After trying the re-installation (using Synaptic) dpkg completed the
installation successfully.

I currently have the following "mercurial-" packages installed:

mercurial
mercurial-server
mercurial-common

I think what happens is that the dep-tree is broken, so server gets
installed out of sequence. During the re-install the dependencies would
have been installed so it goes through successfully.

-- 
package mercurial-server 1.0.1-1 failed to install/upgrade: exit status 255 - 
abort: couldn't find mercurial libraries
https://bugs.launchpad.net/bugs/539810
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