I found that adding a contact name and phone number in Skype that already exists in the built in contact manager reports that the contact already exists.
I confirmed with the Skype desktop client that the contact does not exist in Skype. Sooo it appears Skype is checking the built in contact list but integration is not completed to show the contacts in Skype or add a Skype call button in the Nokia contact manager.
Can anyone else confirm?
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My bad... I was using a phone number that was already attached to a different Skype contact. to which it responded that the contact already existed.