Index: subversion/libsvn_wc/merge.c
===================================================================
--- subversion/libsvn_wc/merge.c	(revision 1349217)
+++ subversion/libsvn_wc/merge.c	(working copy)
@@ -929,6 +929,8 @@
  * The merge is trivial if the file at LEFT_ABSPATH equals the detranslated
  * form of the target at DETRANSLATED_TARGET_ABSPATH, because in this case
  * the content of RIGHT_ABSPATH can be copied to the target.
+ * Another trivial case is if DETRANSLATED_TARGET_ABSPATH is identical to 
+ * RIGHT_ABSPATH - we can just accept the existing content as merge result.
  * On success, set *MERGE_OUTCOME to SVN_WC_MERGE_MERGED in case the
  * target was changed, or to SVN_WC_MERGE_UNCHANGED if the target was not
  * changed. Install work queue items allocated in RESULT_POOL in *WORK_ITEMS.
@@ -992,6 +994,22 @@
 
       return SVN_NO_ERROR;
     }
+  else
+    {
+      /* Check whether the existing version equals the right side. If it 
+       * does, the locally existing, changed file equals the incoming
+       * file, so there is no conflict. For binary files, we historically
+       * conflicted them needlessly, while merge_text_file figured it out 
+       * eventually and returned svn_wc_merge_unchanged for them, which
+       * is what we do here. */
+      SVN_ERR(svn_io_files_contents_same_p(&same_contents, detranslated_target_abspath,
+                                           right_abspath, scratch_pool));
+      if (same_contents)
+        {
+          *merge_outcome = svn_wc_merge_unchanged;
+          return SVN_NO_ERROR;
+        }
+    }
 
   *merge_outcome = svn_wc_merge_no_merge;
   return SVN_NO_ERROR;
Index: subversion/tests/cmdline/update_tests.py
===================================================================
--- subversion/tests/cmdline/update_tests.py	(revision 1349217)
+++ subversion/tests/cmdline/update_tests.py	(working copy)
@@ -310,7 +310,6 @@
 
 #----------------------------------------------------------------------
 
-@XFail()
 @Issue(4128)
 def update_binary_file_3(sbox):
   "update locally modified file to equal versions"
@@ -367,7 +366,7 @@
 
   # Create expected output tree for an update to rev 2.
   expected_output = svntest.wc.State(wc_dir, {
-    'A/theta' : Item(status='  '),
+    'A/theta' : Item(status='G '),
     })
 
   # Create expected disk tree for the update