diff --git a/hgext/lfs/wrapper.py b/hgext/lfs/wrapper.py
--- a/hgext/lfs/wrapper.py
+++ b/hgext/lfs/wrapper.py
@@ -46,7 +46,13 @@
     '''Wrap server command to announce lfs server capability'''
     caps = orig(repo, proto)
     if util.safehasattr(repo.svfs, 'lfslocalblobstore'):
-        # XXX: change to 'lfs=serve' when separate git server isn't required?
+        # Advertise a slightly different capability when lfs is *required*, so
+        # that the client knows it MUST load the extension.  If lfs is not
+        # required on the server, there's no reason to autoload the extension
+        # on the client.
+        if b'lfs' in repo.requirements:
+            caps.append('lfs-serve')
+
         caps.append('lfs')
     return caps
 
diff --git a/mercurial/hg.py b/mercurial/hg.py
--- a/mercurial/hg.py
+++ b/mercurial/hg.py
@@ -578,6 +578,23 @@
 
         createopts['narrowfiles'] = True
 
+    if srcpeer.capable(b'lfs-serve'):
+        # Repository creation honors the config if it disabled the extension, so
+        # we can't just announce that lfs will be enabled.  This check avoids
+        # saying that lfs will be enabled, and then saying it's an unknown
+        # feature.  The lfs creation option is set in either case so that a
+        # requirement is added.  If the extension is explicitly disabled but the
+        # requirement is set, the clone aborts early, before transferring any
+        # data.
+        createopts['lfs'] = True
+
+        if extensions.disabledext('lfs'):
+            ui.status(_('(remote is using large file support (lfs), but it is '
+                        'explicitly disabled in the local configuration)\n'))
+        else:
+            ui.status(_('(remote is using large file support (lfs); lfs will '
+                        'be enabled for this repository)\n'))
+
     shareopts = shareopts or {}
     sharepool = shareopts.get('pool')
     sharenamemode = shareopts.get('mode')
diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -2895,6 +2895,9 @@
     if createopts.get('narrowfiles'):
         requirements.add(repository.NARROW_REQUIREMENT)
 
+    if createopts.get('lfs'):
+        requirements.add('lfs')
+
     return requirements
 
 def filterknowncreateopts(ui, createopts):
@@ -2912,6 +2915,7 @@
     they know how to handle.
     """
     known = {
+        'lfs',
         'backend',
         'narrowfiles',
         'sharedrepo',
@@ -2931,6 +2935,9 @@
 
     backend
        The storage backend to use.
+    lfs
+       Repository will be created with ``lfs`` requirement. The lfs extension
+       will automatically be loaded when the repository is accessed.
     narrowfiles
        Set up repository to support narrow file storage.
     sharedrepo
diff --git a/tests/test-lfs-serve-access.t b/tests/test-lfs-serve-access.t
--- a/tests/test-lfs-serve-access.t
+++ b/tests/test-lfs-serve-access.t
@@ -42,6 +42,7 @@
 Downloads fail...
 
   $ hg clone http://localhost:$HGPORT httpclone
+  (remote is using large file support (lfs); lfs will be enabled for this repository)
   requesting all changes
   adding changesets
   adding manifests
@@ -76,6 +77,7 @@
   $ hg clone --debug http://localhost:$HGPORT/subdir/mount/point cloned2
   using http://localhost:$HGPORT/subdir/mount/point
   sending capabilities command
+  (remote is using large file support (lfs); lfs will be enabled for this repository)
   query 1; heads
   sending batch command
   requesting all changes
@@ -88,7 +90,6 @@
   adding file changes
   adding lfs.bin revisions
   added 1 changesets with 1 changes to 1 files
-  calling hook pretxnchangegroup.lfs: hgext.lfs.checkrequireslfs
   bundle2-input-part: total payload size 648
   bundle2-input-part: "listkeys" (params: 1 mandatory) supported
   bundle2-input-part: "phase-heads" supported
@@ -239,6 +240,7 @@
 Test an I/O error in localstore.verify() (Batch API) with GET
 
   $ hg clone http://localhost:$HGPORT1 httpclone2
+  (remote is using large file support (lfs); lfs will be enabled for this repository)
   requesting all changes
   adding changesets
   adding manifests
diff --git a/tests/test-lfs-serve.t b/tests/test-lfs-serve.t
--- a/tests/test-lfs-serve.t
+++ b/tests/test-lfs-serve.t
@@ -304,10 +304,10 @@
   $ grep 'lfs' .hg/requires $SERVER_REQUIRES
   $TESTTMP/server/.hg/requires:lfs
 
-TODO: fail more gracefully.
-
-  $ hg clone -q http://localhost:$HGPORT $TESTTMP/client4_clone
-  abort: HTTP Error 500: Internal Server Error
+  $ hg clone http://localhost:$HGPORT $TESTTMP/client4_clone
+  (remote is using large file support (lfs), but it is explicitly disabled in the local configuration)
+  abort: repository requires features unknown to this Mercurial: lfs!
+  (see https://mercurial-scm.org/wiki/MissingRequirement for more information)
   [255]
   $ grep 'lfs' $TESTTMP/client4_clone/.hg/requires $SERVER_REQUIRES
   grep: $TESTTMP/client4_clone/.hg/requires: $ENOENT$
@@ -661,8 +661,6 @@
   $ cat $TESTTMP/errors.log | grep '^[A-Z]'
   Traceback (most recent call last):
   ValueError: no common changegroup version
-  Traceback (most recent call last):
-  ValueError: no common changegroup version
 #else
   $ cat $TESTTMP/errors.log
 #endif