Lee cruised to a 75-25, 71-41, 5-66, 67-9, 21-65, 70-24, 69-58 win in the best-of-nine frames quarter-finals.
Lee led 3-1 before Merchant narrowed the margin by clinching the fifth frame.
The Englishman, who started well with a break of 64 in the opening frame, struck a 59 in the sixth to take control of the match and then pocketed the seventh to make the last four.
Lee would meet either his countryman Michael Holt or India's Shahbaaz Khan, who will play the last quarter-final tomorrow, for a berth in the final.
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The third foreigner in the fray, world No. 26 Nigel Bond, crashed out of the competition after going down to India's professional Aditya Mehta 2-4 in Group C.
Bond needed to beat Mehta by a two-frame margin to make it to the quarter-finals and his loss paved the way for Siddharth Parikh to squeak through.
Results: Group A: Stephen Lee (GBR) bt Kamal Chawla (MP) 72-22, 0-88(67), 56-47, 19-69(69), 70-36, 24-108(57), 95(68)-0.
Group B: Michael Holt (GBR) bt Manan Chandra (PSPB) 104(97)-0, 87-55, 71-20, 57-34.
Group D: Pankaj Advani (PSPB) bt Mohd. Al Joker (UAE) 124(117unf), 76-23, 27-69, 6-90(85), 71(40)-21, 54-36.