diff --git a/mercurial/config.py b/mercurial/config.py
--- a/mercurial/config.py
+++ b/mercurial/config.py
@@ -100,7 +100,13 @@ class config(object):
                 base = os.path.dirname(src)
                 inc = os.path.normpath(os.path.join(base, inc))
                 if include:
-                    include(inc, remap=remap, sections=sections)
+                    try:
+                        include(inc, remap=remap, sections=sections)
+                    except IOError, inst:
+                        msg = _("config error at %s:%d: "
+                                "cannot include %s (%s)") \
+                            % (src, line, inc, inst.strerror)
+                        raise error.ConfigError(msg)
                 continue
             if emptyre.match(l):
                 continue
diff --git a/tests/test-hgrc b/tests/test-hgrc
--- a/tests/test-hgrc
+++ b/tests/test-hgrc
@@ -22,3 +22,6 @@ cd ..
 echo '[foo]' >> $HGRCPATH
 echo '  x = y' >> $HGRCPATH
 hg version 2>&1 | sed -e "s|$HGRCPATH|\$HGRCPATH|"
+
+echo '%include /no-such-file' > $HGRCPATH
+hg version 2>&1 | sed -e "s|$HGRCPATH|\$HGRCPATH|"
diff --git a/tests/test-hgrc.out b/tests/test-hgrc.out
--- a/tests/test-hgrc.out
+++ b/tests/test-hgrc.out
@@ -11,3 +11,4 @@ defaults.tag=-d "0 0"
 paths.default=.../foo%bar
 ui.slash=True
 hg: config error at $HGRCPATH:8: '  x = y'
+hg: config error at $HGRCPATH:1: cannot include /no-such-file (No such file or directory)