Sync with Outlook causes duplicate contacts

Can you please elaborate on...
Where the contact folder is being created?
Where are you turning on the option to replace iphone contacts?
Where are you turning on option to sync with selected groups?

If you did not get this answered yet, I believe I can help. You first create the new contact folder in Outlook with exactly the info/contacts you want. You do this by clicking on 'New' at the top left of your Outlook Contacts screen. Be sure to name the folder, so you know what to look for when you go to iTunes. You can select the contacts you want from your orig. list and drag them into the new folder. Then in iTunes, (with your phone attached) on the info tab, go first to the Contacts section and make sure you have 'Selected groups' and your new folder checked. Then, at the very bottom of the info tab is the 'advanced' option. Make your selections there and click apply and sync, and you should get what you need. Hope this helps.

I was doing this process but still kept getting duplicates until I went into (iTunes menu) Edit, Preferences, Devices tab, and clicked Reset Sync History. Then after that I cleared out the contact list on my iPhone, then I was able to sync it with no duplicates. I hope this helps.