You /may/ be able to do this if you are outputting to a new document or
printer, but I am much less sure it could be made to work for output to
e-mail. YOu can certainly try the following:
a. you will have to insert the picture using an { INCLUDEPICTURE } field
(you may have this already, but it may not be apparent your picture is
probably not currently formatted as an "in-line" picture
b. you will need to put the INCLUDEPICTURE field in a text box, and format
the text box to be behind the text.
c. you will need to modify the field to test the value in your merge data -
suppose you have

{ INCLUDEPICTURE "c:\\mypictures\\watermark.jpg" }

then you could either try something along the lines of

{ IF { MERGEFIELD copy } = "Y"
"{ INCLUDEPICTURE "c:\\mypictures\\watermark.jpg" }"
"" }

or if that doesn't work you could try using a small 1-pixel picture for the
case where you don't need a picture and use something like

{ INCLUDEPICTURE "c:\\mypictures\\{ IF { MERGEFIELD copy } = "Y"
"watermark.jpg" "1pixel.jpg" }" }

where all the {} are the special field code braces you can insert using
ctrl-F9.

Both these approaches seemed to work reasonably well here using Word 2000
and outputting to Acrobat but I could not tell whether the "watermark"
effect was working as you would probably expect, and you really will have to
experiment for yourself on this one.
--
Peter Jamieson
MS Word MVP