diff --git a/komparemodellist.cpp b/komparemodellist.cpp
--- a/komparemodellist.cpp
+++ b/komparemodellist.cpp
@@ -268,7 +268,7 @@
 	if ( !blendOriginalIntoModelList( m_info->localSource ) )
 	{
 		qCDebug(LIBKOMPAREDIFF2) << "Oops cant blend original file into modellist : " << m_info->localSource;
-		emit( i18n( "<qt>There were problems applying the diff <b>%1</b> to the file <b>%2</b>.</qt>", m_info->destination.url(), m_info->source.url() ) );
+		emit error( i18n( "<qt>There were problems applying the diff <b>%1</b> to the file <b>%2</b>.</qt>", m_info->source.url(), m_info->destination.url() ) );
 		return false;
 	}
 
@@ -295,7 +295,7 @@
 	{
 		// Trouble blending the original into the model
 		qCDebug(LIBKOMPAREDIFF2) << "Oops cant blend original dir into modellist : " << m_info->localSource;
-		emit error( i18n( "<qt>There were problems applying the diff <b>%1</b> to the folder <b>%2</b>.</qt>", m_info->destination.url(), m_info->source.url() ) );
+		emit error( i18n( "<qt>There were problems applying the diff <b>%1</b> to the folder <b>%2</b>.</qt>", m_info->source.url(), m_info->destination.url() ) );
 		return false;
 	}
 
@@ -987,12 +987,41 @@
 	return 0;
 }
 
+QString adjustDepthInPath(const QString localURL, const QString sourcePath, const QString destinationPath)
+{
+	QString basePath = localURL;
+	if( !basePath.endsWith("/") )
+	{
+		basePath += "/";
+	}
+
+	QStringList sourcePathParts = sourcePath.split("/", QString::SkipEmptyParts);
+	QStringList destinationPathParts = destinationPath.split("/", QString::SkipEmptyParts);
+
+	// Scan source and destination paths' parts going backward and keeping only the common parts
+	int sourceIdx = sourcePathParts.size() - 1;
+	int destinationIdx = destinationPathParts.size() - 1;
+	QString commonPath = "";
+
+	while( sourceIdx >= 0 && destinationIdx >= 0 && sourcePathParts.at( sourceIdx ) == destinationPathParts.at( destinationIdx ) )
+	{
+		if(!commonPath.isEmpty())
+			commonPath = "/" + commonPath;
+
+		commonPath = sourcePathParts.at( sourceIdx ) + commonPath;
+		sourceIdx--;
+		destinationIdx--;
+	};
+
+	return basePath + commonPath;
+}
+
 bool KompareModelList::blendOriginalIntoModelList( const QString& localURL )
 {
 	qCDebug(LIBKOMPAREDIFF2) << "Hurrah we are blending...";
 	QFileInfo fi( localURL );
 
-	bool result = false;
+	bool result = true;
 	DiffModel* model;
 
 	QString fileContents;
@@ -1009,20 +1038,22 @@
 			qCDebug(LIBKOMPAREDIFF2) << "Model : " << model;
 			QString filename = model->source();
 			if ( !filename.startsWith( localURL ) )
-				filename = QDir(localURL).filePath(filename);
+			{
+				filename = adjustDepthInPath(localURL, model->source(), model->destination());
+			}
 			QFileInfo fi2( filename );
 			if ( fi2.exists() )
 			{
 				qCDebug(LIBKOMPAREDIFF2) << "Reading from: " << filename;
 				fileContents = readFile( filename );
-				result = blendFile( model, fileContents );
+				result = result && blendFile( model, fileContents );
 			}
 			else
 			{
 				qCDebug(LIBKOMPAREDIFF2) << "File " << filename << " does not exist !";
 				qCDebug(LIBKOMPAREDIFF2) << "Assume empty file !";
 				fileContents.truncate( 0 );
-				result = blendFile( model, fileContents );
+				result = result && blendFile( model, fileContents );
 			}
 		}
 		qCDebug(LIBKOMPAREDIFF2) << "End of Blend Dir";
@@ -1033,7 +1064,7 @@
 		qCDebug(LIBKOMPAREDIFF2) << "Reading from: " << localURL;
 		fileContents = readFile( localURL );
 
