To send a Form Letter or use a Custom Template for a new letter to a
Contact, you can use the Letter wizard invoked with the Actions... New
Letter to Contact.

For your custom letter template to appear in the list of Page Designs in the
Microsoft Word Letter Wizard, the letter templates you create must be saved
in the "Letters & Faxes folder Word 97) or the Templates\1033 folder (Word
2000 or 2002). The word "Letter" must be in the file name. Details here:
http://support.microsoft.com/support/kb/articles/q181/2/73.asp
http://support.microsoft.com/support/kb/articles/Q197/3/40.ASP
http://support.microsoft.com/default.aspx?scid=kb;EN-US;Q210884
http://support.microsoft.com/default.aspx?scid=kb;EN-US;Q291186

Once you have set up your Custom Template(s) you should see it as a choice
when you use the New Letter to Contact option in Outlook.
Take a look here for some other ways to merge Contact data to a new letter
to a Contact:
http://www.slipstick.com/contacts/startletter.htm