The river first formed as the Sierra Nevada rose about 10 million years ago, and sediment eroded from its canyon helped form the flat floor of the San Joaquin Valley. Glaciation during the Ice Ages carved the high elevation parts of the watershed, including Yosemite Valley, into their present shape. Historically, there was an extensive riparian zone which provided habitat for millions of migrating birds, and the river had one of the southernmost runs of chinook salmon in North America.
Large-scale irrigation was introduced to the San Joaquin Valley in the late 19th century, and led to the construction of numerous state, federal and privately owned dams, which blocked migrating salmon and caused a large decline in riparian habitat. Diversion of water for irrigation often reduces the river to a small stream by the time it reaches its mouth. Efforts to mitigate environmental damage include habitat conservation work, re-establishment of historic streamflow patterns, and the construction of a salmon hatchery.
The Merced continues to the northwest for 3 miles (4.8 km) where collects into Merced Lake. Leaving Merced Lake, the river continues to the west northwest for 2.3 miles (3.7 km) where the canyons open up into Echo Valley. The river then turns generally westward for another 3 miles (4.8 km), where it snakes through a spectacular narrow gorge between massive, glacially resistant granite cliffs. The gorge opens up after Bunnell Point and Sugarloaf Dome confine the river to form Bunnell Cascade, before turning southward through the Lost Valley of the Merced, and then spills over a granite cliff into Little Yosemite Valley, named for its resemblance to Yosemite Valley downstream.
The river arcs northwest to receive the North Fork, and a few miles after it enters Lake McClure, formed by New Exchequer Dam. Below New Exchequer, the river flows west through a heavily irrigated region of the Central Valley, passing through McSwain and Crocker-Huffman Dams and the cities of Hopeton, Delhi and Livingston. It joins the San Joaquin River at Hills Ferry, a few miles south of Turlock.
Much of the Merced River basin is at high elevation, where an alpine climate prevails. The Sierra receives heavy snowfall in the winter, which melts in the spring and early summer causing annual flooding. By late autumn the river level has dropped considerably, and some smaller tributaries dry up altogether. Up to 85% of the flow above Happy Isles comes from melting snow. In the dry season, groundwater provides the only base flow to the river. In addition, the river is fed by dozens of high Sierra lakes, the largest of which include Merced Lake, Tenaya Lake, Ostrander Lake, the Chain Lakes, and May Lake. The foothills experience a drier Mediterranean climate, while the San Joaquin Valley floor is dry enough to be considered semi-desert.
Of the 127 bird species found along the Merced River, only 35 occur along the entire length of the river. Many of these birds are migratory and only pass the area a few times every year, while 109 species of birds are found only in the breeding season. Birds are more abundant along the slow-moving lower river, which has more suitable riparian habitat compared to the rocky, swift upper river. Common species of bird throughout the basin include ruby-crowned kinglet, cedar waxwing, American robin, yellow-rumped warbler, tree swallow and European starling, and several endangered species, including white-tailed kite and Swainson's hawk. Birds that occur commonly in the middle and upper sections of the Merced River include mourning dove, Cassin's finch, California quail, dark-eyed junco, woodpecker, dipper, great blue heron, scrub jay, red-winged blackbird, red-tailed hawk, turkey vulture, cliff swallow, canyon wren, merganser, and bald eagles. Common insects found along the river include mayflies, stoneflies and caddisflies. The river is impacted by invasive Asiatic clam, Chinese mitten crab, and New Zealand mud snail.
Over about 80 million years, erosion caused the transportation of massive amounts of alluvial sediment to the floor of the Central Valley, where it was trapped between the California Coast Range on the west and the Sierra Nevada on the east, forming an incredibly flat and fertile land surface. The present-day form of the upper Merced River watershed, however, was formed by glaciers, and the lower watershed was indirectly but significantly affected.
In the early 19th century, several military expeditions sent by Spanish colonists from coastal California traveled into the Central Valley. One of these trips, headed by lieutenant Gabriel Moraga, arrived on the south bank of the Merced River on September 29, 1806. They named the river Rio de Nuestra Se˝ora de la Merced (River of Our Lady of Mercy), who is the patron saint of the diocese of Barcelona and is celebrated on September 24. Another expedition to the Central Valley in 1805 also named the Kings River upon reaching it on January 6, 1805, which is the feast of the Magi or Epiphany. Moraga's expedition was part of a series of exploratory ventures, funded by the Spanish government, to find suitable sites for missions in the Central Valley and the Sierra Nevada foothills. In 1808 and 1810, Moraga led further expeditions along the lower Merced River below Merced Canyon, each time coming to nothing. Eventually, plans to establish a mission chain in the Valley were abandoned. In 1855, Merced County was created, named after the Merced River.
Even before the establishment of Yosemite National Park, tourists began to travel into the Merced Canyon and Yosemite Valley as early as 1855. The first roads were constructed into Yosemite Valley in the 1870s. The first was Coulterville Road, followed by Big Oak Flat Road, a trading route from Stockton to Merced Canyon. Environmental movements led by John Muir and Robert Underwood Johnson convinced the U.S. Congress to establish Yosemite National Park in 1890. With the creation of the national park tourism to the Valley and the Merced River increased significantly, leading to many other roads being built throughout the upper Merced River watershed. Other national forests protecting more of the Merced River upper basin followed, including Sierra National Forest and Stanislaus National Forest.
Cascades Diversion Dam was a timber crib dam built in 1917 near where the Merced River flows out of Yosemite Valley. Originally built to generate hydropower, the dam was decommissioned in 1985 but remained standing for a number of years afterward. After the great flood of 1997, the U.S. Bureau of Reclamation surveyed the dam and found it in danger of failure. Classified as a "high hazard" structure, it was originally considered for inclusion on the National Register of Historic Places but was deemed too dangerous, and was subsequently removed. Today, the Merced River above Lake McClure is completely free-flowing and unobstructed by any dams.