Are you trying to merge the SAME picture into each document, or a different picture for each record? Surely a letterhead would have the same picture, in which case insert the picture into the merge document you are using for the merge, and position it as required before running the merge.
For merging graphics see
http://www.gmayor.com/mail_merge_graphics.htm and http://www.gmayor.com/mail_merge_graphics_addin.htm
As for the mechanics of inserting a picture, you should note that pictures are, by default, inserted in line with text, which means they will shrink (but never grow) to the width between the current margins. If you want the image to fill the width of the page beyond the margins, then it must be inserted as a 'floating' image, whereupon it can be positioned and resized as required or use a (negative) indents to set the current margins at the edge of the paper.
You can insert a single page PDF as an object (probably better to insert it in the header/footer) and set its wrap option to 'behind text'.