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I used undiluted artist's acrylic paint for the letters, several coats straight onto the wood. I left the block itself unfinished but you could varnish the wood. Do experiment on the spare wood first.
If your wood has a tight grain, as here: Sycamore, a Maple-like wood, the painted letters should end up with neat edges from the carving when the block is finally sanded.
If your wood has a more open grain (Oak, for example), the paint will tend to 'wick' into the wood fibres and you are very likely to see fuzzing at the surface edges. You need to seal the ends of the cut fibres first with a PVA wood glue before applying the acrylic paint.