-		result = blendFile( (*m_models)[ 0 ], fileContents );
+		result = result && blendFile( (*m_models)[ 0 ], fileContents );
 		qCDebug(LIBKOMPAREDIFF2) << "End of Blend File";
 	}
 
@@ -1042,6 +1073,7 @@
 
 bool KompareModelList::blendFile( DiffModel* model, const QString& fileContents )
 {
+	bool hasConflicts = false;
 	if ( !model )
 	{
 		qCDebug(LIBKOMPAREDIFF2) << "**** model is null :(";
@@ -1053,13 +1085,12 @@
 	int srcLineNo = 1, destLineNo = 1;
 
 	QStringList list = split( fileContents );
-	QLinkedList<QString> lines;
+	QStringList lines;
 	foreach (const QString &str, list) {
 		lines.append(str);
 	}
 
-	QLinkedList<QString>::ConstIterator linesIt = lines.begin();
-	QLinkedList<QString>::ConstIterator lEnd    = lines.end();
+	int lineIndex = 0;
 
 	DiffHunkList* hunks = model->hunks();
 	qCDebug(LIBKOMPAREDIFF2) << "Hunks in hunklist: " << hunks->count();
@@ -1077,6 +1108,22 @@
 	{
 		// Do we need to insert a new hunk before this one ?
 		DiffHunk* hunk = *hunkIt;
+
+		// In case we are blending diff with files, check for conflicts
+		if( m_info->mode == Kompare::BlendingDir || m_info->mode == Kompare::BlendingFile )
+		{
+			for (int i = 0; i < hunk->differences().count(); ++i) {
+				Difference *diff = hunk->differences().at(i);
+				for (int j = 0; j < diff->destinationLineCount(); ++j) {
+					if (lines.size() > diff->destinationLineNumber() + j - 1 &&
+						lines.at(diff->destinationLineNumber() + j - 1) != diff->destinationLineAt(j)->string()) {
+						diff->setConflict(true);
+						hasConflicts = true;
+					}
+				}
+			}
+		}
+
 		if ( srcLineNo < hunk->sourceLineNumber() )
 		{
 			newHunk = new DiffHunk( srcLineNo, destLineNo, "", DiffHunk::AddedByBlend );
@@ -1088,29 +1135,29 @@
 
 			newHunk->add( newDiff );
 
-			while ( srcLineNo < hunk->sourceLineNumber() && linesIt != lEnd )
+			while ( destLineNo < hunk->destinationLineNumber() && lineIndex < lines.size() )
 			{
-				newDiff->addSourceLine( *linesIt );
-				newDiff->addDestinationLine( *linesIt );
+				newDiff->addSourceLine( lines.at(lineIndex) );
+				newDiff->addDestinationLine( lines.at(lineIndex) );
 				srcLineNo++;
 				destLineNo++;
-				++linesIt;
+				++lineIndex;
 			}
 		}
 
 		// Now we add the linecount difference for the hunk that follows
-		int size = hunk->sourceLineCount();
+		int size = hunk->destinationLineCount();
 
 		for ( int i = 0; i < size; ++i )
 		{
-			++linesIt;
+			++lineIndex;
 		}
 
-		srcLineNo += size;
-		destLineNo += hunk->destinationLineCount();
+		srcLineNo += hunk->sourceLineCount();
+		destLineNo += size;
 	}
 
-	if ( linesIt != lEnd )
+	if ( lineIndex < lines.size() )
 	{
 		newHunk = new DiffHunk( srcLineNo, destLineNo, "", DiffHunk::AddedByBlend );
 
@@ -1120,11 +1167,11 @@
 
 		newHunk->add( newDiff );
 
-		while ( linesIt != lEnd )
+		while ( lineIndex < lines.size() )
 		{
-			newDiff->addSourceLine( *linesIt );
-			newDiff->addDestinationLine( *linesIt );
-			++linesIt;
+			newDiff->addSourceLine( lines.at(lineIndex) );
+			newDiff->addDestinationLine( lines.at(lineIndex) );
+			++lineIndex;
 		}
 	}
 #if 0
@@ -1274,7 +1321,7 @@
 
 	m_selectedDifference = m_selectedModel->firstDifference();
 
-	return true;
+	return !hasConflicts;
 }
 
 void KompareModelList::show()