diff --git a/test/test_streamlayerformat.py b/test/test_streamlayerformat.py
index 5294f2095..4ec639126 100644
--- a/test/test_streamlayerformat.py
+++ b/test/test_streamlayerformat.py
@@ -310,5 +310,32 @@ class TestStreamLayerMerger(unittest.TestCase):
     self.assertHasFile(squashed, 'foo/some_file', 'baz')
     self.assertDoesNotHaveFile(squashed, 'foo/another_file')
 
+  def test_delete_directory_prefix(self):
+    third_layer = self.create_layer(
+      foo = 'foobar/some_file',
+      bar = 'foo/another_file')
+
+    second_layer = self.create_layer(
+      _ = 'foo/')
+
+    squashed = self.squash_layers([second_layer, third_layer])
+
+    self.assertHasFile(squashed, 'foobar/some_file', 'foo')
+    self.assertDoesNotHaveFile(squashed, 'foo/another_file')
+
+
+  def test_delete_directory_pre_prefix(self):
+    third_layer = self.create_layer(
+      foo = 'foobar/baz/some_file',
+      bar = 'foo/another_file')
+
+    second_layer = self.create_layer(
+      _ = 'foo/')
+
+    squashed = self.squash_layers([second_layer, third_layer])
+
+    self.assertHasFile(squashed, 'foobar/baz/some_file', 'foo')
+    self.assertDoesNotHaveFile(squashed, 'foo/another_file')
+
 if __name__ == '__main__':
   unittest.main()
diff --git a/util/streamlayerformat.py b/util/streamlayerformat.py
index cb3bdd3ca..3a4be529e 100644
--- a/util/streamlayerformat.py
+++ b/util/streamlayerformat.py
@@ -89,9 +89,14 @@ class StreamLayerMerger(object):
     # Check if this file has already been encountered somewhere. If so,
     # skip it.
     ubsolute = unicode(absolute)
-    if ubsolute in self.path_trie or any(self.prefix_trie.iter_prefixes(ubsolute)):
+    if ubsolute in self.path_trie:
       return False
 
+    # Check if this file is under a deleted path.
+    for prefix in self.prefix_trie.iter_prefixes(ubsolute):
+      if not os.path.relpath(ubsolute, prefix).startswith('..'):
+        return False
+
     # Otherwise, add the path to the encountered list and return it.
     self.path_encountered.append(absolute)
     return True