diff --git a/src/__phutil_library_map__.php b/src/__phutil_library_map__.php
--- a/src/__phutil_library_map__.php
+++ b/src/__phutil_library_map__.php
@@ -618,6 +618,7 @@
     'DiffusionMercurialServeSSHWorkflow' => 'applications/diffusion/ssh/DiffusionMercurialServeSSHWorkflow.php',
     'DiffusionMercurialWireClientSSHProtocolChannel' => 'applications/diffusion/ssh/DiffusionMercurialWireClientSSHProtocolChannel.php',
     'DiffusionMercurialWireProtocol' => 'applications/diffusion/protocol/DiffusionMercurialWireProtocol.php',
+    'DiffusionMercurialWireProtocolTests' => 'applications/diffusion/protocol/__tests__/DiffusionMercurialWireProtocolTests.php',
     'DiffusionMercurialWireSSHTestCase' => 'applications/diffusion/ssh/__tests__/DiffusionMercurialWireSSHTestCase.php',
     'DiffusionMergedCommitsQueryConduitAPIMethod' => 'applications/diffusion/conduit/DiffusionMergedCommitsQueryConduitAPIMethod.php',
     'DiffusionMirrorDeleteController' => 'applications/diffusion/controller/DiffusionMirrorDeleteController.php',
@@ -4341,6 +4342,7 @@
     'DiffusionMercurialServeSSHWorkflow' => 'DiffusionMercurialSSHWorkflow',
     'DiffusionMercurialWireClientSSHProtocolChannel' => 'PhutilProtocolChannel',
     'DiffusionMercurialWireProtocol' => 'Phobject',
+    'DiffusionMercurialWireProtocolTests' => 'PhabricatorTestCase',
     'DiffusionMercurialWireSSHTestCase' => 'PhabricatorTestCase',
     'DiffusionMergedCommitsQueryConduitAPIMethod' => 'DiffusionQueryConduitAPIMethod',
     'DiffusionMirrorDeleteController' => 'DiffusionController',
diff --git a/src/applications/diffusion/controller/DiffusionServeController.php b/src/applications/diffusion/controller/DiffusionServeController.php
--- a/src/applications/diffusion/controller/DiffusionServeController.php
+++ b/src/applications/diffusion/controller/DiffusionServeController.php
@@ -536,12 +536,14 @@
       $body = strlen($stderr)."\n".$stderr;
     } else {
       list($length, $body) = explode("\n", $stdout, 2);
+      if ($cmd == 'capabilities') {
+        $body = DiffusionMercurialWireProtocol::filterBundle2Capability($body);
+      }
     }
 
     return id(new DiffusionMercurialResponse())->setContent($body);
   }
 
-
   private function getMercurialArguments() {
     // Mercurial sends arguments in HTTP headers. "Why?", you might wonder,
     // "Why would you do this?".
diff --git a/src/applications/diffusion/protocol/DiffusionMercurialWireProtocol.php b/src/applications/diffusion/protocol/DiffusionMercurialWireProtocol.php
--- a/src/applications/diffusion/protocol/DiffusionMercurialWireProtocol.php
+++ b/src/applications/diffusion/protocol/DiffusionMercurialWireProtocol.php
@@ -99,4 +99,34 @@
     return true;
   }
 
