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I've seen mostly Magic (blue) quality items on merchants. Occasionally, I see a Rare (yellow) item. The rare items tend to appear about as often as they drop out in the world, at least from my experience.

That's got me wondering: Is it possible for a merchant to have a legendary item in his shop?

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I don't think so... neither greens. but I didn't reach inferno yet to check it. and no source on the web that I have found. –  Michel May 22 '12 at 14:41
    
Legendary items are basically the equivalent to Uniques in Diablo 2, which you could not buy from merchants, except from Gheed via gambling (and even then, the changes of getting a unique was extremely low). –  Krazer May 30 '12 at 17:25
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up vote 4 down vote accepted

Currently, the answer appears to be no - if such a thing is possible, it's so extraordinarily rare that thus far nobody has encountered it and lived to tell the tale. However, it is possible to craft legendaries using plans found in Inferno - an expensive proposition, but as close to a vendored legendary as you'll likely be able to find.

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Plans for legendary drops on any difficulty, the legendary they create will be level appropriate for where they drop. –  Blem May 22 '12 at 15:07
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