If it receives authorisation, molnupiravir, which is designed to introduce errors into the genetic code of the virus, would be the first oral antiviral medication for Covid-19.
Merck and partner Ridgeback Biotherapeutics said they planned to seek US emergency use authorisation for the pill as soon as possible and make regulatory applications worldwide.
"An oral antiviral that can impact hospitalisation risk to such a degree would be game changing," said Amesh Adalja, senior scholar at the Johns Hopkins Centre for Health Security.
Current treatment options include Gilead Sciences' infused antiviral remdesivir and generic steroid dexamethasone, both of which are generally only given once a patient has already been admitted to hospital.
"This is going to change the dialogue around how to manage Covid-19," Merck chief executive Robert Davis told Reuters.
Existing treatments are "cumbersome and logistically challenging to administer", Mr Adalja said.
"A simple oral pill would be the opposite of that," he said.
The results from the Phase 3 trial, which sent Merck shares up by more than 9 per cent, were so strong the study is being stopped early at the recommendation of outside monitors.
Shares of Atea Pharmaceuticals, which is developing a similar Covid-19 treatment, were up by more than 21 per cent following the news.
Shares of Covid-19 vaccine makers Moderna were down by more than 10 per cent, while Pfizer was down less than 1 per cent.
Jefferies analyst Michael Yee said investors believed "people will be less afraid of Covid and less inclined to get vaccines if there is a simple pill that can treat Covid".
Pfizer and Swiss drugmaker Roche Holding AG are also racing to develop an easy-to-administer antiviral pill for Covid-19. For now, only antibody cocktails that have to be given intravenously are approved for patients who have not been admitted to hospital.
White House Covid-19 response co-ordinator Jeff Zients said molnupiravir was "a potential additional tool ... to protect people from the worst outcomes of Covid".
But he said vaccination "remains far and away, our best tool against Covid-19".
A planned interim analysis of 775 patients in Merck's study looked at hospital admissions or deaths among people at risk of severe disease. It found 7.3 per cent of those given molnupiravir twice a day for five days were admitted to hospital and none had died by 29 days after treatment.
By contrast, a rate of 14.1 per cent of placebo patients were admitted to hospital. There were also eight deaths in the placebo group.
"Antiviral treatments that can be taken at home to keep people with Covid-19 out of the hospital are critically needed,” said Wendy Holman, chief executive of Ridgeback.
'A huge advance'
Scientists welcomed the potential new treatment to help prevent serious illness from the virus, which has killed almost five million people around the world, 700,000 of them in the US.
“A safe, affordable, and effective oral antiviral would be a huge advance in the fight against Covid," said Peter Horby, a professor of emerging infectious diseases at the University of Oxford.
The study enrolled patients with laboratory-confirmed mild-to-moderate Covid-19, who had symptoms for no more than five days. All patients had at least one risk factor associated with poor disease outcome, such as obesity or older age.
Drugs in the same class as molnupiravir have been linked to birth defects in animal studies. Merck has said similar studies of molnupiravir – for longer and at higher doses than used in humans – indicate the drug does not affect mammalian DNA.
Merck said viral sequencing carried out so far showed molnupiravir was effective against all variants of the coronavirus, including the highly transmissible Delta strain, which has driven the recent worldwide surge in hospital admissions and deaths.
It said rates of adverse events were similar for both molnupiravir and placebo patients, but did not give details.
The US drugmaker said it expected to produce 10 million courses of the treatment by the end of 2021.
The company has a US government contract to supply 1.7 million courses of molnupiravir at a price of $700 for every course.
Mr Davis said Merck had similar agreements with other governments, and was in talks with more. The company said it planned to create a tiered pricing approach based on country income criteria.
The US government has the option to purchase up to an additional 3.5 million treatment courses if needed, a US health official told Reuters.
Merck has also agreed to license the drug to several generic drugmakers in India. They would be able to supply the treatment to low and middle-income countries.
Molnupiravir is also being studied in a Phase 3 trial for preventing infection in people exposed to the coronavirus.
Merck officials said it was unclear how long the FDA review would take, although Dean Li, head of the company's research labs, said "they are going to try to work with alacrity on this".