Fix 3-way-merge of original parent, workdir and new parent. The dirstate has to match what is in the repository (what would be checked out with 'hg update -C'), because the resulting file may be identical to the new parent, or it may be completely different. Previously the dirstate wasn't updated, so if you changed the file to look like the original parent, it might be considered unmodified relative to the new parent.

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+ hg init

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+ hg add a

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+ hg commit -m first -d 0 0 a

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+ hg add sub/b

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+ hg commit -m second -d 0 0 sub/b

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321

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+ hg co 0

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cat: sub/b: No such file or directory

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ls: sub: No such file or directory