git mergetool reports "No files need merging"

It looks like my problem had to do with file timestamps. Thanks to this SO answer suggested by Mark Longair, the following setting fixed it for me:

git config --global core.trustctime false

Solution 1:

$git config --global core.trustctime false

If false, the ctime differences between the index and the working copy are ignored; useful when the inode change time is regularly modified by something outside Git (file system crawlers and some backup systems). and core.trustctime is true by default.

Solution 2: just:

$git rebase --skip

It's OK for you to skip it

This fixed it for me:
git mergetool .

I found this fix here

Trivial solution

which worked for me: Git creates some merge related files in the very same directory where the conflicted file is, so remember to run git mergetool in correct path.