I believe one piece still missing is the full functionality provided by the index in Git. There is the record extension, but IIRC that doesn't emulate one of the index's greatest features: during a merge/rebase, non-conflicting changes are already staged, so "git diff" shows only conflicts (and "git diff --cached" shows those changes that merged successfully).

Mercurial does this, and you only have to manually resolve conflicting changes during a merge/rebase. See here

http://mercurial.selenic.com/wiki/MergeToolConfiguration

I think you might have tried this on a instance of Mercurial where the "premerge" option of the merge tool has been turned off for some reason..