Use smerge minor mode in emacs to resolve conflicts.
The condition-case is used to suppress errors with emacs versions before 21.
% file replaced with directory
adding a
% should fail - would corrupt dirstate
abort: file 'a' in dirstate clashes with 'a/a'
% directory replaced with file
adding a/a
% should fail - would corrupt dirstate
abort: directory 'a' already in dirstate
% directory replaced with file
adding b/c/d
% should fail - would corrupt dirstate
abort: directory 'b' already in dirstate