diff --git a/hgext/largefiles/lfcommands.py b/hgext/largefiles/lfcommands.py
--- a/hgext/largefiles/lfcommands.py
+++ b/hgext/largefiles/lfcommands.py
@@ -455,6 +455,7 @@ def updatelfiles(ui, repo, filelist=None
             lfiles = [f for f in lfiles if f in filelist]
 
         update = {}
+        dropped = set()
         updated, removed = 0, 0
         wvfs = repo.wvfs
         wctx = repo[None]
@@ -476,7 +477,11 @@ def updatelfiles(ui, repo, filelist=None
                 expecthash = lfutil.readasstandin(wctx[relstandin])
                 if expecthash != '':
                     if lfile not in wctx: # not switched to normal file
-                        wvfs.unlinkpath(rellfile, ignoremissing=True)
+                        if repo.dirstate[relstandin] != '?':
+                            wvfs.unlinkpath(rellfile, ignoremissing=True)
+                        else:
+                            dropped.add(rellfile)
+
                     # use normallookup() to allocate an entry in largefiles
                     # dirstate to prevent lfilesrepo.status() from reporting
                     # missing files as removed.
@@ -496,6 +501,15 @@ def updatelfiles(ui, repo, filelist=None
         lfdirstate.write()
 
         if lfiles:
+            lfiles = [f for f in lfiles if f not in dropped]
+
+            for f in dropped:
+                repo.wvfs.unlinkpath(lfutil.standin(f))
+
+                # This needs to happen for dropped files, otherwise they stay in
+                # the M state.
+                lfutil.synclfdirstate(repo, lfdirstate, f, normallookup)
+
             statuswriter(_('getting changed largefiles\n'))
             cachelfiles(ui, repo, None, lfiles)
 
diff --git a/tests/test-largefiles-misc.t b/tests/test-largefiles-misc.t
--- a/tests/test-largefiles-misc.t
+++ b/tests/test-largefiles-misc.t
@@ -1148,20 +1148,18 @@ Move (and then undo) a directory move wi
   ? dir/subdir2/large.bin
   ? large.orig
 
-BUG: The content of the forgotten file shouldn't be clobbered
+The content of the forgotten file shouldn't be clobbered
 
   $ cat dir/subdir2/large.bin
-  large2
+  modified
 
-BUG: the standin for subdir2 should be deleted, not just dropped
+The standin for subdir2 should be deleted, not just dropped
 
   $ listtree .hglf dir* large*
   .hglf/
   .hglf/dir/
   .hglf/dir/subdir/
   .hglf/dir/subdir/large.bin
-  .hglf/dir/subdir2/
-  .hglf/dir/subdir2/large.bin
   .hglf/large
   dir/
   dir/subdir/
@@ -1173,13 +1171,13 @@ BUG: the standin for subdir2 should be d
 
   $ rm -r dir/subdir2
 
-BUG: subdir should not be in the destination.  This is caused by the directory
-existing under .hglf/.
+'subdir' should not be in the destination.  It would be if the subdir2 directory
+existed under .hglf/.
   $ hg mv dir/subdir dir/subdir2
-  moving .hglf/dir/subdir/large.bin to .hglf/dir/subdir2/subdir/large.bin (glob)
+  moving .hglf/dir/subdir/large.bin to .hglf/dir/subdir2/large.bin (glob)
 
   $ hg status -C
-  A dir/subdir2/subdir/large.bin
+  A dir/subdir2/large.bin
     dir/subdir/large.bin
   R dir/subdir/large.bin
   ? large.orig
@@ -1189,13 +1187,10 @@ existing under .hglf/.
   .hglf/dir/
   .hglf/dir/subdir2/
   .hglf/dir/subdir2/large.bin
-  .hglf/dir/subdir2/subdir/
-  .hglf/dir/subdir2/subdir/large.bin
   .hglf/large
   dir/
   dir/subdir2/
-  dir/subdir2/subdir/
-  dir/subdir2/subdir/large.bin
+  dir/subdir2/large.bin
   large
   large.orig
 
@@ -1236,9 +1231,6 @@ Start from scratch, and rename something
   .hglf/dir/
   .hglf/dir/subdir/
   .hglf/dir/subdir/large.bin
-  .hglf/dir2/
-  .hglf/dir2/subdir/
-  .hglf/dir2/subdir/large.bin
   .hglf/large
   dir/
   dir/subdir/