diff --git a/mercurial/commands.py b/mercurial/commands.py
--- a/mercurial/commands.py
+++ b/mercurial/commands.py
@@ -256,9 +256,9 @@ def branch(ui, repo, label=None):
     """
 
     if label is not None:
-        repo.opener("branch", "w").write(label)
+        repo.opener("branch", "w").write(util.fromlocal(label) + '\n')
     else:
-        b = repo.workingctx().branch()
+        b = util.tolocal(repo.workingctx().branch())
         if b:
             ui.write("%s\n" % b)
 
@@ -1433,7 +1433,7 @@ def identify(ui, repo):
 
     if not ui.quiet:
 
-        branch = repo.workingctx().branch()
+        branch = util.tolocal(repo.workingctx().branch())
         if branch:
             output.append("(%s)" % branch)
 
diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -683,7 +683,11 @@ class localrepository(repo.repository):
         m2 = self.manifest.read(c2[0])
 
         if use_dirstate:
-            branchname = util.fromlocal(self.workingctx().branch())
+            branchname = self.workingctx().branch()
+            try:
+                branchname = branchname.decode('UTF-8').encode('UTF-8')
+            except UnicodeDecodeError:
+                raise util.Abort(_('branch name not in UTF-8!'))
         else:
             branchname = ""
 
diff --git a/mercurial/merge.py b/mercurial/merge.py
--- a/mercurial/merge.py
+++ b/mercurial/merge.py
@@ -489,7 +489,6 @@ def update(repo, node, branchmerge, forc
         repo.dirstate.setparents(fp1, fp2)
         repo.hook('update', parent1=xp1, parent2=xp2, error=stats[3])
         if not branchmerge:
-            b = util.tolocal(p2.branch())
             repo.opener("branch", "w").write(p2.branch() + "\n")
 
     return stats
diff --git a/tests/test-encoding b/tests/test-encoding
--- a/tests/test-encoding
+++ b/tests/test-encoding
@@ -25,7 +25,7 @@ echo "utf-8" > a
 HGENCODING=utf-8 hg ci -l utf-8 -d "1000000 0"
 
 HGENCODING=latin-1 hg tag -d "1000000 0" `cat latin-1-tag`
-cp latin-1-tag .hg/branch
+HGENCODING=latin-1 hg branch `cat latin-1-tag`
 HGENCODING=latin-1 hg ci -d "1000000 0" -m 'latin1 branch'
 rm .hg/branch
 
@@ -55,4 +55,7 @@ HGENCODING=utf-8 hg log
 
 HGENCODING=dolphin hg log
 
+HGENCODING=ascii hg branch `cat latin-1-tag`
+cp latin-1-tag .hg/branch
+HGENCODING=latin-1 hg ci -d "1000000 0" -m 'should fail'
 exit 0
diff --git a/tests/test-encoding.out b/tests/test-encoding.out
--- a/tests/test-encoding.out
+++ b/tests/test-encoding.out
@@ -165,3 +165,5 @@ date:        Mon Jan 12 13:46:40 1970 +0
 summary:     latin-1 e': И = u'\xe9'
 
 abort: unknown encoding: dolphin, please check your locale settings
+abort: decoding near 'é': 'ascii' codec can't decode byte 0xe9 in position 0: ordinal not in range(128)!
+abort: branch name not in UTF-8!