Hi Mike,
If you were using the Measure Tool in ArcMap, it may be defaulting to the projected / Cartesian distance. That is, the distance in the projected coordinate system. Usually if you switch the tool to use the geodesic distance, you'll get a closer-to-ground measurement because the geodesic distance is based on the shortest path on the spheroid (ellipsoid) that's being used.
Because, at best, only some distances are maintained in any map projection, measuring the projected coordinate system distance can give some very distorted results. In your particular case, Mercator is definitely not designed to minimize distance distortion, particular at higher latitudes. Meridians (longitude lines) don't converge to the poles in Mercator so distance measurements will get worse and worse as you go North or South away from the Equator. Caveat: Esri's implementation of Mercator does include a standard parallel parameter. Set that to the area of interest and distance measurements will improve, but still won't be very accurate.
UTM uses transverse Mercator which does have the meridians converge at the poles, and is designed for larger scale data. That's why the results are better than Mercator.
Melita