+  /** If the server version is running 3.4+ it will respond
+   * with 'bundle2' capability in the format of "bundle2=(url-encoding)".
+   * Until we maange to properly package up bundles to send back we
+   * disallow the client from knowing we speak bundle2 by removing it
+   * from the capabilities listing.
+   *
+   * The format of the capabilties string is: "a space separated list
+   * of strings representing what commands the server supports"
+   * @link https://www.mercurial-scm.org/wiki/CommandServer#Protocol
+   *
+   * @param string  $capabilities - The string of capabilities to
+   *   strip the bundle2 capability from. This is expected to be
+   *   the space-separated list of strings resulting from the
+   *   querying the 'capabilties' command.
+   *
+   * @return string  The resulting space-separated list of capabilities
+   *   which no longer contains the 'bundle2' capability. This is meant
+   *   to replace the original $body to send back to client.
+   */
+  public static function filterBundle2Capability($capabilities) {
+    $parts = explode(' ', $capabilities);
+    foreach ($parts as $key => $part) {
+      if (preg_match('/^bundle2=/', $part)) {
+        unset($parts[$key]);
+        break;
+      }
+    }
+    return implode(' ', $parts);
+  }
+
 }
diff --git a/src/applications/diffusion/protocol/__tests__/DiffusionMercurialWireProtocolTests.php b/src/applications/diffusion/protocol/__tests__/DiffusionMercurialWireProtocolTests.php
new file mode 100644
--- /dev/null
+++ b/src/applications/diffusion/protocol/__tests__/DiffusionMercurialWireProtocolTests.php
@@ -0,0 +1,48 @@
+<?php
+
+final class DiffusionMercurialWireProtocolTests extends PhabricatorTestCase {
+
+  public function testFilteringBundle2Capability() {
+    // this was the result of running 'capabilities' over
+    // `hg serve --stdio` on my systems with Mercurial 3.5.1, 2.6.2
+
+    $capabilities_with_bundle2_hg_351 =
+    'lookup changegroupsubset branchmap pushkey '.
+    'known getbundle unbundlehash batch stream '.
+    'bundle2=HG20%0Achangegroup%3D01%2C02%0Adigests%3Dmd5%2Csha1%2Csha512'.
+    '%0Aerror%3Dabort%2Cunsupportedcontent%2Cpushraced%2Cpushkey%0A'.
+    'hgtagsfnodes%0Alistkeys%0Apushkey%0Aremote-changegroup%3Dhttp%2Chttps '.
+    'unbundle=HG10GZ,HG10BZ,HG10UN httpheader=1024';
+
+    $capabilities_without_bundle2_hg_351 =
+    'lookup changegroupsubset branchmap pushkey '.
+    'known getbundle unbundlehash batch stream '.
+    'unbundle=HG10GZ,HG10BZ,HG10UN httpheader=1024';
+
+    $capabilities_hg_262 =
+    'lookup changegroupsubset branchmap pushkey '.
+    'known getbundle unbundlehash batch stream '.
+    'unbundle=HG10GZ,HG10BZ,HG10UN httpheader=1024 largefiles=serve';
+
+    $cases = array(
+      array(
+        'name' => pht('Filter bundle2 from Mercurial 3.5.1'),
+        'input' => $capabilities_with_bundle2_hg_351,
+        'expect' => $capabilities_without_bundle2_hg_351,
+      ),
+
+      array(
+        'name' => pht('Filter bundle does not affect Mercurial 2.6.2'),
+        'input' => $capabilities_hg_262,
+        'expect' => $capabilities_hg_262,
+      ),
+    );
+
+    foreach ($cases as $case) {
+      $actual = DiffusionMercurialWireProtocol::filterBundle2Capability(
+        $case['input']);
+      $this->assertEqual($case['expect'], $actual, $case['name']);
+    }
+  }
+
+}
diff --git a/src/applications/diffusion/ssh/DiffusionMercurialServeSSHWorkflow.php b/src/applications/diffusion/ssh/DiffusionMercurialServeSSHWorkflow.php
--- a/src/applications/diffusion/ssh/DiffusionMercurialServeSSHWorkflow.php
+++ b/src/applications/diffusion/ssh/DiffusionMercurialServeSSHWorkflow.php
@@ -107,8 +107,14 @@
       $this->didSeeWrite = true;
     }
 
+    $raw_message = $message['raw'];
+    if ($command == 'capabilities') {
+      $raw_message = DiffusionMercurialWireProtocol::filterBundle2Capability(
+        $raw_message);
+    }
+
     // If we're good, return the raw message data.
-    return $message['raw'];
+    return $raw_message;
   }
 
 }