diff --git a/mercurial/templater.py b/mercurial/templater.py
--- a/mercurial/templater.py
+++ b/mercurial/templater.py
@@ -245,14 +245,16 @@
     except error.ParseError as inst:
         if len(inst.args) > 1:  # has location
             loc = inst.args[1]
-            # TODO: Opportunity for improvement! If there is a newline in the
-            # template, this hint does not point to the right place, so skip.
-            if '\n' not in tmpl:
-                # We want the caret to point to the place in the template that
-                # failed to parse, but in a hint we get a open paren at the
-                # start. Therefore, we print "loc" spaces (instead of "loc - 1")
-                # to line up the caret with the location of the error.
-                inst.hint = tmpl + '\n' + ' ' * (loc) + '^ ' + _('here')
+            # if there are newlines in front of the location of the error,
+            # offset the caret location by that number, since we will next
+            # replace newlines with the two-char literal r'\n'.
+            offset = tmpl[:loc].count('\n')
+            tmpl = tmpl.replace('\n', r'\n')
+            # We want the caret to point to the place in the template that
+            # failed to parse, but in a hint we get a open paren at the
+            # start. Therefore, we print "loc" spaces (instead of "loc - 1")
+            # to line up the caret with the location of the error.
+            inst.hint = tmpl + '\n' + ' ' * (loc + offset) + '^ ' + _('here')
         raise
     yield ('end', None, pos)
 
diff --git a/tests/test-parse-errors.t b/tests/test-parse-errors.t
--- a/tests/test-parse-errors.t
+++ b/tests/test-parse-errors.t
@@ -16,4 +16,7 @@
   > {shortest(node}
   > line4\nline5'
   hg: parse error at 28: unexpected token: end
+  (line 1\nline2\n{shortest(node}\nline4
+                                ^ here)
   [255]
+