diff --git a/app/controllers/projects/blob_controller.rb b/app/controllers/projects/blob_controller.rb
index 6ca3a636359fcc1135f0020f8b283d49220e7d78..8133de90a41ba845e0fa4bb29fa787791283fbf8 100644
--- a/app/controllers/projects/blob_controller.rb
+++ b/app/controllers/projects/blob_controller.rb
@@ -66,7 +66,7 @@ class Projects::BlobController < Projects::ApplicationController
 
   def diff
     @form  = UnfoldForm.new(params)
-    @lines = Gitlab::Diff::Highlight.process_file(repository, @ref, @path)
+    @lines = Gitlab::Highlight.highlight_lines(repository, @ref, @path)
     @lines = @lines[@form.since - 1..@form.to - 1]
 
     if @form.bottom?
diff --git a/app/views/projects/diffs/_parallel_view.html.haml b/app/views/projects/diffs/_parallel_view.html.haml
index a2958286adae5da6478128d3cdf2a40bfafdd2ce..7b9cecbc3da8ac6fad341a7c2f0fdc59f2d09e5f 100644
--- a/app/views/projects/diffs/_parallel_view.html.haml
+++ b/app/views/projects/diffs/_parallel_view.html.haml
@@ -13,7 +13,7 @@
             = link_to raw(left[:number]), "##{left[:line_code]}", id: left[:line_code]
             - if @comments_allowed && can?(current_user, :create_note, @project)
               = link_to_new_diff_note(left[:line_code], 'old')
-            %td.line_content{class: "parallel noteable_line #{left[:type]} #{left[:line_code]}", "line_code" => left[:line_code] }= diff_line_content(left[:text])
+            %td.line_content{class: "parallel noteable_line #{left[:type]} #{left[:line_code]}", data: { "line_code" => left[:line_code] }}= diff_line_content(left[:text])
 
           - if right[:type] == 'new'
             - new_line_class = 'new'
@@ -26,7 +26,7 @@
             = link_to raw(right[:number]), "##{new_line_code}", id: new_line_code
             - if @comments_allowed && can?(current_user, :create_note, @project)
               = link_to_new_diff_note(right[:line_code], 'new')
-            %td.line_content.parallel{class: "noteable_line #{new_line_class} #{new_line_code}", "line_code" => new_line_code}= diff_line_content(right[:text])
+            %td.line_content.parallel{class: "noteable_line #{new_line_class} #{new_line_code}", data: { "line_code" => new_line_code }}= diff_line_content(right[:text])
 
       - if @reply_allowed
         - comments_left, comments_right = organize_comments(left[:type], right[:type], left[:line_code], right[:line_code])
diff --git a/app/views/projects/diffs/_text_file.html.haml b/app/views/projects/diffs/_text_file.html.haml
index 521f2ac1e8d5d5d6a4084a8701ed10fbc17bd5e4..6761155dcf916f06aefe68f09e7907472aa5ed9f 100644
--- a/app/views/projects/diffs/_text_file.html.haml
+++ b/app/views/projects/diffs/_text_file.html.haml
@@ -22,7 +22,7 @@
             = link_to_new_diff_note(line_code)
         %td.new_line{data: {linenumber: line.new_pos}}
           = link_to raw(type == "old" ? "&nbsp;" : line.new_pos), "##{line_code}", id: line_code
-        %td.line_content{class: "noteable_line #{type} #{line_code}", "line_code" => line_code}= diff_line_content(line.text)
+        %td.line_content{class: "noteable_line #{type} #{line_code}", data: { "line_code" => line_code }}= diff_line_content(line.text)
 
     - if @reply_allowed
       - comments = @line_notes.select { |n| n.line_code == line_code && n.active? }.sort_by(&:created_at)
diff --git a/lib/gitlab/diff/file.rb b/lib/gitlab/diff/file.rb
index cb93c6a574a2f51aada49550217dbe619eb193b4..c1a6e16da5a42dadedda488d725a46785d8b7298 100644
--- a/lib/gitlab/diff/file.rb
+++ b/lib/gitlab/diff/file.rb
@@ -18,7 +18,7 @@ module Gitlab
       end
 
       def highlighted_diff_lines
-        Gitlab::Diff::Highlight.process_diff_lines(self)
+        Gitlab::Diff::Highlight.new(self).highlight
       end
 
       def mode_changed?
diff --git a/lib/gitlab/diff/highlight.rb b/lib/gitlab/diff/highlight.rb
index ba2f12db147b0dc458e950aa4a73eefba4be404c..e21f496102d80d0d9156075648f9f3a2ff438fcd 100644
--- a/lib/gitlab/diff/highlight.rb
+++ b/lib/gitlab/diff/highlight.rb
@@ -6,59 +6,199 @@ module Gitlab
       delegate :repository, :old_path, :new_path, :old_ref, :new_ref,
         to: :diff_file, prefix: :diff
 
