Thanks for the super quick reply.
You'd get a much quicker reply by email

support at yummysoftware dot com
Ive got it sussed now. What I was not doing was selecting a file in the local pane and then ctrl selecting the corresponding file in the remote pain.
Actually, I'm not really sure what you mean... if you ctrl-click on a file the contextual menu shows up, and Diff isn't an option there. My suspicion is that you're choosing different files this time. One of the odd behaviors I've seen with File Merge before is not accepting certain files - and providing no feedback to say why, just silence!
Anyway, glad to hear you're up and running now.
One of my files in the local pain (test.html) is now highlighted in red/pink. What does that mean?
As you discovered, you can set color labels from the context menu. This works for both local and remote files.