Hi LAR,

Word doesn't really support that. However, if you run the following 'ResetPaths' macro against the merged output, it will update all
the paths for you:

Option Explicit
Dim TrkStatus As Boolean      ' Track Changes flag

Private Sub ResetPaths()
' This routine runs whenever the document is opened.
' It calls on the others to do the real work.
' Prepare the environment.
Call MacroEntry
' Make sure the document has been saved, so that it has a valid path
If ActiveDocument.Saved = False then ActiveDocument.Save
' Most of the work is done by this routine.
Call UpdateFields
ActiveDocument.Save
' Go to the start of the document
Selection.HomeKey Unit:=wdStory
' Clean up and exit.
Call MacroExit
End Sub

Private Sub MacroEntry()
' Store current Track Changes status, then switch off temporarily.
With ActiveDocument
   TrkStatus = .TrackRevisions
   .TrackRevisions = False
End With
' Turn Off Screen Updating temporarily.
Application.ScreenUpdating = False
End Sub

Private Sub MacroExit()
' Restore original Track Changes status
ActiveDocument.TrackRevisions = TrkStatus
' Restore Screen Updating
Application.ScreenUpdating = True
End Sub

Private Sub UpdateFields()
' This routine sets the new path for external links.
Dim oRange As Word.Range
Dim oField As Word.Field
Dim OldPath As String
Dim NewPath As String
' Set the new path
NewPath = Replace$(ActiveDocument.Path, "\", "\\")
' Go through all story ranges in the document, including shapes,
' headers & footers.
For Each oRange In ActiveDocument.StoryRanges
' Go through the fields in the story range.
   For Each oField In oRange.Fields
       With oField
           ' Process IncludePicture fields only
           If .Type = wdFieldIncludePicture Then
           ' Alternatively process all fields that have links to external files
           ' If Not .LinkFormat Is Nothing Then
               ' Get the old path
               OldPath = Replace(.LinkFormat.SourcePath, "\", "\\")
               ' Replace the link to the external file
               .Code.Text = Replace(.Code.Text, OldPath, NewPath)
           End If
       End With
   Next oField
Next oRange
End Sub

Amongst other things, the macro gives feedback on its progress. If you look through the code, you'll see that it only acts on
IncludePicture fields, but has commented-out code you could use instead to process all fields that have links to external files.

Cheers

Worth trying the following, just in case...

{ INCLUDEPICTURE "{ filename \p }\\..\\{ MERGEFIELD picname }.jpg }

But
a. although it appears to work here these sorts of construct make me
nervous
b. you may have to uncheck Word Tools|Options|General|"Web
options"|Files|"Update links on save"

Peter Jamieson