Recursive query in SQL Server

Try this:

;WITH CTE
AS
(
    SELECT DISTINCT
        M1.Product_ID Group_ID,
        M1.Product_ID
    FROM matches M1
        LEFT JOIN matches M2
            ON M1.Product_Id = M2.matching_Product_Id
    WHERE M2.matching_Product_Id IS NULL
    UNION ALL
    SELECT
        C.Group_ID,
        M.matching_Product_Id
    FROM CTE C
        JOIN matches M
            ON C.Product_ID = M.Product_ID
)
SELECT * FROM CTE ORDER BY Group_ID

You can use OPTION(MAXRECURSION n) to control recursion depth.

SQL FIDDLE DEMO

Something like this (not tested)

with match_groups as (

  select product_id, 
         matching_product_id,
         product_id as group_id
  from matches
  where product_id not in (select matching_product_id from matches)

  union all

  select m.product_id, m.matching_product_id, p.group_id
  from matches m
    join match_groups p on m.product_id = p.matching_product_id
)
select group_id, product_id
from match_groups
order by group_id;

Sample of the Recursive Level:

DECLARE @VALUE_CODE AS VARCHAR(5);

--SET @VALUE_CODE = 'A' -- Specify a level

WITH ViewValue AS
(
    SELECT ValueCode
    , ValueDesc
    , PrecedingValueCode
    FROM ValuesTable
    WHERE PrecedingValueCode IS NULL
    UNION ALL
    SELECT A.ValueCode
    , A.ValueDesc
    , A.PrecedingValueCode 
    FROM ValuesTable A
    INNER JOIN ViewValue V ON
        V.ValueCode = A.PrecedingValueCode
)

SELECT ValueCode, ValueDesc, PrecedingValueCode

FROM ViewValue

--WHERE PrecedingValueCode  = @VALUE_CODE -- Specific level

--WHERE PrecedingValueCode  IS NULL -- Root