Report inside Mail Merge template
As an alternate approach, depending on what is needed, I have created calculated text fields used solely as mail merge helper fields. These calculated text field simply returns HTML syntax of what is needed. Depending on the report and what needs to be displayed determines if this type of calculation is viable. Are you able to add a screenshot of the report?
Also, there is a way to add a global report to the application layout now. I am unsure if the mail merge capability has been updated to call the report that is on the layout. If it has, then this would be worth looking into.