I think I've just ran into the same issue.

/home/user/www/hahler_de.bzr is the branch.
It contains the following symlink:
blogs/media -> /home/user/www/hahler_live/web/media

I don't know if it's a dupe of bug 124859, but sounds related from skimming comments.


Here's what I've done:

$ bzr merge --force
Merging from remembered location /home/user/dev/tailor/b2evo/bzr/
bzr: ERROR: bzrlib.errors.PathNotChild: Path "/home/user/www/hahler_live/web/media/t" is not a child of path "/home/user/www/hahler_de.bzr"

Traceback (most recent call last):
  File "/usr/lib/python2.5/site-packages/bzrlib/commands.py", line 834, in run_bzr_catch_errors
    return run_bzr(argv)
  File "/usr/lib/python2.5/site-packages/bzrlib/commands.py", line 790, in run_bzr
    ret = run(*run_argv)
  File "/usr/lib/python2.5/site-packages/bzrlib/commands.py", line 492, in run_argv_aliases
    return self.run(**all_cmd_args)
  File "/usr/lib/python2.5/site-packages/bzrlib/builtins.py", line 2895, in run
    verified)
  File "/usr/lib/python2.5/site-packages/bzrlib/builtins.py", line 2913, in _do_merge
    conflict_count = merger.do_merge()
  File "/usr/lib/python2.5/site-packages/bzrlib/merge.py", line 421, in do_merge
    merge.do_merge()
  File "/usr/lib/python2.5/site-packages/bzrlib/merge.py", line 520, in do_merge
    self._compute_transform()
  File "/usr/lib/python2.5/site-packages/bzrlib/merge.py", line 570, in _compute_transform
    lambda t, c: conflict_pass(t, c, self.other_tree))
  File "/usr/lib/python2.5/site-packages/bzrlib/transform.py", line 1973, in resolve_conflicts
    conflicts = tt.find_conflicts()
  File "/usr/lib/python2.5/site-packages/bzrlib/transform.py", line 582, in find_conflicts
    self._add_tree_children()
  File "/usr/lib/python2.5/site-packages/bzrlib/transform.py", line 613, in _add_tree_children
    list(self.iter_tree_children(parent_id))
  File "/usr/lib/python2.5/site-packages/bzrlib/transform.py", line 632, in iter_tree_children
    yield self.trans_id_tree_path(childpath)
  File "/usr/lib/python2.5/site-packages/bzrlib/transform.py", line 294, in trans_id_tree_path
    path = self.canonical_path(path)
  File "/usr/lib/python2.5/site-packages/bzrlib/transform.py", line 288, in canonical_path
    relpath = self._tree.relpath(abs)
  File "/usr/lib/python2.5/site-packages/bzrlib/workingtree.py", line 481, in relpath
    return osutils.relpath(self.basedir, path)
  File "/usr/lib/python2.5/site-packages/bzrlib/osutils.py", line 914, in relpath
    raise errors.PathNotChild(rp, base)
PathNotChild: Path "/home/user/www/hahler_live/web/media/t" is not a child of path "/home/user/www/hahler_de.bzr"

bzr 1.3.1 on python 2.5.2.final.0 (linux2)
arguments: ['/usr/bin/bzr', 'merge', '--force']
encoding: 'UTF-8', fsenc: 'UTF-8', lang: 'de_DE.UTF-8'
plugins:
  builddeb             /usr/lib/python2.5/site-packages/bzrlib/plugins/builddeb [0.92.0dev0]
  bzrtools             /usr/lib/python2.5/site-packages/bzrlib/plugins/bzrtools [1.3.0]
  gtk                  /usr/lib/python2.5/site-packages/bzrlib/plugins/gtk [0.94.0]
  launchpad            /usr/lib/python2.5/site-packages/bzrlib/plugins/launchpad [unknown]
  qbzr                 /usr/lib/python2.5/site-packages/bzrlib/plugins/qbzr [0.9.0]
  rebase               /usr/lib/python2.5/site-packages/bzrlib/plugins/rebase [0.3.0]
*** Bazaar has encountered an internal error.
    Please report a bug at https://bugs.launchpad.net/bzr/+filebug
    including this traceback, and a description of what you
    were doing when the error occurred.