diff --git a/hgext/largefiles/overrides.py b/hgext/largefiles/overrides.py
--- a/hgext/largefiles/overrides.py
+++ b/hgext/largefiles/overrides.py
@@ -1432,7 +1432,9 @@
         lfdirstate.write()
 
         oldstandins = lfutil.getstandinsstate(repo)
-
+        # largefiles is not a good candidate for in-memory merge (large files,
+        # custom dirstate, matcher usage) so always force an on-disk merge.
+        kwargs["ondisk"] = True
         result = orig(repo, node, branchmerge, force, *args, **kwargs)
 
         newstandins = lfutil.getstandinsstate(repo)
diff --git a/mercurial/merge.py b/mercurial/merge.py
--- a/mercurial/merge.py
+++ b/mercurial/merge.py
@@ -1467,7 +1467,7 @@
 
 def update(repo, node, branchmerge, force, ancestor=None,
            mergeancestor=False, labels=None, matcher=None, mergeforce=False,
-           updatecheck=None):
+           updatecheck=None, ondisk=True):
     """
     Perform a merge between the working directory and the given node
 
@@ -1516,6 +1516,8 @@
     3 = abort: uncommitted changes (checked in commands.py)
 
     Return the same tuple as applyupdates().
+
+    This function might run parts of the merge in memory if ``ondisk=False``.
     """
     # Avoid cycle.
     from . import sparse