diff --git a/mercurial/filemerge.py b/mercurial/filemerge.py
--- a/mercurial/filemerge.py
+++ b/mercurial/filemerge.py
@@ -532,6 +532,33 @@
     return _imerge(repo, mynode, orig, fcd, fco, fca, toolconf, files, labels)
 
 
+@internaltool(
+    b'mergediff',
+    fullmerge,
+    _(
+        b"warning: conflicts while merging %s! "
+        b"(edit, then use 'hg resolve --mark')\n"
+    ),
+    precheck=_mergecheck,
+)
+def _imerge_diff(
+    repo, mynode, orig, fcd, fco, fca, toolconf, files, labels=None
+):
+    """
+    Uses the internal non-interactive simple merge algorithm for merging
+    files. It will fail if there are any conflicts and leave markers in
+    the partially merged file. The marker will have two sections, one with the
+    content from one side of the merge, and one with a diff from the base
+    content to the content on the other side. (experimental)"""
+    if not labels:
+        labels = _defaultconflictlabels
+    if len(labels) < 3:
+        labels.append(b'base')
+    return _merge(
+        repo, mynode, orig, fcd, fco, fca, toolconf, files, labels, b'mergediff'
+    )
+
+
 def _imergeauto(
     repo,
     mynode,
diff --git a/mercurial/simplemerge.py b/mercurial/simplemerge.py
--- a/mercurial/simplemerge.py
+++ b/mercurial/simplemerge.py
@@ -455,6 +455,68 @@
     return ctx.node() != nodemod.nullid
 
 
+def _mergediff(m3, name_a, name_b, name_base):
+    lines = []
+    conflicts = False
+    for group in m3.merge_groups():
+        if group[0] == b'conflict':
+            base_lines, a_lines, b_lines = group[1:]
+            base_text = b''.join(base_lines)
+            b_blocks = list(
+                mdiff.allblocks(
+                    base_text,
+                    b''.join(b_lines),
+                    lines1=base_lines,
+                    lines2=b_lines,
+                )
+            )
+            a_blocks = list(
+                mdiff.allblocks(
+                    base_text,
+                    b''.join(a_lines),
+                    lines1=base_lines,
+                    lines2=b_lines,
+                )
+            )
+
+            def matching_lines(blocks):
+                return sum(
+                    block[1] - block[0]
+                    for block, kind in blocks
+                    if kind == b'='
+                )
+
+            def diff_lines(blocks, lines1, lines2):
+                for block, kind in blocks:
+                    if kind == b'=':
+                        for line in lines1[block[0] : block[1]]:
+                            yield b' ' + line
+                    else:
+                        for line in lines1[block[0] : block[1]]:
+                            yield b'-' + line
+                        for line in lines2[block[2] : block[3]]:
+                            yield b'+' + line
+
+            lines.append(b"<<<<<<<\n")
+            if matching_lines(a_blocks) < matching_lines(b_blocks):
+                lines.append(b"======= %s\n" % name_a)
+                lines.extend(a_lines)
+                lines.append(b"------- %s\n" % name_base)
+                lines.append(b"+++++++ %s\n" % name_b)
+                lines.extend(diff_lines(b_blocks, base_lines, b_lines))
+            else:
+                lines.append(b"------- %s\n" % name_base)
+                lines.append(b"+++++++ %s\n" % name_a)
+                lines.extend(diff_lines(a_blocks, base_lines, a_lines))
+                lines.append(b"======= %s\n" % name_b)
+                lines.extend(b_lines)
+            lines.append(b">>>>>>>\n")
+            conflicts = True
+        else:
+            lines.extend(group[1])
+    return lines, conflicts
+
+
 def simplemerge(ui, localctx, basectx, otherctx, **opts):
     """Performs the simplemerge algorithm.
 
