mercurial/mdiff.py

--- a/mercurial/mdiff.py	Mon Nov 14 18:16:01 2011 +0100
+++ b/mercurial/mdiff.py	Thu Nov 17 16:53:17 2011 -0600
@@ -72,7 +72,7 @@
         text = re.sub('[ \t\r]+', ' ', text)
         text = text.replace(' \n', '\n')
     if blank and opts.ignoreblanklines:
-        text = re.sub('\n+', '', text)
+        text = re.sub('\n+', '\n', text).strip('\n')
     return text
 
 def diffline(revs, a, b, opts):