Assuming you are trying to send email, and not receive it, check the following:
That Mercury is actually running (does telnet connect?)
That you are using MercuryS to send email (rather than the relay)
That it is set to require authentication (in the Configuration menu, under MercuryS, on the Connection Control tab, at the bottom, the "Only authenticated . . ." check box, and the one above it, should both be checked).
That the AUTH Password file name is present.
That the file exists - click on the Edit button.
That the file is in the correct format - each user/password combination is on a seperate line, user name first, then password, with a single space between them.
If that doesn't work, you may have a problem with the Mercury install. I have seen it reported that sometimes the install that comes with Xampp has some kind of file permission problem that prevents it from saving changes. It wouldn't hurt to download the install file (from http://www.pmail.com/
- it's free), and reinstall from that, as a new installation.