--- a/mercurial/merge.py	Fri Jul 01 14:09:53 2016 +0200
+++ b/mercurial/merge.py	Fri Jul 01 17:42:55 2016 +0200
@@ -1076,15 +1076,14 @@
                 absf = repo.wjoin(f)
                 orig = scmutil.origpath(ui, repo, absf)
                 try:
-                    # TODO Mercurial has always aborted if an untracked
-                    # directory is replaced by a tracked file, or generally
-                    # with file/directory merges. This needs to be sorted out.
                     if repo.wvfs.isfileorlink(f):
                         util.rename(absf, orig)
                 except OSError as e:
                     if e.errno != errno.ENOENT:
                         raise
 
+            if repo.wvfs.isdir(f):
+                repo.wvfs.removedirs(f)
             wwrite(f, fctx(f).data(), flags, backgroundclose=True)
             if i == 100:
                 yield i, f

--- a/tests/test-merge1.t	Fri Jul 01 14:09:53 2016 +0200
+++ b/tests/test-merge1.t	Fri Jul 01 17:42:55 2016 +0200
@@ -24,9 +24,10 @@
   $ hg update 0
   0 files updated, 0 files merged, 1 files removed, 0 files unresolved
 
-Test interrupted updates by exploiting our non-handling of directory collisions
+Test interrupted updates by having a non-empty dir with the same name as one
+of the files in a commit we're updating to
 
-  $ mkdir b
+  $ mkdir b && touch b/nonempty
   $ hg up
   abort: *: '$TESTTMP/t/b' (glob)
   [255]
@@ -38,10 +39,10 @@
   parent: 0:538afb845929 
    commit #0
   branch: default
-  commit: (interrupted update)
+  commit: 1 unknown (interrupted update)
   update: 1 new changesets (update)
   phases: 2 draft
-  $ rmdir b
+  $ rm b/nonempty
   $ hg up
   1 files updated, 0 files merged, 0 files removed, 0 files unresolved
   $ hg sum

--- /dev/null	Thu Jan 01 00:00:00 1970 +0000
+++ b/tests/test-update-names.t	Fri Jul 01 17:42:55 2016 +0200
@@ -0,0 +1,55 @@
+Test update logic when there are renames or weird same-name cases between dirs
+and files
+
+Update with local changes across a file rename
+
+  $ hg init r1 && cd r1
+
+  $ echo a > a
+  $ hg add a
+  $ hg ci -m a
+
+  $ hg mv a b
+  $ hg ci -m rename
+
+  $ echo b > b
+  $ hg ci -m change
+
+  $ hg up -q 0
+
+  $ echo c > a
+
+  $ hg up
+  merging a and b to b
+  warning: conflicts while merging b! (edit, then use 'hg resolve --mark')
+  0 files updated, 0 files merged, 0 files removed, 1 files unresolved
+  use 'hg resolve' to retry unresolved file merges
+  [1]
+
+Test update when local untracked directory exists with the same name as a
+tracked file in a commit we are updating to
+  $ hg init r2 && cd r2
+  $ echo root > root && hg ci -Am root  # rev 0
+  adding root
+  $ echo text > name && hg ci -Am "name is a file"  # rev 1
+  adding name
+  $ hg up 0
+  0 files updated, 0 files merged, 1 files removed, 0 files unresolved
+  $ mkdir name
+  $ hg up 1
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+
+Test update when local untracked directory exists with some files in it and has
+the same name a tracked file in a commit we are updating to. In future this
+should be updated to give an friendlier error message, but now we should just
+make sure that this does not erase untracked data
+  $ hg up 0
+  0 files updated, 0 files merged, 1 files removed, 0 files unresolved
+  $ mkdir name
+  $ echo text > name/file
+  $ hg st
+  ? name/file
+  $ hg up 1
+  abort: *: '$TESTTMP/r1/r2/name' (glob)
+  [255]
+  $ cd ..

--- a/tests/test-update-renames.t	Fri Jul 01 14:09:53 2016 +0200
+++ /dev/null	Thu Jan 01 00:00:00 1970 +0000
@@ -1,26 +0,0 @@
-Test update logic when there are renames
-
-Update with local changes across a file rename
-
-  $ hg init
-
-  $ echo a > a
-  $ hg add a
-  $ hg ci -m a
-
-  $ hg mv a b
-  $ hg ci -m rename
-
-  $ echo b > b
-  $ hg ci -m change
-
-  $ hg up -q 0
-
-  $ echo c > a
-
-  $ hg up
-  merging a and b to b
-  warning: conflicts while merging b! (edit, then use 'hg resolve --mark')
-  0 files updated, 0 files merged, 0 files removed, 1 files unresolved
-  use 'hg resolve' to retry unresolved file merges
-  [1]