Git produces "BUG: There are unmerged index entries"

That error message was introduced in January 2010, and to help debug this case, Junio C. Hamano recommends settings GIT_MERGE_VERBOSITY to 5:

We might want to suggest the user to set GIT_MERGE_VERBOSITY to 5 and re-run the merge in the message.
At least we will know which part of process_renames() or process_entry() functions is not correctly handling the unmerged paths, and it might help us diagnosing the issue.

The OP julkiewicz reports

CONFLICT (directory/file): 
There is a directory with name doc in Temporary merge branch 1. 
Adding doc as doc~Temporary merge branch 2

which allowed for isolating the directory causing this error message.

I've just removed the doc/ (the conflicting folder) in the current checkout and re-run the merge. Got some conflicts but, no bugs this time.