Mail Merge isn't as easy as "click this button," it's more like using a recipe to cook a meal. These two videos, show you how to "cook" with Mail Merge. The first video goes over label creation by using any contact list (via a CSV file); the second is importing Outlook contacts to personalize an event flyer (nearly the same steps as creating a form letter).
This stuff is a bit tricky and these videos -- just like cooking videos -- go over the process lightly.
Set up a mail merge in Publisher 2007: