Use Modify|Mark Resolved to mark conflicting files (see Common Primary File States) or conflicting directories (see Primary Directory States) as resolved. You have to resolve conflicts to be able to commit the files/directories.
In case of directories you have the option to Resolve files and subdirectories recursively. If selected, all conflicting files and directories within the selected directory will be resolved. Otherwise only the property conflicts of the directory itself will be resolved.
Regarding the File Content, use Leave as is to apply no further modifications to resolved files. Use Take working copy to replace the contents of resolved files by their contents as they were before the update/merge. Use Take new to replace the contents of resolved files by the contents of their corresponding pristine copies as they are now after the update/merge. Use Take old to replace the contents of resolved files by the contents of their corresponding pristine copies as they were before the update/merge.
Certain kinds of conflicts are not directly related to the content or properties of a file (or directory) but to conflicting actions on a file/directory. Such conflicts are called tree-conflicts.
Tree conflicts are similar to normal conflicts as conflicting files/directories can't be committed before they have been resolved. The Local State column for files shows details for a tree conflict, if present. File and directory tooltips display this information as well.