Ummm - first - I think you need to fix your php.ini file. (hopefully you only have one and its in XAMPP/php) ON a webhost this is already done for you, not so with XAMMP, as it is a test environment - aha!
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DO NOT USE/UNCOMMENT THE LINE IN THE DEFAULT FILE THE SYNTAX IS WRONG!
here is the exact entry I used (my Wordpress installs send passowrd reteivals successfully). I'm pretty also sure you need an ISP SMTP connect that works on port 25. (or you will have to twiddle things)
sendmail_path = "C:\xampp\sendmail\sendmail.exe -t"
and then Fix the sendmail.ini
First - add an account for your ISP's SMTP server (you can use other ones if you want read the stuff in sendmail,ini)
then make that account the default
# Set a default account
account default : xxx
Save it all, restart Apache and give it a whirl.
My thanks to Nobbie, who explained this to me...
This assumes (my bad) you do NOT want to actually run your own mailserver (which is what Mercury is) - but merely send mail from your applications (like, gee, sendmail on the *nix world)