I needed to compare the web.config files generated by Visual Studio for ASP.NET 2.0 and ASP.NET 3.5 projects. (In my opinion, web.config files are totally out of hand in ASP.NET 3.5, but that's another blog post.)
DiffMerge is a polished product for side-by-side comparison (and merging) of files. It highlights changes within the lines and has many configuration options.
As they say on the Pricing page, "It's FREE...Enjoy!"