"OK, I think the parts diagram
"OK, I think the parts diagrams for your engine are these:
http://www.crowleymarine.com/mercury_parts/496.cfm
Looks pretty much identical to what I'm used to seeing so the parts & adjustments are probably the same, but do have a look at your motor anyway.
Probably the first thing I'd do is disconnect the shift cable from the engine and see if you can shift into reverse manually by moving the lever that the cable connects to (officially I think you're not supposed to do this with the engine not running, but often there seems to be no way of avoiding it).
The shift cable is the lower one, not visible in the pic above. Just make sure you don't drop the cable locking collar overboard - it will fall off the cable end once disconnected (don't ask how I know).
With the shift cable disconnected, you could use the throttle handle to set the engine to idle and then shift manually by pushing the lever front (Forward) or towards the rear (Reverse). You can tell when it's in neutral from the fact that the little ratchet-type lever at the corner of the starter housing swings out to allow the manual starter to be used.
Once in reverse, add a bit of throttle from the handle and see if you can drive backwards. If this works OK then I'd suspect a problem somewhere in the link adjustments, control cables or even the throttle/shift handle.
I'll email you a section from my official Mercury electronic service manual (the aftermarket Clymer/Seloc shop manuals are otherwise excellent but unfortunately have nothing to say about control cable attachments). If the shifting works without the shift cable as described above, then as a next step you could check that the adjustments are as specified.
Note, however, that the manual is officially for slightly newer model year range, so don't sue me if something goes awry...
My e-mail can be found in the profile link to the left.
Cheers"