Choice 1 would work and choice 2 would be ugly. If you use styles in your Word TOC then Calibre will recognize the TOC entries. If you make it LOOK like a TOC by changing the font of "Normal" text, then you will not get the smart stuff you're looking for. The MSWord manual covers making a TOC using things like the Header 1 style, and I use that sort of thing all the time.
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