Index: mercurial/configitems.py
===================================================================
--- mercurial/configitems.py
+++ mercurial/configitems.py
@@ -305,6 +305,9 @@
 coreconfigitem('merge', 'followcopies',
     default=True,
 )
+coreconfigitem('merge', 'on-failure',
+    default='continue',
+)
 coreconfigitem('merge', 'preferancestor',
         default=lambda: ['*'],
 )
Index: mercurial/filemerge.py
===================================================================
--- mercurial/filemerge.py
+++ mercurial/filemerge.py
@@ -721,6 +721,20 @@
         if not r and back is not None:
             util.unlink(back)
 
+def _haltmerge():
+    msg = _('merge halted after failed merge (see hg resolve)')
+    raise error.InterventionRequired(msg)
+
+def _onfilemergefailure(ui):
+    action = ui.config('merge', 'on-failure')
+    if action == 'prompt':
+        msg = _('continue merge operation (yn)?' '$$ &Yes $$ &No')
+        if ui.promptchoice(msg, 0) == 1:
+            _haltmerge()
+    if action == 'halt':
+        _haltmerge()
+    # default action is 'continue', in which case we neither prompt nor halt
+
 def _check(repo, r, ui, tool, fcd, files):
     fd = fcd.path()
     unused, unused, unused, back = files
Index: mercurial/help/config.txt
===================================================================
--- mercurial/help/config.txt
+++ mercurial/help/config.txt
@@ -1239,6 +1239,17 @@
    different contents. Similar to ``merge.checkignored``, except for files that
    are not ignored. (default: ``abort``)
 
+``on-failure``
+   When set to ``continue`` (the default), the merge process attempts to
+   merge all unresolved files using the merge chosen tool, regardless of
+   whether previous file merge attempts during the process succeeded or not.
+   Setting this to ``prompt`` will prompt after any merge failure continue
+   or halt the merge process. Setting this to ``halt`` will automatically
+   halt the merge process on any merge tool failure. The merge process
+   can be restarted by using the ``resolve`` command. When a merge is
+   halted, the repository is left in a normal ``unresolved`` merge state.
+   (default: ``continue``)
+
 ``merge-patterns``
 ------------------