Whole brain parcellation requires inferring hundreds of segmentation labels in large image volumes and thus presents significant practical challenges for deep learning approaches. We introduce label merge-and-split, a method that first greatly reduces the effective number of labels required for learning-based whole brain parcellation and then recovers original labels. Using a greedy graph colouring algorithm, our method automatically groups and merges multiple spatially separate labels prior to model training and inference. The merged labels may be semantically unrelated. A deep learning model is trained to predict merged labels. At inference time, original labels are restored using atlas-based influence regions. In our experiments, the proposed approach reduces the number of labels by up to 68% while achieving segmentation accuracy comparable to the baseline method without label merging and splitting. Moreover, model training and inference times as well as GPU memory requirements were reduced significantly. The proposed method can be applied to all semantic segmentation tasks with a large number of spatially separate classes within an atlas-based prior.