diff --git a/rhodecode/lib/db_manage.py b/rhodecode/lib/db_manage.py
--- a/rhodecode/lib/db_manage.py
+++ b/rhodecode/lib/db_manage.py
@@ -149,6 +149,13 @@ class DbManage(object):
         hooks4.ui_key = 'preoutgoing.pull_logger'
         hooks4.ui_value = 'python:rhodecode.lib.hooks.log_pull_action'
 
+        #for mercurial 1.7 set backward comapatibility with format
+
+        dotencode_disable = RhodeCodeUi()
+        dotencode_disable.ui_section = 'format'
+        dotencode_disable.ui_key = 'dotencode'
+        dotencode_disable.ui_section = 'false'
+
 
         web1 = RhodeCodeUi()
         web1.ui_section = 'web'
@@ -181,8 +188,6 @@ class DbManage(object):
 
 
         try:
-
-
             self.sa.add(hooks1)
             self.sa.add(hooks2)
             self.sa.add(hooks3)
@@ -194,6 +199,7 @@ class DbManage(object):
             self.sa.add(paths)
             self.sa.add(hgsettings1)
             self.sa.add(hgsettings2)
+            self.sa.add(dotencode_disable)
             for k in ['ldap_active', 'ldap_host', 'ldap_port', 'ldap_ldaps',
                       'ldap_dn_user', 'ldap_dn_pass', 'ldap_base_dn']:
 
diff --git a/rhodecode/lib/utils.py b/rhodecode/lib/utils.py
--- a/rhodecode/lib/utils.py
+++ b/rhodecode/lib/utils.py
@@ -212,12 +212,15 @@ def make_ui(read_from='file', path=None,
         ret = sa.query(RhodeCodeUi)\
             .options(FromCache("sql_cache_short",
                                "get_hg_ui_settings")).all()
-        meta.Session.remove()
+
         hg_ui = ret
         for ui_ in hg_ui:
             if ui_.ui_active:
-                log.debug('settings ui from db[%s]%s:%s', ui_.ui_section, ui_.ui_key, ui_.ui_value)
+                log.debug('settings ui from db[%s]%s:%s', ui_.ui_section,
+                          ui_.ui_key, ui_.ui_value)
                 baseui.setconfig(ui_.ui_section, ui_.ui_key, ui_.ui_value)
+
+        meta.Session.remove()
     return baseui
 
 
diff --git a/setup.py b/setup.py
--- a/setup.py
+++ b/setup.py
@@ -8,7 +8,7 @@ requirements = [
         "Mako>=0.3.6",
         "vcs>=0.1.10",
         "pygments>=1.3.0",
-        "mercurial>=1.6.4",
+        "mercurial>=1.7.1",
         "whoosh>=1.3.1",
         "celery>=2.1.3",
         "py-bcrypt",