Thank you to the people who have given me help with this problem I have a solution so thought I'd post the solution in case it helps anyone else. To recap when asked for password after adding a new a/c in Thunderbird I got the message 'username or password incorrect'.

A friend with far more smarts than me looked at a number of reasons this may happen and found the reason for the problem and the solution:

My PC belives my port 110 to be being used by another server (to my knowledge it isn't so may be a glitch??). Anyway if you have the same problem and have tried everything else. Try:

-Going into mercury admin
-Select 'Configuration' from top menu
-Select 'Mercury POP3 service'
You will see listen on TCP port 110 change to:
-Listen on TCP port 1100 (i.e. add extra 0)

Now in Thunderbird add a/cs as per the manual.
-Cancel the password error
-You wil see the a/c name still appears in the left panel
-Right click on it
-select 'properties'
-then select 'server settings' under that new a/c name
-Also change that from port 110 to 1100
-uncheck ckeck for messages every 10 mins.
Now stop and restart mercury and thunderbird for the changes to take effect. click on an a/c in thunderbird you have added and when asked for the password fingers crossed it will work.

I hope I have explained this correctly, good luck.