diff --git a/src/cargo/sources/path.rs b/src/cargo/sources/path.rs
index 7a21713f49a..784520535f8 100644
--- a/src/cargo/sources/path.rs
+++ b/src/cargo/sources/path.rs
@@ -106,11 +106,27 @@ impl<'cfg> PathSource<'cfg> {
                          .map(|p| parse(p))
                          .collect::<Result<Vec<_>, _>>()?;
 
+        fn matches_path_or_parents(pattern: &Pattern, target: &Path) -> bool {
+            if pattern.matches_path(target) {
+                return true;
+            }
+            let mut current = target;
+            while let Some(parent) = current.parent() {
+                if pattern.matches_path(parent) {
+                    return true;
+                }
+                current = parent;
+            }
+            false
+        }
+
         let mut filter = |p: &Path| {
             let relative_path = util::without_prefix(p, root).unwrap();
-            include.iter().any(|p| p.matches_path(relative_path)) || {
-                include.is_empty() &&
-                 !exclude.iter().any(|p| p.matches_path(relative_path))
+            // mutually exclusive: setting include will override exclude
+            if include.is_empty() {
+                !exclude.iter().any(|exc| matches_path_or_parents(exc, relative_path))
+            } else {
+                include.iter().any(|inc| matches_path_or_parents(inc, relative_path))
             }
         };
 
diff --git a/tests/package.rs b/tests/package.rs
index d54fdc2375a..0abfc8d0ece 100644
--- a/tests/package.rs
+++ b/tests/package.rs
@@ -251,13 +251,23 @@ fn exclude() {
             name = "foo"
             version = "0.0.1"
             authors = []
-            exclude = ["*.txt"]
+            exclude = [
+                "*.txt",
+                "data1",
+                "data2/", # Does NOT match
+                "data3/*",
+                "data4/**",
+            ]
         "#)
         .file("src/main.rs", r#"
             fn main() { println!("hello"); }
         "#)
         .file("bar.txt", "")
-        .file("src/bar.txt", "");
+        .file("src/bar.txt", "")
+        .file("data1/hello1.bin", "")
+        .file("data2/hello2.bin", "")
+        .file("data3/hello3.bin", "")
+        .file("data4/hello4.bin", "");
 
     assert_that(p.cargo_process("package").arg("--no-verify").arg("-v"),
                 execs().with_status(0).with_stderr("\
@@ -266,6 +276,16 @@ See http://doc.crates.io/manifest.html#package-metadata for more info.
 [PACKAGING] foo v0.0.1 ([..])
 [ARCHIVING] [..]
 [ARCHIVING] [..]
+[ARCHIVING] [..]
+"));
+
+    assert_that(&p.root().join("target/package/foo-0.0.1.crate"), existing_file());
+
+    assert_that(p.cargo("package").arg("-l"),
+                execs().with_status(0).with_stdout("\
+Cargo.toml
+data2[/]hello2.bin
+src[/]main.rs
 "));
 }