Give ssh a better chance of working on Windows.
Switch the type of quotes used for the remote command.
Open the pipe in binary mode.
#!/bin/sh
hg init
touch a
hg add a
hg ci -m "a" -d "0 0"
echo 123 > b
hg add b
hg diff | sed -e "s/\(+++ [a-zA-Z0-9_/.-]*\).*/\1/" \
-e "s/\(--- [a-zA-Z0-9_/.-]*\).*/\1/"
hg diff -r tip | sed -e "s/\(+++ [a-zA-Z0-9_/.-]*\).*/\1/" \
-e "s/\(--- [a-zA-Z0-9_/.-]*\).*/\1/"