Office version?

The easy way is to do a separate merge document for each city. If you only have a handful of cities to work with, this might be the better option.

If 2003, go to Tools > Letters and Mailings > Mail Merge...

In Step 3, choose "Select from Outlook contacts." The resulting dialog box acts like a list which you can autofilter on the City field to select only the contacts listed in the city you want. When you complete the merge, only those selected contacts will be used.

A more complex way, but a way you can use only one merge document, is to use conditional fields. See http://word.tips.net/Pages/T000287_Conditional_Processing_During_a_Mail_Merge.html for ideas on how to do that.