diff --git a/doc/source/whatsnew/v1.1.1.rst b/doc/source/whatsnew/v1.1.1.rst
index cdc244ca193b4..b37103910afab 100644
--- a/doc/source/whatsnew/v1.1.1.rst
+++ b/doc/source/whatsnew/v1.1.1.rst
@@ -22,6 +22,7 @@ Fixed regressions
 - Fixed regression in :meth:`DataFrame.shift` with ``axis=1`` and heterogeneous dtypes (:issue:`35488`)
 - Fixed regression in ``.groupby(..).rolling(..)`` where a segfault would occur with ``center=True`` and an odd number of values (:issue:`35552`)
 - Fixed regression in :meth:`DataFrame.apply` where functions that altered the input in-place only operated on a single row (:issue:`35462`)
+- Fixed regression where :meth:`DataFrame.merge_asof` would raise a ``UnboundLocalError`` when ``left_index`` , ``right_index`` and ``tolerance`` were set (:issue:`35558`)
 - Fixed regression in ``.groupby(..).rolling(..)`` where a custom ``BaseIndexer`` would be ignored (:issue:`35557`)
 
 .. ---------------------------------------------------------------------------
diff --git a/pandas/core/reshape/merge.py b/pandas/core/reshape/merge.py
index 27b331babe692..2349cb1dcc0c7 100644
--- a/pandas/core/reshape/merge.py
+++ b/pandas/core/reshape/merge.py
@@ -1667,7 +1667,7 @@ def _get_merge_keys(self):
 
             msg = (
                 f"incompatible tolerance {self.tolerance}, must be compat "
-                f"with type {repr(lk.dtype)}"
+                f"with type {repr(lt.dtype)}"
             )
 
             if needs_i8_conversion(lt):
diff --git a/pandas/tests/reshape/merge/test_merge_asof.py b/pandas/tests/reshape/merge/test_merge_asof.py
index 9b09f0033715d..895de2b748c34 100644
--- a/pandas/tests/reshape/merge/test_merge_asof.py
+++ b/pandas/tests/reshape/merge/test_merge_asof.py
@@ -1339,3 +1339,25 @@ def test_merge_index_column_tz(self):
             index=pd.Index([0, 1, 2, 3, 4]),
         )
         tm.assert_frame_equal(result, expected)
+
+    def test_left_index_right_index_tolerance(self):
+        # https://github.com/pandas-dev/pandas/issues/35558
+        dr1 = pd.date_range(
+            start="1/1/2020", end="1/20/2020", freq="2D"
+        ) + pd.Timedelta(seconds=0.4)
+        dr2 = pd.date_range(start="1/1/2020", end="2/1/2020")
+
+        df1 = pd.DataFrame({"val1": "foo"}, index=pd.DatetimeIndex(dr1))
+        df2 = pd.DataFrame({"val2": "bar"}, index=pd.DatetimeIndex(dr2))
+
+        expected = pd.DataFrame(
+            {"val1": "foo", "val2": "bar"}, index=pd.DatetimeIndex(dr1)
+        )
+        result = pd.merge_asof(
+            df1,
+            df2,
+            left_index=True,
+            right_index=True,
+            tolerance=pd.Timedelta(seconds=0.5),
+        )
+        tm.assert_frame_equal(result, expected)