May 26 (Bloomberg) -- The United Arab Emirates and Qatar could abandon their currency pegs to the U.S. dollar in favor of a basket of currencies within months, and Saudi Arabia may follow the move late next year, The National said, citing a Merrill Lynch & Co. report.

In mentioning the issue of inflation among Gulf Cooperation Council countries, the U.S. Treasury may be signaling its approval for an easing of the states' ties to the dollar, the Merrill report said, according to the Abu Dhabi-based newspaper.

Gulf states have been under pressure to drop their dollar pegs after inflation hit record levels. Kuwait dropped its currency's peg to the dollar last May, but others have all kept their links, citing the need to keep currencies fixed until they form a monetary union in 2010, and the limited inflationary impact of the weak dollar.

The six GCC states are Saudi Arabia, Kuwait, the U.A.E., Qatar, Oman and Bahrain.

To contact the reporter on this story: Shaji Mathew in Dubai at shajimathew@bloomberg.net

Last Updated: May 26, 2008 01:53 EDT