File externals stop working in 1.7

Hi

We have encountered a problem with SVN 1.7 when we are checking out
(or updating) some of our repositories containing externals. These
were all functioning in 1.6.17 but seems to have been either broken
or changed in 1.7. I tried to find any relevant posts regarding the
error message but couldn't find anything that points to whether this
is an intended change or a bug.

Script to reproduce is as follows:

---
svnadmin create repo
svn co file://`pwd`/repo wc
cd wc
mkdir -p A/B/C D
echo text > A/B/file
svn add A D
echo ^/A/B E > external.prop
echo ^/A/B/file E/file2 >> external.prop
svn propset svn:externals -F external.prop D
svn ci -mm
cd ..
rm -rf wc
svn co file://`pwd`/repo/D wc
---
In 1.6.17 this results in the following output:
---
$ svnadmin create repo
$ svn co file://`pwd`/repo wc
Checked out revision 0.
$ cd wc
wc$ mkdir -p A/B/C D
wc$ echo text > A/B/file
wc$ svn add A D
A         A
A         A/B
A         A/B/file
A         A/B/C
A         D
wc$ echo ^/A/B E > external.prop
wc$ echo ^/A/B/file E/file2 >> external.prop
wc$ svn propset svn:externals -F external.prop D
property 'svn:externals' set on 'D'
wc$ svn ci -mm
Adding         A
Adding         A/B
Adding         A/B/C
Adding         A/B/file
Adding         D
Transmitting file data .
Committed revision 1.
wc$ cd ..
$ rm -rf wc
$ svn co file://`pwd`/repo/D wc
 U   wc
Fetching external item into 'wc/E'
A    wc/E/file
A    wc/E/C
Checked out external at revision 1.
Fetching external item into 'wc/E/file2'
E    wc/E/file2
Checked out external at revision 1.
Checked out revision 1.
---
But when I try the same in 1.7 I get:
---
$ svnadmin create repo
$ svn co file://`pwd`/repo wc
Checked out revision 0.
wc$ cd wc
wc$ mkdir -p A/B/C D
wc$ echo text > A/B/file
wc$ svn add A D
A         A
A         A/B
A         A/B/file
A         A/B/C
A         D
wc$ echo ^/A/B E > external.prop
wc$ echo ^/A/B/file E/file2 >> external.prop
wc$ ../svn propset svn:externals -F external.prop D
property 'svn:externals' set on 'D'
wc$ ../svn ci -mm
Adding         A
Adding         A/B
Adding         A/B/C
Adding         A/B/file
Adding         D
Transmitting file data .
Committed revision 1.
wc$ cd ..
$ rm -rf wc
$ ./svn co file://`pwd`/repo/D wc
 U   wc
Fetching external item into 'wc/E':
A    wc/E/file
A    wc/E/C
Checked out external at revision 1.
Fetching external item into 'wc/E/file2':
svn: warning: W155022: Cannot insert a file external defined on 'wc' into the working copy 'wc/E'.
Checked out revision 1.
---
Right now this prevents us from moving to 1.7 since files are missing from the working copy.
Will this be fixed or has the use of externals changed? 
Thanks,
Kristian
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