diff --git a/hgext/histedit.py b/hgext/histedit.py
--- a/hgext/histedit.py
+++ b/hgext/histedit.py
@@ -430,19 +430,26 @@ def histedit(ui, repo, *parent, **opts):
          tmpnodes, existing, rules, keep, tip, replacemap) = readstate(repo)
         currentparent, wantnull = repo.dirstate.parents()
         parentctx = repo[parentctxnode]
-        # discover any nodes the user has added in the interim
-        newchildren = [c for c in parentctx.children()
-                       if c.node() not in existing]
+        # existing is the list of revisions initially considered by
+        # histedit. Here we use it to list new changesets, descendants
+        # of parentctx without an 'existing' changeset in-between. We
+        # also have to exclude 'existing' changesets which were
+        # previously dropped.
+        descendants = set(c.node() for c in
+                repo.set('(%n::) - %n', parentctxnode, parentctxnode))
+        existing = set(existing)
+        notdropped = set(n for n in existing if n in descendants and
+                (n not in replacemap or replacemap[n] in descendants))
+        # Discover any nodes the user has added in the interim. We can
+        # miss changesets which were dropped and recreated the same.
+        newchildren = list(c.node() for c in repo.set(
+            'sort(%ln - (%ln or %ln::))', descendants, existing, notdropped))
         action, currentnode = rules.pop(0)
-        while newchildren:
-            if action in ('f', 'fold'):
-                tmpnodes.extend([n.node() for n in newchildren])
-            else:
-                created.extend([n.node() for n in newchildren])
-            filtered = []
-            for r in newchildren:
-                filtered += [c for c in r.children() if c.node not in existing]
-            newchildren = filtered
+        if action in ('f', 'fold'):
+            tmpnodes.extend(newchildren)
+        else:
+            created.extend(newchildren)
+
         m, a, r, d = repo.status()[:4]
         oldctx = repo[currentnode]
         message = oldctx.description()
diff --git a/tests/test-histedit-fold.t b/tests/test-histedit-fold.t
--- a/tests/test-histedit-fold.t
+++ b/tests/test-histedit-fold.t
@@ -183,3 +183,56 @@ should effectively drop the changes from
   
 
   $ cd ..
+
+Test corner case where folded revision is separated from its parent by a
+dropped revision.
+
+
+  $ hg init fold-with-dropped
+  $ cd fold-with-dropped
+  $ printf "1\n2\n3\n" > file
+  $ hg commit -Am '1+2+3'
+  adding file
+  $ echo 4 >> file
+  $ hg commit -m '+4'
+  $ echo 5 >> file
+  $ hg commit -m '+5'
+  $ echo 6 >> file
+  $ hg commit -m '+6'
+  $ hg log -G --template '{rev}:{node|short} {desc|firstline}\n'
+  @  3:251d831eeec5 +6
+  |
+  o  2:888f9082bf99 +5
+  |
+  o  1:617f94f13c0f +4
+  |
+  o  0:0189ba417d34 1+2+3
+  
+  $ EDITED=`pwd`/../editcommands
+  $ cat > $EDITED <<EOF
+  > pick 617f94f13c0f 1 +4
+  > drop 888f9082bf99 2 +5
+  > fold 251d831eeec5 3 +6
+  > EOF
+  $ HGEDITOR="cat $EDITED >" hg histedit 1
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  patching file file
+  Hunk #1 FAILED at 2
+  1 out of 1 hunks FAILED -- saving rejects to file file.rej
+  abort: Fix up the change and run hg histedit --continue
+  [255]
+  $ echo 5 >> file
+  $ hg commit -m '+5.2'
+  created new head
+  $ echo 6 >> file
+  $ HGEDITOR=cat hg histedit --continue
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  +4
+  ***
+  +5.2
+  ***
+  +6
+  0 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  saved backup bundle to $TESTTMP/fold-with-dropped/.hg/strip-backup/617f94f13c0f-backup.hg (glob)
+  $ cd ..
+