@@ -499,9 +561,15 @@
         extrakwargs[b'name_base'] = name_base
         extrakwargs[b'minimize'] = False
 
-    lines = m3.merge_lines(
-        name_a=name_a, name_b=name_b, **pycompat.strkwargs(extrakwargs)
-    )
+    if mode == b'mergediff':
+        lines, conflicts = _mergediff(m3, name_a, name_b, name_base)
+    else:
+        lines = list(
+            m3.merge_lines(
+                name_a=name_a, name_b=name_b, **pycompat.strkwargs(extrakwargs)
+            )
+        )
+        conflicts = m3.conflicts
 
     # merge flags if necessary
     flags = localctx.flags()
@@ -519,5 +587,5 @@
     else:
         localctx.write(mergedtext, flags)
 
-    if m3.conflicts and not mode == b'union':
+    if conflicts and not mode == b'union':
         return 1
diff --git a/relnotes/next b/relnotes/next
--- a/relnotes/next
+++ b/relnotes/next
@@ -25,6 +25,13 @@
 
 == New Experimental Features ==
 
+ * There is a new internal merge tool called `internal:mergediff` (can
+   be set as the value for the `merge` config in the `[ui]`
+   section). It resolves merges the same was as `internal:merge` and
+   `internal:merge3`, but it shows conflicts differently. Instead of
+   showing 2 or 3 snapshots of the conflicting pieces of code, it
+   shows one snapshot and a diff. This may be useful when at least one
+   side of the conflict is similar to the base.
 
 
 == Bug Fixes ==
diff --git a/tests/test-conflict.t b/tests/test-conflict.t
--- a/tests/test-conflict.t
+++ b/tests/test-conflict.t
@@ -280,6 +280,80 @@
   >>>>>>> merge rev
   Hop we are done.
 
+internal:mergediff
+
+  $ hg co -C 1
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  $ cat << EOF > a
+  > Small Mathematical Series.
+  > 1
+  > 2
+  > 3
+  > 4
+  > 4.5
+  > 5
+  > Hop we are done.
+  > EOF
+  $ hg co -m 2 -t internal:mergediff
+  merging a
+  warning: conflicts while merging a! (edit, then use 'hg resolve --mark')
+  0 files updated, 0 files merged, 0 files removed, 1 files unresolved
+  use 'hg resolve' to retry unresolved file merges
+  [1]
+  $ cat a
+  Small Mathematical Series.
+  1
+  2
+  3
+  <<<<<<<
+  ------- base
+  +++++++ working copy
+   4
+  +4.5
+   5
+  ======= destination
+  6
+  8
+  >>>>>>>
+  Hop we are done.
+Test the same thing as above but modify a bit more so we instead get the working
+copy in full and the diff from base to destination.
+  $ hg co -C 1
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  $ cat << EOF > a
+  > Small Mathematical Series.
+  > 1
+  > 2
+  > 3.5
+  > 4.5
+  > 5.5
+  > Hop we are done.
+  > EOF
+  $ hg co -m 2 -t internal:mergediff
+  merging a
+  warning: conflicts while merging a! (edit, then use 'hg resolve --mark')
+  0 files updated, 0 files merged, 0 files removed, 1 files unresolved
+  use 'hg resolve' to retry unresolved file merges
+  [1]
+  $ cat a
+  Small Mathematical Series.
+  1
+  2
+  <<<<<<<
+  ======= working copy
+  3.5
+  4.5
+  5.5
+  ------- base
+  +++++++ destination
+   3
+  -4
+  -5
+  +6
+  +8
+  >>>>>>>
+  Hop we are done.
+
 Add some unconflicting changes on each head, to make sure we really
 are merging, unlike :local and :other
 
diff --git a/tests/test-help.t b/tests/test-help.t
--- a/tests/test-help.t
+++ b/tests/test-help.t
@@ -2052,6 +2052,13 @@
         partially merged file. Marker will have three sections, one from each
         side of the merge and one for the base content.
   
+      ":mergediff"
+        Uses the internal non-interactive simple merge algorithm for merging
+        files. It will fail if there are any conflicts and leave markers in the
+        partially merged file. The marker will have two sections, one with the
+        content from one side of the merge, and one with a diff from the base
+        content to the content on the other side. (experimental)
+  
       ":other"
         Uses the other 'p2()' version of files as the merged version.