Thanks, Merlinman, Outmode is (part of) the answer.
It's not a crossbar OFFICE that only does rotary, it's a 1000 pound, 40 line crossbar PBX (a Western Electric Switching System 400) sitting next to the Merlin that only does rotary. I know it's strange, but I wanted to have one. Some of my friends are stranger, they have cordboards or step pbx's.
Setting the Outmode to rotary gives me Merlin system dialtone when I access the line, and outpulses the digits correctly. But it waits 15-20 seconds before connecting the voice path. When connected to a CO line, it cuts through immediately, I guess on receipt of a wink from the CO. Is there any way to disable this wait, and have the audio cut through immediately after outpulsing?