I suppose you mean that you are using SourceGear DiffMerge as an external merge tool. What is yours .hgrc? Is it based on a sample from the hg website ?
I assume yours is diffmerge.argsproblematic. You can try running diffmerge manually with these arguments to make sure it works.
.hgrc . hg diffmerge -r 32 -r 30 myfile , hg diffmerge ( [extdiff]), myfile 32 30. .
hg merge [-r<the other head>], .hgrc hg diffmerge ( [ui]), hg diffmerge 3-way merge. , Windows hgrc.