Why is the subsurf modifier not creating smooth geometry? I'm totally new to Blender. Excuse me, if my problem is dumb.

I'm trying to model something rather simple from a mesh. A handle. When I try to merge vertices of those two highlighted faces, I'm getting pretty awful result with subsurf modifier. The same thing happens, when I snap one face to another and then remove doubles. I guess the root of the problem is something simple, but can't figure it out.



And the result:
Scale along the Y axis to 0 (S > Y > 0), delete the faces (X > Faces), and remove doubles (W > Remove Doubles). The issue you are having is there are internal faces, if you just remove the doubles, then there is still a face inside of the mesh, which leads to this weird artifact.