Merlin is a great and powerful Wizard older than and wiser in the ways of Magic than any other man to date. Merlin is the one that calls all the minor Lords and Kings together and fortells that he who pulls the sword from the Stone shall rule Britania.
As prophecised Arthur pulled out the stone and brought about another age of Magic and Heroes, Merlin dissappeared the very same day the Sword was pulled from the Stone.
Merlin dissappeared for a time on unknown business but eventually returns to urge Arthur that the Old Faith will allow him to conquer all of Britania by placating the Welsh and giving Arthur time to deal with the Saxons in the East.
Merlin will eventually join Arthur as a Knight should the player decide to follow the Old Faith storyline and is a highly skilled Sage in battle able to perform powerful spells.