Brendan, could it be easy like the following ?

diff --git a/hgext/imerge.py b/hgext/imerge.py
--- a/hgext/imerge.py
+++ b/hgext/imerge.py
@@ -117,11 +117,6 @@
         (fd, fo) = self.conflicts[fn]
         p1, p2 = self.wctx.parents()
 
-        # this could be greatly improved
-        realmerge = os.environ.get('HGMERGE')
-        if not interactive:
-            os.environ['HGMERGE'] = 'merge'
-
         # The filemerge ancestor algorithm does not work if self.wctx
         # already has two parents (in normal merge it doesn't yet). But
         # this is very dirty.
@@ -131,10 +126,6 @@
             return filemerge.filemerge(self.repo, fn, fd, fo, self.wctx, p2)
         finally:
             self.wctx._parents.append(p2)
-            if realmerge:
-                os.environ['HGMERGE'] = realmerge
-            elif not interactive:
-                del os.environ['HGMERGE']
 
     def start(self, rev=None):
         _filemerge = filemerge.filemerge


It passes the unit test and a couple of tests. But I was using the extension for
the first time, and have no new style tools configured just the usual ui.merge
with a custom merge script.