--- a/mercurial/merge.py	Wed Oct 04 17:59:27 2006 -0500
+++ b/mercurial/merge.py	Wed Oct 04 19:08:04 2006 -0500
@@ -151,7 +151,7 @@
         ''' check if an apparent pair actually matches '''
         c2 = ctx(f2, man[f2])
         ca = c.ancestor(c2)
-        if ca:
+        if ca and ca.path() == c.path() or ca.path() == c2.path():
             copy[c.path()] = f2
             copy[f2] = c.path()
 
@@ -284,8 +284,8 @@
                                  (f, inst.strerror))
             removed +=1
         elif m == "c": # copy
-            f2, fd, my, other, flag, remove = a[2:]
-            if filemerge(repo, f, f2, fd, my, other, xp1, xp2, remove):
+            f2, fd, my, other, flag, move = a[2:]
+            if filemerge(repo, f, f2, fd, my, other, xp1, xp2, move):
                 unresolved += 1
             util.set_exec(repo.wjoin(fd), flag)
             merged += 1
@@ -339,6 +339,25 @@
                 fl = repo.file(f)
                 f_len = fl.size(fl.rev(other))
                 repo.dirstate.update([f], 'n', st_size=f_len, st_mtime=-1)
+        elif m == "c": # copy
+            f2, fd, my, other, flag, move = a[2:]
+            if branchmerge:
+                # We've done a branch merge, mark this file as merged
+                # so that we properly record the merger later
+                repo.dirstate.update([fd], 'm')
+            else:
+                # We've update-merged a locally modified file, so
+                # we set the dirstate to emulate a normal checkout
+                # of that file some time in the past. Thus our
+                # merge will appear as a normal local file
+                # modification.
+                fl = repo.file(f)
+                f_len = fl.size(fl.rev(other))
+                repo.dirstate.update([fd], 'n', st_size=f_len, st_mtime=-1)
+            if move:
+                repo.dirstate.update([f], 'r')
+            if f != fd:
+                repo.dirstate.copy(f, fd)
 
 def update(repo, node, branchmerge=False, force=False, partial=None,
            wlock=None, show_stats=True, remind=True):

--- a/tests/test-rename-merge1	Wed Oct 04 17:59:27 2006 -0500
+++ b/tests/test-rename-merge1	Wed Oct 04 19:08:04 2006 -0500
@@ -3,6 +3,8 @@
 mkdir t
 cd t
 hg init
+echo "[merge]" >> .hg/hgrc
+echo "followcopies = 1" >> .hg/hgrc
 echo foo > a
 echo foo > a2
 hg add a a2
@@ -18,6 +20,6 @@
 hg ci -m "modify" -d "0 0"
 echo "merge"
 hg merge -y --debug
-cat a
+hg status -AC
 cat b
 hg ci -m "merge" -d "0 0"

--- a/tests/test-rename-merge1.out	Wed Oct 04 17:59:27 2006 -0500
+++ b/tests/test-rename-merge1.out	Wed Oct 04 19:08:04 2006 -0500
@@ -4,11 +4,18 @@
 resolving manifests
  overwrite None branchmerge True partial False
  ancestor f26ec4fc3fa3 local 8e765a822af2 remote af1939970a1c
- b: remote created -> g
+ a: remote moved -> c
  b2: remote created -> g
-getting b
+resolving a
+my a@f26ec4fc3fa3 other b@8e765a822af2 ancestor a@af1939970a1c
+copying a to b
+removing a
 getting b2
-2 files updated, 0 files merged, 0 files removed, 0 files unresolved
+1 files updated, 1 files merged, 0 files removed, 0 files unresolved
 (branch merge, don't forget to commit)
+M b
+  a
+M b2
+R a
+C c2
 blahblah
-foo