diff --git a/hgext/extdiff.py b/hgext/extdiff.py
--- a/hgext/extdiff.py
+++ b/hgext/extdiff.py
@@ -212,13 +212,15 @@ def dodiff(ui, repo, cmdline, pats, opts
                    'clabel': label2, 'child': dir2,
                    'root': repo.root}
         def quote(match):
-            key = match.group()[1:]
+            pre = match.group(2)
+            key = match.group(3)
             if not do3way and key == 'parent2':
-                return ''
-            return util.shellquote(replace[key])
+                return pre
+            return pre + util.shellquote(replace[key])
 
         # Match parent2 first, so 'parent1?' will match both parent1 and parent
-        regex = '\$(parent2|parent1?|child|plabel1|plabel2|clabel|root)'
+        regex = (r'''(['"]?)([^\s'"$]*)'''
+                 r'\$(parent2|parent1?|child|plabel1|plabel2|clabel|root)\1')
         if not do3way and not re.search(regex, cmdline):
             cmdline += ' $parent1 $child'
         cmdline = re.sub(regex, quote, cmdline)
diff --git a/tests/test-extdiff.t b/tests/test-extdiff.t
--- a/tests/test-extdiff.t
+++ b/tests/test-extdiff.t
@@ -160,6 +160,28 @@ issue4463: usage of command line configu
   running "echo echo-naked 'being quoted' */a $TESTTMP/a/a" in */extdiff.* (glob)
 #endif
 
+  $ touch 'sp ace'
+  $ hg add 'sp ace'
+  $ hg ci -m 'sp ace'
+  created new head
+  $ echo > 'sp ace'
+
+Test pre-72a89cf86fcd backward compatibility with half-baked manual quoting
+
+  $ cat <<EOF >> $HGRCPATH
+  > [extdiff]
+  > odd =
+  > [merge-tools]
+  > odd.diffargs = --foo='\$clabel' '\$clabel' "--bar=\$clabel" "\$clabel"
+  > odd.executable = echo
+  > EOF
+#if windows
+TODO
+#else
+  $ hg --debug odd | grep '^running'
+  running "/bin/echo --foo='sp ace' 'sp ace' --bar='sp ace' 'sp ace'" in * (glob)
+#endif
+
 #if execbit
 
 Test extdiff of multiple files in tmp dir: