I've recently finished my MSc at a top 5 university for my subject, however my dissertation grade was a lot lower than expected, lowering my overall average to a mid Merit. Now the PhD I'm apply for at Cambridge only lists a Merit as their entry requirements, however, will my mid level Merit mean I'm not even considered, especially as places at Cambridge will be so competitive?

I have a potential supervisor at the department already who has called my research topic fascinating and said my proposal is great. Will this interest from the supervisor make the percentage of Merit less important? My topic perfectly fits within the supervisors interests and he has already said he would be more than happy to be listed as my supervisor so as I do meet the entry requirements and have strong interest from a member of the department?

This comes to my second question: will my Merit mean I can't get funding? I achieved a low 2:1 at undergrad at a former poly, having suffered horrifically with mental health and I had to leave university early because of family issues. How much will a research council take my undergraduate results into consideration? And is my Merit good enough to receive funding or even a place at Cambridge?

Please help I got my result yesterday and have been really miserable thinking that my chances of completely a PhD with a supervisor that's perfect is out the window :(

Also I got a Distinction in the module relating to my research topic, is that beneficial?

I think that all you can do is wait and see. And that would be the same even if you had got a distinction and felt more confident about things - it is never guaranteed - there are usually more applicants than places. How about making some Plan Bs in case? You could even talk to the supervisor about other possible avenues of funding etc, or asking them about how you might strengthen your application in other ways. Sorry if this is no help. You can't change the result and just have to work with it. It is possible you'll get the funding since you do meet the entry requirements!