A lot of people are talking about how great WinMerge is. KDiff3 does the same thing and shows character-by-character differences much better (color-codes which characters/lines were added, deleted, etc.). Add in the ability to diff 3 files (not 3-way merge, diffing and merging 3 input files!) and the ability to adjust the colors and KDiff3 is the clear winner as far as open source merge tools go.
Compare them yourself: