diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -1225,14 +1225,15 @@ class localrepository(repo.repository):
             modified, added, clean = [], [], []
             for fn in mf2:
                 if fn in mf1:
-                    if (mf1.flags(fn) != mf2.flags(fn) or
-                        (mf1[fn] != mf2[fn] and
-                         (mf2[fn] or ctx1[fn].cmp(ctx2[fn])))):
+                    if (fn not in deleted and
+                        (mf1.flags(fn) != mf2.flags(fn) or
+                         (mf1[fn] != mf2[fn] and
+                          (mf2[fn] or ctx1[fn].cmp(ctx2[fn]))))):
                         modified.append(fn)
                     elif listclean:
                         clean.append(fn)
                     del mf1[fn]
-                else:
+                elif fn not in deleted:
                     added.append(fn)
             removed = mf1.keys()
 
diff --git a/tests/test-diff-issue2761.t b/tests/test-diff-issue2761.t
new file mode 100644
--- /dev/null
+++ b/tests/test-diff-issue2761.t
@@ -0,0 +1,23 @@
+Test issue2761
+
+  $ hg init
+
+  $ touch to-be-deleted
+  $ hg add
+  adding to-be-deleted
+  $ hg ci -m first
+  $ echo a > to-be-deleted
+  $ hg ci -m second
+  $ rm to-be-deleted
+  $ hg diff -r 0
+
+Same issue, different code path
+
+  $ hg up -C
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  $ touch doesnt-exist-in-1
+  $ hg add
+  adding doesnt-exist-in-1
+  $ hg ci -m third
+  $ rm doesnt-exist-in-1
+  $ hg diff -r 1
diff --git a/tests/test-mq-qdiff.t b/tests/test-mq-qdiff.t
--- a/tests/test-mq-qdiff.t
+++ b/tests/test-mq-qdiff.t
@@ -163,4 +163,13 @@ qdiff preserve existing git flag:
   $ hg qdiff --stat
    lines |  7 +++++--
    1 files changed, 5 insertions(+), 2 deletions(-)
+  $ hg qrefresh
 
+qdiff when file deleted (but not removed) in working dir:
+
+  $ hg qnew deleted-file
+  $ echo a > newfile
+  $ hg add newfile
+  $ hg qrefresh
+  $ rm newfile
+  $ hg qdiff