I have word 2007, you are doing things the right way you are just missing one step which is finish tghe mailnerge to a new document, when you insert an address from your outlook contacts word somehow assumes you are doing a mail merge. Here is what i did step by step:
1) Open new document
2) On the mailings tab, click select recipients (you can type a new list, use an existing list such as excel list, csv list or other or merge from your outlook contacts)
3) If you selected use existing list, on the next dialog browse to find your file on your drive bny default it shows database connections but you can use an excel file or a text file or a comma delimited file, on the window look in go to the directory that contains your file and select it
if you selected outlook contacts close outlook and then click ok on the next two dialog boxes, this willopen your outlook contacts then check or uncheck the names you need.
4) Click address block
5) Click finish and merge, and select edit individual documents, select the radio button all and click ok\
and voila!
I hope this helps