diff --git a/mercurial/filemerge.py b/mercurial/filemerge.py
--- a/mercurial/filemerge.py
+++ b/mercurial/filemerge.py
@@ -222,8 +222,8 @@ def filemerge(repo, mynode, orig, fcd, f
         if "$output" in args:
             out, a = a, back # read input from backup, write to original
         replace = dict(local=a, base=b, other=c, output=out)
-        args = re.sub("\$(local|base|other|output)",
-            lambda x: '"%s"' % util.localpath(replace[x.group()[1:]]), args)
+        args = util.interpolate(r'\$', replace, args,
+                                lambda s: '"%s"' % util.localpath(s))
         r = util.system(toolpath + ' ' + args, cwd=repo.root, environ=env)
 
     if not r and (_toolbool(ui, tool, "checkconflicts") or
diff --git a/mercurial/util.py b/mercurial/util.py
--- a/mercurial/util.py
+++ b/mercurial/util.py
@@ -1408,3 +1408,18 @@ def termwidth():
         except ValueError:
             pass
     return termwidth_()
+
+def interpolate(prefix, mapping, s, fn=None):
+    """Return the result of interpolating items in the mapping into string s.
+
+    prefix is a single character string, or a two character string with
+    a backslash as the first character if the prefix needs to be escaped in
+    a regular expression.
+
+    fn is an optional function that will be applied to the replacement text
+    just before replacement.
+    """
+    fn = fn or (lambda s: s)
+    r = re.compile(r'%s(%s)' % (prefix, '|'.join(mapping.keys())))
+    return r.sub(lambda x: fn(mapping[x.group()[1:]]), s)
+