Yup, they're merging. It is a work in progress, will be released soon as Rails 3. (RailsConf 09: David Heinemeier Hansson, "Rails 3 ...and the real secret to high productivity" - YouTube) Here is a nice talk about it.
Will Merb continue to exists/evolve as a separate framework (after the merge)?
Is Merb Dead?
The big question is: how they will do it?
Rails 3.0 – LIVE, released!