List.Generate() takes only last element from IF statement?

On the first iteration after the initialization, you have counter = [counter] + 1 = 1 + 1 = 2, so it returns listResult1. You probably want to write "if [counter] = 1" instead of "if counter = 1" since the latter is already incremented. Note that it doesn't matter if you write "counter = [counter] + 1" before or after listResult.

You may also want to start your counter at zero:

let
    result =
        List.Generate(
            () => [listResult = null, nextOffset = 0, counter = 0],
            each [counter] <= 2 ,
            each [
                    listResult0 = {1,2},
                    listResult1 = {3,4},
                    listResult = if [counter] = 1 then listResult0 else listResult1,
                    counter = [counter] + 1
                ],
            each [listResult]
        )
in
    result