Vardy has scored 10 goals already this season, and he currently leads the Premier League's goalscoring charts.
The 28-year-old has been in scintaliting form, but Merson is worried that Vardy could look to leave the King Power Stadium in January.
The former Arsenal midfielder predicts that teams like Newcastle, Sunderland and Villa, who are all in the bottom three at the moment, will be trying to sign Vardy in the new year - and he claims that he would be a great addition for any of the struggling sides.
"They need to offer him a new deal," Merson said. "There's three big football teams in the bottom three and they would all take him - and he would get them out of trouble.
"Why wouldn't he go to one of them? He would keep them up. Not because of his great skill, but because of his enthusiasm and work-rate. He would score goals.
"I would love to play number 10 with him, I wouldn't even have to look. He's so willing. He's a dream, he's an absolute dream."
Sunderland, Villa and Newcastle have all struggled for goals this term, and there is no question that Vardy would improve their forward ranks.
The former Fleetwood Town has been in blistering form this campaign, and he is oozing with confidence whenever he gets a chance to go through on goal.
To prise him away from Leicester would be a tough task from any of them, though, as the Foxes have started the season so well.
Claudio Ranieri's men are in fifth place in the Premier League, and they will be determined to keep hold of Vardy for as long as possible.