man 5 hgrc implied you need to use external tools to do CRLF translation.
This is no longer true; win32text provides a much better in-process alternative.
#!/bin/sh
hg init
echo "# revision 0"
echo "unchanged" > unchanged
echo "remove me" > remove
echo "copy me" > copy
echo "move me" > move
for i in 1 2 3 4 5 6 7 8 9; do
echo "merge ok $i" >> zzz1_merge_ok
done
echo "merge bad" > zzz2_merge_bad
hg ci -Am "revision 0" -d "1000000 0"
echo "# revision 1"
hg rm remove
hg mv move moved
hg cp copy copied
echo "added" > added
hg add added
echo "new first line" > zzz1_merge_ok
hg cat zzz1_merge_ok >> zzz1_merge_ok
echo "new last line" >> zzz2_merge_bad
hg ci -m "revision 1" -d "1000000 0"
echo "# local changes to revision 0"
hg co 0
echo "new last line" >> zzz1_merge_ok
echo "another last line" >> zzz2_merge_bad
hg diff --nodates | grep "^[+-][^<>]"
hg st
echo "# local merge with bad merge tool"
HGMERGE=false hg co
hg co 0
hg diff --nodates | grep "^[+-][^<>]"
hg st
echo "# local merge with conflicts"
hg co
hg co 0
hg diff --nodates | grep "^[+-][^<>]"
hg st
echo "# local merge without conflicts"
hg revert zzz2_merge_bad
hg co
hg diff --nodates | grep "^[+-][^<>]"
hg st