It should work, in theory, if you use File|Page Setup|Paper to set the
printer tray for the "first page" to "manual feed" and the "other pages" to
your normal feeder. If you merge to a new document, you should see that each
letter is contained in a single Word section, and examination of the first
few sections should show that the paper setup is retained in the output
document.

However, I hesitate for several reasons:
a. I don't have a printer here that makes it easy to experiment with
different trays. In fact, whatever I do seems to go wrong, because I have to
change the physical configuration of the printer to use the different
"trays", and printing seems to hang up. It is possible that you will
encounter similar difficulties with yours. Further, I cannot easily verify
that printing directly to the printer is the same as outputting to a new
document, then printing.
b. I am not sure that every version of Word gets this right. I seem to
remember that in some versions (possibly fixed in Service packs) the
difference between "first page" and subsequent pages" is lost after section
1. It seems OK in the fully up-to-date version of Word 2003.
c. Your printer driver may be a critical factor in making this work. It may
or may not behave the way you hope. In particular, it might do things such
as "if the manual tray is empty, don't wait, just take the next sheet from
an automatic tray". I hope not, but if you are producing several hundred
letters you need to be sure.

Personally, I would do a small-scale experiment with the equipment you are
intending to use, establish the basic feasibility of the operation, then
consider carefully whether you are going to attempt to do a single batch
with several hundred letters (i.e. whether everything has to work perfectly
or you may spend a lot of time sorting out which letterhead goes with which
page 2/3), or do the merge in smaller batches that make it easier to recover
from any printing problems that may occur.

Peter Jamieson
d.