-      # Apply syntax highlight to provided source code
-      #
-      # diff_file - an instance of Gitlab::Diff::File
-      #
-      # Returns an Array with the processed items.
-      def self.process_diff_lines(diff_file)
-        processor = new(diff_file)
-        processor.highlight
+      def initialize(diff_file)
+        @diff_file = diff_file
+        @diff_lines = diff_file.diff_lines
+        @raw_lines = @diff_lines.map(&:text)
       end
 
-      def self.process_file(repository, ref, file_name)
-        blob = repository.blob_at(ref, file_name)
-        return [] unless blob
+      def highlight
+        return [] if @diff_lines.empty?
 
-        Gitlab::Highlight.highlight(file_name, blob.data).lines.map!(&:html_safe)
-      end
+        find_inline_diffs
 
-      def initialize(diff_file)
-        @diff_file = diff_file
-        @file_name = diff_file.new_path
-        @lines     = diff_file.diff_lines
+        process_lines
+
+        @diff_lines
       end
 
-      def highlight
-        return [] if @lines.empty?
+      private
 
-        @lines.each_with_index do |line, i|
-          line_prefix = line.text.match(/\A([+-])/) ? $1 : ' '
+      def find_inline_diffs
+        @inline_diffs = []
 
+        local_edit_indexes.each do |index|
+          old_index = index
+          new_index = index + 1
+          old_line = @raw_lines[old_index][1..-1]
+          new_line = @raw_lines[new_index][1..-1]
+
+          # Skip inline diff if empty line was replaced with content
+          next if old_line == ""
+
+          lcp = longest_common_prefix(old_line, new_line)
+          lcs = longest_common_suffix(old_line, new_line)
+
+          old_diff_range = lcp..(old_line.length - lcs - 1)
+          new_diff_range = lcp..(new_line.length - lcs - 1)
+
+          @inline_diffs[old_index] = old_diff_range if old_diff_range.begin <= old_diff_range.end
+          @inline_diffs[new_index] = new_diff_range if new_diff_range.begin <= new_diff_range.end
+        end
+      end
+
+      def process_lines
+        @diff_lines.each_with_index do |diff_line, i|
           # ignore highlighting for "match" lines
-          next if line.type == 'match'
+          next if diff_line.type == 'match'
+
+          rich_line = highlight_line(diff_line, i)
+          rich_line = mark_inline_diffs(rich_line, diff_line, i)
+          diff_line.text = rich_line.html_safe
+        end
+      end
+
+      def highlight_line(diff_line, index)
+        line_prefix = line_prefixes[index]
+
+        case diff_line.type
+        when 'new', nil
+          rich_line = new_lines[diff_line.new_pos - 1]
+        when 'old'
+          rich_line = old_lines[diff_line.old_pos - 1]
+        end
+
+        # Only update text if line is found. This will prevent
+        # issues with submodules given the line only exists in diff content.
+        rich_line ? line_prefix + rich_line : diff_line.text
+      end
+
+      def mark_inline_diffs(rich_line, diff_line, index)
+        inline_diff = @inline_diffs[index]
+        return rich_line unless inline_diff
+
+        raw_line = diff_line.text
+
+        # Based on the prefixless versions
+        from = inline_diff.begin + 1
+        to = inline_diff.end + 1
+
+        position_mapping = map_character_positions(raw_line, rich_line)
+        inline_diff_positions = position_mapping[from..to]
+        marker_ranges = collapse_ranges(inline_diff_positions)
+
+        offset = 0
+        marker_ranges.each do |range|
+          offset = insert_around_range(rich_line, range, "<span class='idiff'>", "</span>", offset)
+        end
+
+        rich_line
+      end
 
-          case line.type
-          when 'new', nil
-            highlighted_line = new_lines[line.new_pos - 1]
-          when 'old'
-            highlighted_line = old_lines[line.old_pos - 1]
+      def line_prefixes
+        @line_prefixes ||= @raw_lines.map { |line| line.match(/\A([+-])/) ? $1 : ' ' }
+      end
+
+      def local_edit_indexes
+        @local_edit_indexes ||= begin
+          joined_line_prefixes = " #{line_prefixes.join} "
+
+          offset = 0
+          local_edit_indexes = []
+          while index = joined_line_prefixes.index(" -+ ", offset)
+            local_edit_indexes << index
+            offset = index + 1
           end
 
