diff --git a/t/t1004-read-tree-m-u-wf.sh b/t/t1004-read-tree-m-u-wf.sh
index d609a551ae..9d1371c2c6 100755
--- a/t/t1004-read-tree-m-u-wf.sh
+++ b/t/t1004-read-tree-m-u-wf.sh
@@ -116,4 +116,45 @@ test_expect_success 'three-way not complaining on an untracked file' '
 	git read-tree -m -u --exclude-per-directory=.gitignore branch-point master side
 '
 
+test_expect_success '3-way not overwriting local changes (setup)' '
+
+	git reset --hard &&
+	git checkout -b side-a branch-point &&
+	echo >>file1 "new line to be kept in the merge result" &&
+	git commit -a -m "side-a changes file1" &&
+	git checkout -b side-b branch-point &&
+	echo >>file2 "new line to be kept in the merge result" &&
+	git commit -a -m "side-b changes file2" &&
+	git checkout side-a
+
+'
+
+test_expect_success '3-way not overwriting local changes (our side)' '
+
+	# At this point, file1 from side-a should be kept as side-b
+	# did not touch it.
+
+	git reset --hard &&
+
+	echo >>file1 "local changes" &&
+	git read-tree -m -u branch-point side-a side-b &&
+	grep "new line to be kept" file1 &&
+	grep "local changes" file1
+
+'
+
+test_expect_success '3-way not overwriting local changes (their side)' '
+
+	# At this point, file2 from side-b should be taken as side-a
+	# did not touch it.
+
+	git reset --hard &&
+
+	echo >>file2 "local changes" &&
+	test_must_fail git read-tree -m -u branch-point side-a side-b &&
+	! grep "new line to be kept" file2 &&
+	grep "local changes" file2
+
+'
+
 test_done
diff --git a/unpack-trees.c b/unpack-trees.c
index 93019abdc1..4b359e0832 100644
--- a/unpack-trees.c
+++ b/unpack-trees.c
@@ -595,16 +595,19 @@ static int verify_absent(struct cache_entry *ce, const char *action,
 static int merged_entry(struct cache_entry *merge, struct cache_entry *old,
 		struct unpack_trees_options *o)
 {
+	int update = CE_UPDATE;
+
 	if (old) {
 		/*
 		 * See if we can re-use the old CE directly?
 		 * That way we get the uptodate stat info.
 		 *
-		 * This also removes the UPDATE flag on
-		 * a match.
+		 * This also removes the UPDATE flag on a match; otherwise
+		 * we will end up overwriting local changes in the work tree.
 		 */
 		if (same(old, merge)) {
 			copy_cache_entry(merge, old);
+			update = 0;
 		} else {
 			if (verify_uptodate(old, o))
 				return -1;
@@ -617,7 +620,7 @@ static int merged_entry(struct cache_entry *merge, struct cache_entry *old,
 		invalidate_ce_path(merge, o);
 	}
 
-	add_entry(o, merge, CE_UPDATE, CE_STAGEMASK);
+	add_entry(o, merge, update, CE_STAGEMASK);
 	return 1;
 }