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Compare with previous revision would compare with local workspace resource with the previous revision of that resource. For example after a pull you could select a folder or file and select compare with previous revision to see the differences the last commit introduced. This would have similar behavior to compare with head revision, single file selections bring up a compare editor, single non-file selections open in the Git Tree compare view.
Proposed fix pushed to: http://egit.eclipse.org/r/#change,3267
Fixed in master. Thanks Kevin!