Hi Karen,
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it seems the first problem I am having is that I have always just navigated to the file when I wanted to use it as the data source for merges
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If you're always doing that for a document you've already created as a mailmerge main document, that suggests you're not saving the mailmerge main document after connecting it to the data source. Obviously, though, you'd need to do that for a new mailmerge main document.
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When I try to open a new data source I get an error message that I do not have permission to use the file.
The database is stored on my hard drive because the server does not like me and won't let me save anything there.
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If you don't at least have read permissions to the folder where the database is stored, I'd be surprised if you could access & copy the database file from there. Of course, if another program or user already has the file open, and it isn't set up with the appropriate locks, the operating system might prevent you from opening it for reading. It is quite possible, too, that you'd be allowed to read the file but not be able to save anything to its folder, which would explain why the server won't let you save anything there. In that case, just save to another folder.
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Is this the only way to connect to a data source where you can have fields where you "set key fields"?
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The Key fields have nothing to do with determining the data source - they only tell you which fields from the data source to use as filters for determining when to start a new record group in the output.