Thanks very much for your prompt reply, which reassured me that I was on the right path. From having read various Help topics, I suspected that I'd have to use an Excel data source for the numbers. Fortunately, my knowledge of Excel was good enough to know about the drag and drop facility to create automatic sequential numbering, so the data source creation was easy. In the end, it was the mail merge (no surprises?) which proved a tad tricky, but I got there in the end. I've used MM many times and quite happily in Word documents, but for Publisher label format, it was of course a bit different. The important bit that I had to discover for myself was the significance of, after getting to the Print stage, going into Print options, to Publication & Paper Settings, and selecting Multiple Pages per Sheet (& in my case, also "Single-sided" cos my default of duplex printing had come up). But TA-DA!  All is fine now. Thanks very much again.
Whats happening is that the first set of NUMBERING (including sub numbering) i.e for 1.0 HEADING 1 is coming PERFECTLY as numbered. I hit "enter" at any level of numbering, word automatically puts the next number below that number. However for the rest of the headings such as 2.0 and 3.0, where there should be 2.1 there is 1.1, where there should be 2.2, its 1.2 and so on and so forth. Same for 3.0 and its numbering subsets.

Changing the numbering display affects how pages are indicated in the InDesign document, as in the Pages panel and in the page box at the bottom of a document window. The numbering display also affects how you specify page ranges when printing and exporting the document. However, the numbering display does not change the appearance of page numbers on document pages.
There is very simple solution that we use and that is to lay out the sheet say 6 up on a A4 sheet as a master page and in document setup set the number of pages to 1,000 if that is the amount you require. Put a page number on each ticket on the page and although they will all have the same number on each page, we put the the first two letters of the customers business name before each number followed by the letters of the alphabet so it then reads for example BT1A, BT2A, BT3A, BT1B, BT2B, BT2C and so on as each page is printed.
There’s an old Steve Martin joke about how to make a million dollars which starts, “First, get a million dollars…” That’s the key to this trick, too: First, get a bunch of numbers. Here’s a file with 1,197 numbers in it. Now import or paste those numbers into a thread so that the numbers appear in the right place. If you need two matching numbers, just import it twice.

Almost everything I learned about Word's numbering I learned from the Word newsgroups (especially the Microsoft Word Numbering newsgroup) and from the MS Word MVP FAQ site. The contributions of John McGhie (especially his article about Word's Numbering Explained on the MS Word MVP FAQ site) and Dave Rado are significant. The current page represents a mere summary and application of some of that work.
You will occasionally want to place an unnumbered paragraph in the middle of a sequence, but the moment you hit Enter, another paragraph number pops up. To fix this, toggle paragraph numbering off by pressing the paragraph numbering button you used for the previous paragraph. (If you use the button’s drop-down, choose None as the numbering scheme.) Unfortunately, the paragraph settings won’t revert to Normal here; it’ll usually have the paragraph indented 0.25. Use the keyboard shortcut CTRL+Q to strip paragraph settings out, then revise the formatting as you wish. numbering in coreldraw