-          # Only update text if line is found. This will prevent
-          # issues with submodules given the line only exists in diff content.
-          line.text = highlighted_line.insert(0, line_prefix).html_safe if highlighted_line
+          local_edit_indexes
         end
+      end
+
+      def map_character_positions(raw_line, rich_line)
+        mapping = []
+        raw_pos = 0
+        rich_pos = 0
+        (0..raw_line.length).each do |raw_pos|
+          raw_char = raw_line[raw_pos]
+          rich_char = rich_line[rich_pos]
+
+          while rich_char == '<'
+            until rich_char == '>'
+              rich_pos += 1
+              rich_char = rich_line[rich_pos]
+            end
+
+            rich_pos += 1
+            rich_char = rich_line[rich_pos]
+          end
 
-        @lines
+          mapping[raw_pos] = rich_pos
+
+          rich_pos += 1
+        end
+
+        mapping
       end
 
       def old_lines
-        @old_lines ||= self.class.process_file(diff_repository, diff_old_ref, diff_old_path)
+        @old_lines ||= Gitlab::Highlight.highlight_lines(diff_repository, diff_old_ref, diff_old_path)
       end
 
       def new_lines
-        @new_lines ||= self.class.process_file(diff_repository, diff_new_ref, diff_new_path)
+        @new_lines ||= Gitlab::Highlight.highlight_lines(diff_repository, diff_new_ref, diff_new_path)
+      end
+
+      def longest_common_suffix(a, b)
+        longest_common_prefix(a.reverse, b.reverse)
+      end
+
+      def longest_common_prefix(a, b)
+        max_length = [a.length, b.length].max
+
+        length = 0
+        (0..max_length - 1).each do |pos|
+          old_char = a[pos]
+          new_char = b[pos]
+
+          break if old_char != new_char
+          length += 1
+        end
+
+        length
+      end
+
+      def collapse_ranges(positions)
+        return [] if positions.empty?
+        ranges = []
+
+        start = prev = positions[0]
+        range = start..prev
+        positions[1..-1].each do |pos|
+          if pos == prev + 1
+            range = start..pos
+            prev = pos
+          else
+            ranges << range
+            start = prev = pos
+            range = start..prev
+          end
+        end
+        ranges << range
+
+        ranges
+      end
+
+      def insert_around_range(text, range, before, after, offset = 0)
+        from = range.begin
+        to = range.end
+
+        text.insert(offset + from, before)
+        offset += before.length
+
+        text.insert(offset + to + 1, after)
+        offset += after.length
+
+        offset
       end
     end
   end
diff --git a/lib/gitlab/highlight.rb b/lib/gitlab/highlight.rb
index 02e097eca3d56f7329473d0679a5fca4b3fbdc6c..a5b041687e318141c331b4f5a42242ef69de9e18 100644
--- a/lib/gitlab/highlight.rb
+++ b/lib/gitlab/highlight.rb
@@ -7,6 +7,13 @@ module Gitlab
       formatter.format(lexer.lex(blob_content, continue: continue)).html_safe
     end
 
+    def self.highlight_lines(repository, ref, file_name)
+      blob = repository.blob_at(ref, file_name)
+      return [] unless blob
+
+      highlight(file_name, blob.data).lines.map!(&:html_safe)
+    end
+
     private
 
     def self.rouge_formatter(options = {})
diff --git a/spec/lib/gitlab/diff/highlight_spec.rb b/spec/lib/gitlab/diff/highlight_spec.rb
index cdeed603e23a7a0e331c2878b803cd4a166cefc7..3c66c9889baa0039ddf7f7fb23c6185f3375c2e6 100644
--- a/spec/lib/gitlab/diff/highlight_spec.rb
+++ b/spec/lib/gitlab/diff/highlight_spec.rb
@@ -51,9 +51,9 @@ describe Gitlab::Diff::Highlight, lib: true do
     end
   end
 
-  describe '.process_file' do
+  describe '.highlight_lines' do
     let(:lines) do
-      Gitlab::Diff::Highlight.process_file(project.repository, commit.id, 'files/ruby/popen.rb')
+      Gitlab::Diff::Highlight.highlight_lines(project.repository, commit.id, 'files/ruby/popen.rb')
     end
 
     it 'should properly highlight all the lines' do