On October 13, 2007, at 1100 eastern daylight time, a Mooney M20E airplane, N1261X, piloted by a private pilot, was substantially damaged during an in-flight collision with a tree and terrain after takeoff from runway 24 (6,501 feet by 150 feet, asphalt) at Muskegon County Airport (MKG), Muskegon, Michigan. The pilot reported a loss of engine power during initial climb after takeoff and was in the process of executing a forced landing at the time of the accident. The personal flight was being conducted under 14 CFR Part 91 without a flight plan. Visual meteorological conditions prevailed. The pilot sustained minor injuries. The local flight was departing at the time of the accident. The pilot stated that the start-up, taxi and run-up were uneventful. He reported that takeoff was normal. However, during initial climb out, about 500 feet above ground level (agl), the engine "suddenly lost all power." He noted that there were trees and a residential sub-division in front of the airplane at the time of the loss of engine power. The pilot elected to execute a left turn in an attempt to return to the airport. The airplane did not have sufficient altitude and subsequently impacted a tree and terrain. It came to rest nose down. A post accident examination was conducted. Engine continuity was confirmed via crankshaft rotation. Compression was observed on all cylinders. Engine control continuity was confirmed. The induction air system was intact. The ignition system appeared intact and provided a spark at all cylinders during crankshaft rotation. The fuel selector was intact and unobstructed. The fuel flow divider contained a small amount of liquid consistent in odor and appearance to aviation fuel. During the examination of the fuel system continuity through the fuel servo could not be conclusively established. The servo was removed and tested under supervision of the NTSB. Initial inspection of the fuel servo revealed that debris had accumulated in the fuel screen. The debris was removed. The fuel screen was otherwise intact and appeared undamaged. Additionally, the bypass spring was intact and appeared to be functional. The fuel screen was re-installed and the unit was tested. The fuel cutoff functioned properly. Fuel flow measurements were within test specification requirements with the exception of the idle test point. At idle, the servo supplied fuel at 5 lbs/hour. The specification required 6 to 7 lbs/hour at the idle setting.