A while ago I blogged a simple comparison between grace and mercy, from On The Web Blog. I was reading Don Carson's Sermon on The Mount tonight, and here's his take on the difference:
What is mercy? How does it differ from grace? The two terms are frequently synonymous; but where there is a distinction between the two, it appears that grace is a loving response when love is undeserved, and mercy is a loving response prompted by the misery and helplessness of the one on whom the love is to be showered. Grace answers to the undeserving; mercy answers to the miserable.Don Carson, Sermon on the Mount pp27
The context is on the Beatitudes Matthew 5:8. Make sense?