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On my Motorola Verizon Droid there is no <contact> or <contact storage> to clear. Ver 2.0
To delete all contacts stored on phone:
go to settings> applications> manage applications> Contacts storage>clear data.
This will delete all contacts in the address book.
I had some merge issues, duplicates would not merge on phone although I kept merging in gmail contacts, so I turned off sync, deleted all contacts this way and re-synced to google contacts and all is great now!