Tente isto:
;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
Você pode usar
OPTION(MAXRECURSION n)
para controlar a profundidade de recursão. Demonstração do SQL FIDDLE