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How exactly is direct fire performed? I have played the Market Garden scenario several times as both Allies and German vs AI and have yet to figure this out. It seems the only combat option I am given is close assault. Any help would be appreciated.

Here's a quick summary:

Firing unit has to be direct fire capable & target has to be a direct fire target.  See tutorial lesson #1 to see how to id these.

-  Target has to be in a DF allowed type of terrain (typically open/clear/desert/farmland).  
-  Firing unit has to be two hexes away (if in the hex next to target you always get close combat).
-  No enemy units can be inbetween.
-  Target cannot be dug in (no DF allowed if target unit is dug in).

Here's an example of how this works:

Thanks.  That clears it up quite a bit.