Two images cannot be merged into one, by choosing parts from one and other parts from the other, as you would do with text. Instead, you can pick the correct image in case of a conflict.
With Mercurial and Git, when your changes for an image create a conflict, you can resolve by choosing one of the images. Kaleidoscope's merging capabilities allow you to resolve these conflicts.
Be sure you have set Kaleidoscope as your mergetool via the Integration window for your source control management system:
Go to Kaleidoscope > Integration…
Use ksdiff integration settings configured for Git or Mercurial to send your merge conflicts to Kaleidoscope:
ksdiff
settings