Use Modify|Mark Resolved to mark conflicting files/directories 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 old to replace the contents of resolved files by the contents of their corresponding pristine copies 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 working copy to replace the contents of resolved files by their contents as they were before the update/merge.