Information on configuring an external diff/merge tool can be found in:
http://www.selenic.com/mercurial/wiki/MergeToolConfiguration
http://www.selenic.com/mercurial/wiki/index.cgi/MergeProgram
http://www.selenic.com/mercurial/wiki/ExtdiffExtension
The command for comparing 2 versions of a file is hg diff foo.c.
	This will compare the baseline and working-folder versions of foo.c and print
	unified-diffs in the terminal window.  If you add the settings below to
	your mercurial.ini or .hgrc file, you can
	type hg diffmerge foo.c and
	have DiffMerge launched to compare the 2 file versions.
      
The hg merge and hg resolve commands will
	merge files.  When the settings below are added, Mercurial will try to use
	DiffMerge to perform the merge.  There are lots of Mercurial options to
	control how external merge tools are selected (based upon priority and
	file type).  Please see the above references for configuration options.
      

