diff --git a/mercurial/copies.py b/mercurial/copies.py
--- a/mercurial/copies.py
+++ b/mercurial/copies.py
@@ -1096,11 +1096,17 @@
             b"   discovered dir src: '%s' -> dst: '%s'\n" % (d, dirmove[d])
         )
 
+    # Sort the directories in reverse order, so we find children first
+    # For example, if dir1/ was renamed to dir2/, and dir1/subdir1/
+    # was renamed to dir2/subdir2/, we want to move dir1/subdir1/file
+    # to dir2/subdir2/file (not dir2/subdir1/file)
+    dirmove_children_first = sorted(dirmove, reverse=True)
+
     movewithdir = {}
     # check unaccounted nonoverlapping files against directory moves
     for f in addedfilesfn():
         if f not in fullcopy:
-            for d in dirmove:
+            for d in dirmove_children_first:
                 if f.startswith(d):
                     # new file added in a directory that was moved, move it
                     df = dirmove[d] + f[len(d) :]
diff --git a/tests/test-rename-dir-merge.t b/tests/test-rename-dir-merge.t
--- a/tests/test-rename-dir-merge.t
+++ b/tests/test-rename-dir-merge.t
@@ -294,3 +294,45 @@
   M t/t
   R a/s
   R a/t
+
+  $ cd ..
+
+
+Test that files are moved to a new directory based on the path prefix that
+matches the most. dir1/ below gets renamed to dir2/, and dir1/subdir1/ gets
+renamed to dir2/subdir2/. We want dir1/subdir1/newfile to move to
+dir2/subdir2/ (not to dir2/subdir1/ as we would infer based on just the rename
+of dir1/ to dir2/).
+
+  $ hg init nested-renames
+  $ cd nested-renames
+  $ mkdir dir1
+  $ echo a > dir1/file1
+  $ echo b > dir1/file2
+  $ mkdir dir1/subdir1
+  $ echo c > dir1/subdir1/file3
+  $ echo d > dir1/subdir1/file4
+  $ hg ci -Aqm initial
+  $ hg mv dir1 dir2
+  moving dir1/file1 to dir2/file1
+  moving dir1/file2 to dir2/file2
+  moving dir1/subdir1/file3 to dir2/subdir1/file3
+  moving dir1/subdir1/file4 to dir2/subdir1/file4
+  $ hg mv dir2/subdir1 dir2/subdir2
+  moving dir2/subdir1/file3 to dir2/subdir2/file3
+  moving dir2/subdir1/file4 to dir2/subdir2/file4
+  $ hg ci -m 'move dir1/ to dir2/ and dir1/subdir1/ to dir2/subdir2/'
+  $ hg co 0
+  4 files updated, 0 files merged, 4 files removed, 0 files unresolved
+  $ echo e > dir1/subdir1/file5
+  $ hg ci -Aqm 'add file in dir1/subdir1/'
+  $ hg merge 1
+  5 files updated, 0 files merged, 4 files removed, 0 files unresolved
+  (branch merge, don't forget to commit)
+  $ hg files
+  dir2/file1
+  dir2/file2
+  dir2/subdir2/file3
+  dir2/subdir2/file4
+  dir2/subdir2/file5
+  $ cd ..