diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -1009,7 +1009,7 @@ class localrepository(object):
             util.rename(self.join('undo.dirstate'), self.join('dirstate'))
             try:
                 branch = self.opener.read('undo.branch')
-                self.dirstate.setbranch(branch)
+                self.dirstate.setbranch(encoding.tolocal(branch))
             except IOError:
                 ui.warn(_('named branch could not be reset: '
                           'current branch is still \'%s\'\n')
diff --git a/tests/test-encoding.t b/tests/test-encoding.t
--- a/tests/test-encoding.t
+++ b/tests/test-encoding.t
@@ -44,6 +44,10 @@ these should work
   marked working directory as branch \xe9 (esc)
   (branches are permanent and global, did you want a bookmark?)
   $ HGENCODING=latin-1 hg ci -m 'latin1 branch'
+  $ hg -q rollback
+  $ HGENCODING=latin-1 hg branch
+  \xe9 (esc)
+  $ HGENCODING=latin-1 hg ci -m 'latin1 branch'
   $ rm .hg/branch
 
 hg log (ascii)