No chance in hell was Merle going to kill Daryl. Merle sucker punched Daryl, and made his announcement about loyalty, to give the crowd the impression he was still on their side; then he fought Daryl to make the crowd believe his announcement.

Merle was just buying time to think of a plan to get him and Daryl out of that arena.

 

Merle's true intention is that Daryl wants to stay in the prison instead of going with Merle away from the prison♫ At the end, Merle thought that if Daryl wants to stay at the prison, he might as well help keep the prison standing for his brother♫ At least, i think that's what his intention is♪ That, or it's just an excuse in the writer's part just to kill him off♪

 

Merle had no loyalty to anyone at the prison, Merle was only loyal to his brother Daryl, while Merle was working for The Governor he constantly told Philip (aka The Governor) that his brother was at the prison and was worried the Governor would harm Daryl if he attacked them there.
The only reason Merle sacrificed himself was to protect his brother.
Merle had no love for Rick and crew at all, that was very obvious when he abducted Glen and Maggie and almost killed Glen during Merles interrogation of Glen at Woodbury.
It's no wonder why Glen hated Merle so much, Merle was a d!ck.