diff --git a/hgext/mq.py b/hgext/mq.py
--- a/hgext/mq.py
+++ b/hgext/mq.py
@@ -1050,7 +1050,7 @@ class queue:
                 for f in m:
                     repo.dirstate.normal(f)
                 for f in mm:
-                    repo.dirstate.normaldirty(f)
+                    repo.dirstate.normallookup(f)
                 for f in forget:
                     repo.dirstate.forget(f)
 
diff --git a/mercurial/dirstate.py b/mercurial/dirstate.py
--- a/mercurial/dirstate.py
+++ b/mercurial/dirstate.py
@@ -202,18 +202,24 @@ class dirstate(object):
         self._incpath(f)
 
     def normal(self, f):
-        'mark a file normal'
+        'mark a file normal and clean'
         self._dirty = True
         s = os.lstat(self._join(f))
         self._map[f] = ('n', s.st_mode, s.st_size, s.st_mtime)
         if self._copymap.has_key(f):
             del self._copymap[f]
 
-    def normaldirty(self, f):
+    def normallookup(self, f):
         'mark a file normal, but possibly dirty'
         self._dirty = True
-        s = os.lstat(self._join(f))
-        self._map[f] = ('n', s.st_mode, -1, -1)
+        self._map[f] = ('n', 0, -1, -1)
+        if f in self._copymap:
+            del self._copymap[f]
+
+    def normaldirty(self, f):
+        'mark a file normal, but dirty'
+        self._dirty = True
+        self._map[f] = ('n', 0, -2, -1)
         if f in self._copymap:
             del self._copymap[f]
 
@@ -523,6 +529,7 @@ class dirstate(object):
                     st = lstat(_join(fn))
                 if (size >= 0 and (size != st.st_size
                                    or (mode ^ st.st_mode) & 0100)
+                    or size == -2
                     or fn in self._copymap):
                     madd(fn)
                 elif time != int(st.st_mtime):
diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -998,7 +998,7 @@ class localrepository(repo.repository):
                 elif self.dirstate[f] in 'amn':
                     self.ui.warn(_("%s already tracked!\n") % f)
                 elif self.dirstate[f] == 'r':
-                    self.dirstate.normaldirty(f)
+                    self.dirstate.normallookup(f)
                 else:
                     self.dirstate.add(f)
         finally:
diff --git a/mercurial/merge.py b/mercurial/merge.py
--- a/mercurial/merge.py
+++ b/mercurial/merge.py
@@ -543,7 +543,7 @@ def recordupdates(repo, action, branchme
                 # of that file some time in the past. Thus our
                 # merge will appear as a normal local file
                 # modification.
-                repo.dirstate.normaldirty(fd)
+                repo.dirstate.normallookup(fd)
                 if move:
                     repo.dirstate.forget(f)
         elif m == "d": # directory rename
diff --git a/tests/test-issue522 b/tests/test-issue522
new file mode 100755
--- /dev/null
+++ b/tests/test-issue522
@@ -0,0 +1,31 @@
+#!/bin/sh
+
+# In the merge below, the file "foo" has the same contents in both
+# parents, but if we look at the file-level history, we'll notice that
+# the version in p1 is an ancestor of the version in p2.  This test
+# makes sure that we'll use the version from p2 in the manifest of the
+# merge revision.
+
+hg init repo
+cd repo
+
+echo foo > foo
+hg ci -d '0 0' -qAm 'add foo'
+
+echo bar >> foo
+hg ci -d '0 0' -m 'change foo'
+
+hg backout -d '0 0' -r tip -m 'backout changed foo'
+
+hg up -C 0
+touch bar
+hg ci -d '0 0' -qAm 'add bar'
+
+hg merge --debug
+hg debugstate | grep foo
+hg st -A foo
+hg ci -d '0 0' -m 'merge'
+
+hg manifest --debug | grep foo
+hg debugindex .hg/store/data/foo.i
+
diff --git a/tests/test-issue522.out b/tests/test-issue522.out
new file mode 100644
--- /dev/null
+++ b/tests/test-issue522.out
@@ -0,0 +1,17 @@
+reverting foo
+changeset 2:4d9e78aaceee backs out changeset 1:b515023e500e
+1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+resolving manifests
+ overwrite None partial False
+ ancestor bbd179dfa0a7 local 71766447bdbb+ remote 4d9e78aaceee
+ foo: remote is newer -> g
+getting foo
+1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+(branch merge, don't forget to commit)
+n   0         -2 unset             foo
+M foo
+c6fc755d7e68f49f880599da29f15add41f42f5a 644 foo
+   rev    offset  length   base linkrev nodeid       p1           p2
+     0         0       5      0       0 2ed2a3912a0b 000000000000 000000000000
+     1         5       9      1       1 6f4310b00b9a 2ed2a3912a0b 000000000000
+     2        14       5      2       2 c6fc755d7e68 6f4310b00b9a 000000000000