BOSTON — Ariad Pharmaceuticals and Merck yesterday said they will team up to develop an experimental cancer treatment — a partnership that could be worth more than $1 billion to Ariad which has been testing the medication.

Ariad’s shares were down nearly 4% in afternoon trading. A Cowen & Co. analyst, Philip Nadeau, said the company’s shares had already been pumped up after the Cambridge, Mass.-based firm said in April that it would pursue a partnership with a major pharmaceutical company.

“There were a lot of expectations built into the stock price,” Mr. Nadeau said.

The stock was trading at more than 20 times its normal daily volume by mid-afternoon, and Mr. Nadeau said rapid in-out trading by hedge fund managers was sending Ariad’s shares down.

Yesterday ‘s announcement pairs Ariad Pharmaceuticals Inc., a drug developer that reported less than $1 million in revenue last year, with Merck & Co., a Whitehouse Station, N.J.-based drug maker with revenues of $22.6 billion in 2006.

Ariad’s lead experimental medication — known in its pre-marketing stage as “AP23573” — is a new class of potential cancer treatments designed to block a protein called mTOR and interfere with growth of cancer cells by starving them.

Ariad and Merck expect AP23573 will begin late-stage clinical development for the treatment of metastatic sarcomas — cancer that spreads into other tissues — later this summer. It’s also in early stages of testing for solid tumors and blood-based cancers.

The so-called small-molecule inhibitor has been granted fast-track status by the FDA, allowing for a quicker review process.