Here's how I implemented something similar. On the index page of my contacts, I list them alphabetically by default, paginated with 10 per page. At the top of this index page, I spit out the alphabet with each letter having it's own link. Click any letter and I return all the contacts whose last name starts with that letter, paginated 10 per page of that letter. I also add some css styling to the letter they clicked to show which letter they're on. Hope that helps.
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