diff --git a/merge-recursive.c b/merge-recursive.c
index 3e1bc3e07f..d6f0582238 100644
--- a/merge-recursive.c
+++ b/merge-recursive.c
@@ -1116,21 +1116,13 @@ static int process_entry(struct merge_options *o,
 				 o->branch1, o->branch2);
 
 		clean_merge = mfi.clean;
-		if (mfi.clean)
-			update_file(o, 1, mfi.sha, mfi.mode, path);
-		else if (S_ISGITLINK(mfi.mode))
-			output(o, 1, "CONFLICT (submodule): Merge conflict in %s "
-			       "- needs %s", path, sha1_to_hex(b.sha1));
-		else {
+		if (!mfi.clean) {
+			if (S_ISGITLINK(mfi.mode))
+				reason = "submodule";
 			output(o, 1, "CONFLICT (%s): Merge conflict in %s",
 					reason, path);
-
-			if (o->call_depth)
-				update_file(o, 0, mfi.sha, mfi.mode, path);
-			else
-				update_file_flags(o, mfi.sha, mfi.mode, path,
-					      0 /* update_cache */, 1 /* update_working_directory */);
 		}
+		update_file(o, mfi.clean, mfi.sha, mfi.mode, path);
 	} else if (!o_sha && !a_sha && !b_sha) {
 		/*
 		 * this entry was deleted altogether. a_mode == 0 means
diff --git a/t/t7405-submodule-merge.sh b/t/t7405-submodule-merge.sh
new file mode 100755
index 0000000000..aa6c44ce4f
--- /dev/null
+++ b/t/t7405-submodule-merge.sh
@@ -0,0 +1,74 @@
+#!/bin/sh
+
+test_description='merging with submodules'
+
+. ./test-lib.sh
+
+#
+# history
+#
+#        a --- c
+#      /   \ /
+# root      X
+#      \   / \
+#        b --- d
+#
+
+test_expect_success setup '
+
+	mkdir sub &&
+	(cd sub &&
+	 git init &&
+	 echo original > file &&
+	 git add file &&
+	 test_tick &&
+	 git commit -m sub-root) &&
+	git add sub &&
+	test_tick &&
+	git commit -m root &&
+
+	git checkout -b a master &&
+	(cd sub &&
+	 echo A > file &&
+	 git add file &&
+	 test_tick &&
+	 git commit -m sub-a) &&
+	git add sub &&
+	test_tick &&
+	git commit -m a &&
+
+	git checkout -b b master &&
+	(cd sub &&
+	 echo B > file &&
+	 git add file &&
+	 test_tick &&
+	 git commit -m sub-b) &&
+	git add sub &&
+	test_tick &&
+	git commit -m b
+
+	git checkout -b c a &&
+	git merge -s ours b &&
+
+	git checkout -b d b &&
+	git merge -s ours a
+'
+
+test_expect_failure 'merging with modify/modify conflict' '
+
+	git checkout -b test1 a &&
+	test_must_fail git merge b &&
+	test -f .git/MERGE_MSG &&
+	git diff
+
+'
+
+test_expect_success 'merging with a modify/modify conflict between merge bases' '
+
+	git reset --hard HEAD &&
+	git checkout -b test2 c &&
+	git merge d
+
+'
+
+test_done