diff --git a/org.eclipse.jgit.test/tst/org/eclipse/jgit/lib/IndexDiffTest.java b/org.eclipse.jgit.test/tst/org/eclipse/jgit/lib/IndexDiffTest.java
index 51ba5f13e..64e72e8fc 100644
--- a/org.eclipse.jgit.test/tst/org/eclipse/jgit/lib/IndexDiffTest.java
+++ b/org.eclipse.jgit.test/tst/org/eclipse/jgit/lib/IndexDiffTest.java
@@ -467,6 +467,53 @@ public void testUntrackedFolders() throws Exception {
 				diff.getUntrackedFolders());
 	}
 
+	/**
+	 * Test that ignored folders aren't listed as untracked
+	 *
+	 * @throws Exception
+	 */
+	@Test
+	public void testUntrackedNotIgnoredFolders() throws Exception {
+		Git git = new Git(db);
+
+		IndexDiff diff = new IndexDiff(db, Constants.HEAD,
+				new FileTreeIterator(db));
+		diff.diff();
+		assertEquals(Collections.EMPTY_SET, diff.getUntrackedFolders());
+
+		writeTrashFile("readme", "");
+		writeTrashFile("sr/com/X.java", "");
+		writeTrashFile("src/com/A.java", "");
+		writeTrashFile("src/org/B.java", "");
+		writeTrashFile("srcs/org/Y.java", "");
+		writeTrashFile("target/com/A.java", "");
+		writeTrashFile("target/org/B.java", "");
+		writeTrashFile(".gitignore", "/target\n/sr");
+
+		git.add().addFilepattern("readme").addFilepattern(".gitignore")
+				.addFilepattern("srcs/").call();
+		git.commit().setMessage("initial").call();
+
+		diff = new IndexDiff(db, Constants.HEAD, new FileTreeIterator(db));
+		diff.diff();
+		assertEquals(new HashSet<String>(Arrays.asList("src")),
+				diff.getUntrackedFolders());
+
+		git.add().addFilepattern("src").call();
+		writeTrashFile("sr/com/X1.java", "");
+		writeTrashFile("src/tst/A.java", "");
+		writeTrashFile("src/tst/B.java", "");
+		writeTrashFile("srcs/com/Y1.java", "");
+		deleteTrashFile(".gitignore");
+
+		diff = new IndexDiff(db, Constants.HEAD, new FileTreeIterator(db));
+		diff.diff();
+		assertEquals(
+				new HashSet<String>(Arrays.asList("srcs/com", "sr", "src/tst",
+						"target")),
+				diff.getUntrackedFolders());
+	}
+
 	@Test
 	public void testAssumeUnchanged() throws Exception {
 		Git git = new Git(db);
diff --git a/org.eclipse.jgit/src/org/eclipse/jgit/treewalk/filter/IndexDiffFilter.java b/org.eclipse.jgit/src/org/eclipse/jgit/treewalk/filter/IndexDiffFilter.java
index 1b231cce9..c3323b868 100644
--- a/org.eclipse.jgit/src/org/eclipse/jgit/treewalk/filter/IndexDiffFilter.java
+++ b/org.eclipse.jgit/src/org/eclipse/jgit/treewalk/filter/IndexDiffFilter.java
@@ -132,6 +132,7 @@ public boolean include(TreeWalk tw) throws MissingObjectException,
 			IncorrectObjectTypeException, IOException {
 		final int cnt = tw.getTreeCount();
 		final int wm = tw.getRawMode(workingTree);
+		WorkingTreeIterator wi = workingTree(tw);
 		String path = tw.getPathString();
 
 		DirCacheIterator di = tw.getTree(dirCache, DirCacheIterator.class);
@@ -148,7 +149,8 @@ public boolean include(TreeWalk tw) throws MissingObjectException,
 			// contain only untracked files and add it to
 			// untrackedParentFolders. If we later find tracked files we will
 			// remove it from this list
-			if (FileMode.TREE.equals(wm)) {
+			if (FileMode.TREE.equals(wm)
+					&& !(honorIgnores && wi.isEntryIgnored())) {
 				// Clean untrackedParentFolders. This potentially moves entries
 				// from untrackedParentFolders to untrackedFolders
 				copyUntrackedFolders(path);
@@ -179,7 +181,6 @@ public boolean include(TreeWalk tw) throws MissingObjectException,
 		// we can avoid returning a result here, but only if its not in any
 		// other tree.
 		final int dm = tw.getRawMode(dirCache);
-		WorkingTreeIterator wi = workingTree(tw);
 		if (dm == FileMode.TYPE_MISSING) {
 			if (honorIgnores && wi.isEntryIgnored()) {
 				ignoredPaths.add(wi.getEntryPathString());