A report on Friday said the authority had improved its financial management, but needed to boost the ability of councillors and managers to monitor performance.
An action plan has been introduced to improve management of the workforce.
The council is also not yet ready to take back control of its education service, the report found.
Auditor General Huw Vaughan Thomas said: "Merthyr council is making progress, thanks to the external support it is receiving, but without such help, the prospect for continuing to make progress is limited.
"That's why I urge the council and Welsh government to continue working together to keep up the level of support.
"The county borough continues to face significant challenges and needs to draw on outside help to deliver its priorities."
Merthyr Tydfil council still needs government help to improve its performance, the auditor general said.