Java specification states that the encoding of the properties file must be ISO-8859-1. In our project, the encoding of the properties file is ISO-8859-1 and all the other files UTF-8 (e.g. JAVA, HTML, JSP). This different encodings in different files -approach makes merging difficult.
When I do a merge, and have conflicts in Java files (utf-8), the the merge view is ok.
When I do a merge, and have conflicts in properties files (iso-8859-1), then the left pane ("current") is in iso-8859-1, but the right pane is utf-8 displayed in iso-8859-1. So, I get conflicts/changes on all the lines that contain iso-8859-1 character codes that are in range 127-255. It looks like the plugin is running "hg cat" with incorrect character set.
So, I assume that the fix would be such that the plugin should read the file encodings from .settings/org.eclipse.core.resources.prefs and use those encodings when issuing the "hg cat" command (this applies also to the "compare with current" and "compare with each other" -commands in the history view).