diff --git a/src/main.cpp b/src/main.cpp
index b8abcff596..274a336ee2 100644
--- a/src/main.cpp
+++ b/src/main.cpp
@@ -831,15 +831,42 @@ bool AcceptToMemoryPool(CTxMemPool& pool, CValidationState &state, const CTransa
         return state.Invalid(false, REJECT_ALREADY_KNOWN, "txn-already-in-mempool");
 
     // Check for conflicts with in-memory transactions
+    set<uint256> setConflicts;
     {
     LOCK(pool.cs); // protect pool.mapNextTx
-    for (unsigned int i = 0; i < tx.vin.size(); i++)
+    BOOST_FOREACH(const CTxIn &txin, tx.vin)
     {
-        COutPoint outpoint = tx.vin[i].prevout;
-        if (pool.mapNextTx.count(outpoint))
+        if (pool.mapNextTx.count(txin.prevout))
         {
-            // Disable replacement feature for now
-            return state.Invalid(false, REJECT_CONFLICT, "txn-mempool-conflict");
+            const CTransaction *ptxConflicting = pool.mapNextTx[txin.prevout].ptx;
+            if (!setConflicts.count(ptxConflicting->GetHash()))
+            {
+                // Allow opt-out of transaction replacement by setting
+                // nSequence >= maxint-1 on all inputs.
+                //
+                // maxint-1 is picked to still allow use of nLockTime by
+                // non-replacable transactions. All inputs rather than just one
+                // is for the sake of multi-party protocols, where we don't
+                // want a single party to be able to disable replacement.
+                //
+                // The opt-out ignores descendants as anyone relying on
+                // first-seen mempool behavior should be checking all
+                // unconfirmed ancestors anyway; doing otherwise is hopelessly
+                // insecure.
+                bool fReplacementOptOut = true;
+                BOOST_FOREACH(const CTxIn &txin, ptxConflicting->vin)
+                {
+                    if (txin.nSequence < std::numeric_limits<unsigned int>::max()-1)
+                    {
+                        fReplacementOptOut = false;
+                        break;
+                    }
+                }
+                if (fReplacementOptOut)
+                    return state.Invalid(false, REJECT_CONFLICT, "txn-mempool-conflict");
+
+                setConflicts.insert(ptxConflicting->GetHash());
+            }
         }
     }
     }
@@ -957,6 +984,82 @@ bool AcceptToMemoryPool(CTxMemPool& pool, CValidationState &state, const CTransa
             return state.DoS(0, false, REJECT_NONSTANDARD, "too-long-mempool-chain", false, errString);
         }
 
+        // A transaction that spends outputs that would be replaced by it is invalid. Now
+        // that we have the set of all ancestors we can detect this
+        // pathological case by making sure setConflicts and setAncestors don't
+        // intersect.
+        BOOST_FOREACH(CTxMemPool::txiter ancestorIt, setAncestors)
+        {
+            const uint256 &hashAncestor = ancestorIt->GetTx().GetHash();
+            if (setConflicts.count(hashAncestor))
+            {
+                return state.DoS(10, error("AcceptToMemoryPool: %s spends conflicting transaction %s",
+                                           hash.ToString(),
+                                           hashAncestor.ToString()),
+                                 REJECT_INVALID, "bad-txns-spends-conflicting-tx");
+            }
+        }
+
+        // Check if it's economically rational to mine this transaction rather
+        // than the ones it replaces.
+        CAmount nConflictingFees = 0;
+        size_t nConflictingSize = 0;
+        if (setConflicts.size())
+        {
+            LOCK(pool.cs);
+
+            // For efficiency we simply sum up the pre-calculated
+            // fees/size-with-descendants values from the mempool package
+            // tracking; this does mean the pathological case of diamond tx
+            // graphs will be overcounted.
+            BOOST_FOREACH(const uint256 hashConflicting, setConflicts)
+            {
+                CTxMemPool::txiter mi = pool.mapTx.find(hashConflicting);
+                if (mi == pool.mapTx.end())
+                    continue;
+                nConflictingFees += mi->GetFeesWithDescendants();
+                nConflictingSize += mi->GetSizeWithDescendants();
+            }
+
+            // First of all we can't allow a replacement unless it pays greater
+            // fees than the transactions it conflicts with - if we did the
+            // bandwidth used by those conflicting transactions would not be
+            // paid for
+            if (nFees < nConflictingFees)
+            {
+                return state.DoS(0, error("AcceptToMemoryPool: rejecting replacement %s, less fees than conflicting txs; %s < %s",
+                                          hash.ToString(), FormatMoney(nFees), FormatMoney(nConflictingFees)),
+                                 REJECT_INSUFFICIENTFEE, "insufficient fee");
+            }
+
+            // Secondly in addition to paying more fees than the conflicts the
+            // new transaction must additionally pay for its own bandwidth.
+            CAmount nDeltaFees = nFees - nConflictingFees;
+            if (nDeltaFees < ::minRelayTxFee.GetFee(nSize))
+            {
+                return state.DoS(0,
+                        error("AcceptToMemoryPool: rejecting replacement %s, not enough additional fees to relay; %s < %s",
+                              hash.ToString(),
+                              FormatMoney(nDeltaFees),
+                              FormatMoney(::minRelayTxFee.GetFee(nSize))),
+                        REJECT_INSUFFICIENTFEE, "insufficient fee");
+            }
+
+            // Finally replace only if we end up with a larger fees-per-kb than
+            // the replacements.
+            CFeeRate oldFeeRate(nConflictingFees, nConflictingSize);
+            CFeeRate newFeeRate(nFees, nSize);
+            if (newFeeRate <= oldFeeRate)
+            {
+                return state.DoS(0,
+                        error("AcceptToMemoryPool: rejecting replacement %s; new feerate %s <= old feerate %s",
+                              hash.ToString(),
+                              newFeeRate.ToString(),
+                              oldFeeRate.ToString()),
+                        REJECT_INSUFFICIENTFEE, "insufficient fee");
+            }
+        }
+
         // Check against previous transactions
         // This is done last to help prevent CPU exhaustion denial-of-service attacks.
         if (!CheckInputs(tx, state, view, true, STANDARD_SCRIPT_VERIFY_FLAGS, true))
@@ -977,6 +1080,19 @@ bool AcceptToMemoryPool(CTxMemPool& pool, CValidationState &state, const CTransa
                 __func__, hash.ToString(), FormatStateMessage(state));
         }
 
+        // Remove conflicting transactions from the mempool
+        list<CTransaction> ltxConflicted;
+        pool.removeConflicts(tx, ltxConflicted);
+
+        BOOST_FOREACH(const CTransaction &txConflicted, ltxConflicted)
+        {
+            LogPrint("mempool", "replacing tx %s with %s for %s BTC additional fees, %d delta bytes\n",
+                    txConflicted.GetHash().ToString(),
+                    hash.ToString(),
+                    FormatMoney(nFees - nConflictingFees),
+                    (int)nSize - (int)nConflictingSize);
+        }
+
         // Store transaction in memory
         pool.addUnchecked(hash, entry, setAncestors, !IsInitialBlockDownload());