[MERGE][#178591][1.1] diff current tree, not directory, by default

[Ian Clatworthy]

This patch fixes a bug introduced by me into bzr.dev shortly after 1.1
development opened. Matthew Fuller, myself and others want this included
in 1.1 so I'd ask for a quick review by someone. The fix itself is
simple and a test is included. I haven't included a NEWS item because
this is a regression versus the 1.0 behaviour.

Ian C.
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