Du kan inte använda WITH-satsen någon annanstans än i en SELECT-sats. Se dokumentationen här. :
Så du kan göra något i stil med detta (11g testad):
MERGE INTO animalia d
USING (WITH X AS
(SELECT 'moo' AS COW, 'woof' AS CAT,
(SELECT MAX( DECIBELS )
FROM ANIMALIA
WHERE COW = 'moo' ) AS DECIBELS
FROM DUAL )
SELECT * FROM X) q ON (1 = 1)
WHEN MATCHED THEN UPDATE SET d.cow = q.cow||' and more';