Tracking error how much?

If the reason you hold the fund is because you want to hold the index, you want the return to be pretty much the same as the index, give or take. But it doesn't really make a difference if the tracker is a bit up or a bit down from the index as long as it broadly evens out over time (although obviously you would expect the tracker fund return to be lower than the real index due to OCF and transaction costs, which you should consider separately to the 'pure' tracking performance).

So, I am probably more relaxed than some but if I wanted to follow an index I would look for an arbitrary half a percent or less of tracking error impact to my return (the index performance vs the tracker performance, e.g if the index return less my expected OCF is 10%, then either 9.5% or 10.5% is doing its job, assuming it's not 9.5% every time). I don't want it to be off by 10%(i.e. 20% or 0% return against my expectation of 10%) or it's not doing its job. The Vanguard ones generally claim under 0.1%.

When comparing a fund to a benchmark there can be some timing differences based on what time of day they run the NAVs, so a 1 Jan to 31 Dec comparison with the index might be off by a percent (as markets can easily move half a percent or more over the course of a trading session) but generally these will even out over multi-year periods. You just don't want it to be consistently down.

Using Trustnet, the TE figures for the same and other index funds show anything from about 1.5 to 3.5. Is this % per annum?

I had a quick look at the Trustnet page for HSBC FTSE250 fund and it said tracking error of 2.67 - in the middle of the range you mentioned - but didn't have a definition or hover-over bubble to explain what this figure represented and I couldn't be bothered looking to find where they give the explanation.

If it was a percentage of your fund value it would be a lot: £10000 turns into £10500 through (e.g.) 5% market total return market return and then you gain or lose another £267 due to very poor tracking, giving you £10767 or £10233. Seems extreme.

Whereas if the return of the index was £500 and the variance up or down due to tracking error was 2.67% of that, £13.35, it's hardly anything - 0.13% of your NAV. Such a figure, if it was always negative, would be like an extra OCF: turning the 0.35% OCF into almost 0.5%; but if was positive half the time and negative half the time it would be zero impact overall.

The figure they give is probably something like the annualised volatity of the return (ie of the 5% return, not the £10,000 of assets invested), though whether it's a 3-year figure annualised or a 5-yr one or a 6 month one, I couldn't tell without digging. If I was particularly looking to buy the tracker I'd look into it some more and check the prospectus to see what the manager claims they're expecting.