The input windows don't show a cursor, so selections must be made with the mouse by clicking with the left mouse button at the start, holding down the mousebutton and moving to the end, where you release the mouse button again. You can also select a word by double clicking it. In the merge output editor you can also select via the keyboard by holding the "shift"-button and navigation with the cursor keys.
If the selection exceeds the visible range you can move the mouse over the window borders which causes KDiff3 to scroll in that direction.
For very large selections you can also use the navigation keys while holding down the mouse. E.g. use page up and page down to quickly go to a certain position. At the end position release the mouse button.
In order to select everything in the current window use menu "Edit"->"Select All" (Ctrl-A).
To copy to the clipboard you must press the "Copy"-button (Ctrl-C or Ctrl-Insert). But there exists an option "Auto Copy Selection". If this is enabled, then whatever you select is copied immediately and you don't need to explicitely copy. But pay attention when using this because the contents of the clipboard might then be destroyed accidentally.
"Cut" (Ctrl-X or Shift-Delete) copies to the clipboard and deletes the selected text.
"Paste" (Ctrl-V or Shift-Insert) inserts the text in the clipboard at the cursorposition or over the current selection. If you paste to either diff input window the contents of the clipboard will be shown in that window and the comparison will restart immediately. This is useful if you want to quickly grab a piece of text from somewhere and compare it with something else without first creating files.