Make sure you lose one round, so it's Round 3. After it says Finish Him!, get as far away as possible from the opponent and hold run, then press down 4 times, then release run.

Here the Mercy sprite if you want it:

I have always thought the whole MERCY thing was really pointles. Why the hell would you want to give your opponent a chance to turn around and kick your a$$? Talk about putting useless crap into a game. Some of the animalitys were okay, and some were just lame...

the real point of Mercy is for humiliation, you do it, give them a chance to win, and by beating them, the reward is an animality for either player. Not pointless, it's actually a neat concept.

Sure, a mercy can backfire on you, but to me that makes it fun.

When playing at home I understand, but when I use to play at the arcade where you waste money to play there would be no chance in hell I would give someone a chance to come back and kick my ass and make me waste more money to continue playing.

You didn't have enough confidence you could beat someone who is on danger? It would be stupid to Mercy on like any less than 25% life for the average player though, I'll give you that.