Another thing you could have added was that you are (almost certainly) using
a Tablet PC.  However, while this problem was originally only exhibited when
using a Tablet PC, there is a possibility that the same thing may be
happening with Vista.  If you are not using a Tablet PC, please post back
and confirm that fact.

None the less, the following macro should properly propogate the labels

Macro to overcome the problem with propagation of mail merge field fields
with a label type mail merge when using a Tablet PC and some other Computers
that have Tablet PC Functionality available:

Sub MailMergePropagateLabel()

Dim atable As Table

Dim i As Long, j As Long

Dim source As Cell, target As Cell

Dim myrange As Range

Set atable = ActiveDocument.Tables(1)

Set source = atable.Cell(1, 1)

Set myrange = source.Range

myrange.Collapse wdCollapseStart

ActiveDocument.Fields.Add Range:=myrange, Text:="NEXT", _

PreserveFormatting:=False

source.Range.Copy

For j = 2 To atable.Columns.Count

   Set target = atable.Cell(1, j)

   If target.Range.Fields.Count > 0 Then

       target.Range.Paste

   End If

Next j

For i = 2 To atable.Rows.Count

   For j = 1 To atable.Columns.Count

        Set target = atable.Cell(i, j)

        If target.Range.Fields.Count > 0 Then

             target.Range.Paste

        End If

   Next j

Next i

atable.Cell(1, 1).Range.Fields(1).Delete

End Sub

As it is named the same as the Propogate Label command, it will act in place
of that command if it is stored in the normal.dot template, or better still,
in another template that you save in Word's Startup directory.