

Economists, however, say that sovereign funds are good for the US economy as they provide capital for big companies and support the tumbling dollar.