diff --git a/src/misc.c b/src/misc.c
index c362e87e..80fd63ac 100644
--- a/src/misc.c
+++ b/src/misc.c
@@ -131,7 +131,7 @@ collapse_continuations (char *line)
   char *q;
 
   q = strchr(in, '\n');
-  if (q == 0)
+  if (!q)
     return;
 
   do
@@ -162,17 +162,33 @@ collapse_continuations (char *line)
 
       if (i & 1)
         {
-          /* Backslash/newline handling:
-             In traditional GNU Make all trailing whitespace, consecutive
-             backslash/newlines, and any leading non-newline whitespace on the
-             next line is reduced to a single space.
-             In POSIX, each backslash/newline and is replaced by a space.  */
+          unsigned int dollar;
+
+          /* Backslash/newline handling: out points to the final "\".
+             In POSIX, each backslash/newline is replaced by a space.
+             In GNU Make all trailing whitespace, consecutive backslash +
+             newlines, and any leading non-newline whitespace on the next line
+             is reduced to a single space.
+             As a special case, replace "$\" with the empty string.  */
           while (ISBLANK (*in))
             ++in;
-          if (! posix_pedantic)
+
+          {
+            const char *dp = out;
+            while (dp > line && dp[-1] == '$')
+              --dp;
+            dollar = (out - dp) % 2;
+          }
+
+          if (dollar)
+            --out;
+
+          if (!posix_pedantic)
             while (out > line && ISBLANK (out[-1]))
               --out;
-          *out++ = ' ';
+
+          if (!dollar)
+            *out++ = ' ';
         }
       else
         {
diff --git a/tests/scripts/variables/flavors b/tests/scripts/variables/flavors
index 627672f8..ff375b2b 100644
--- a/tests/scripts/variables/flavors
+++ b/tests/scripts/variables/flavors
@@ -115,13 +115,15 @@ all: ; @: $(info recur=/$(recur)/ simple=/$(simple)/ recure=/$(recur_empty)/ sim
 # TEST 9: Line continuation
 run_make_test(q!
 recur = $\
-  one$\
-  two$\
+  zero  $\
+  one$$\
+  two$$$\
   three
 simple := $\
-  four$\
-  five$\
-  six
+  four  $\
+  five$$\
+  six$$$\
+  seven
 
 all: d$\
      e$\
@@ -130,19 +132,21 @@ all: d$\
 .PHONY: dep
 dep: ; @: $(info recur=/$(recur)/ simple=/$(simple)/)
 !,
-             '', "recur=/onetwothree/ simple=/fourfivesix/\n");
+             '', "recur=/zeroone\$ two\$three/ simple=/fourfive\$ six\$seven/\n");
 
-# TEST 9: Line continuation
+# TEST 9: Line continuation with POSIX
 run_make_test(q!
 .POSIX:
 recur = $\
-  one$\
-  two$\
+  zero  $\
+  one$$\
+  two$$$\
   three
 simple := $\
-  four$\
-  five$\
-  six
+  four  $\
+  five$$\
+  six$$$\
+  seven
 
 all: d$\
      e$\
@@ -151,7 +155,7 @@ all: d$\
 .PHONY: dep
 dep: ; @: $(info recur=/$(recur)/ simple=/$(simple)/)
 !,
-             '', "recur=/onetwothree/ simple=/fourfivesix/\n");
+             '', "recur=/zero  one\$ two\$three/ simple=/four  five\$ six\$seven/\n");
 
 # Test POSIX :::=
 # This creates a recursive variable, but it expands the RHS first.  Any
diff --git a/tests/scripts/variables/negative b/tests/scripts/variables/negative
index 5cb600a8..a49bbef7 100644
--- a/tests/scripts/variables/negative
+++ b/tests/scripts/variables/negative
@@ -2,6 +2,8 @@
 
 $description = "Run some negative tests (things that should fail).";
 
+my $unterm = '*** unterminated variable reference.  Stop.';
+
 # TEST #0
 # Check that non-terminated variable references are detected (and
 # reported using the best filename/lineno info
@@ -12,15 +14,12 @@ y = $x
 
 all: ; @echo $y
 ',
-              '', '#MAKEFILE#:3: *** unterminated variable reference.  Stop.',
+              '', "#MAKEFILE#:3: $unterm",
               512);
 
 # TEST #1
 # Bogus variable value passed on the command line.
-run_make_test(undef,
-              ['x=$(other'],
-              '#MAKEFILE#:4: *** unterminated variable reference.  Stop.',
-              512);
+run_make_test(undef, ['x=$(other'], "#MAKEFILE#:4: $unterm", 512);
 
 # TEST #2
 # Again, but this time while reading the makefile.
@@ -33,28 +32,23 @@ z := $y
 
 all: ; @echo $y
 ',
-              '', '#MAKEFILE#:3: *** unterminated variable reference.  Stop.',
-              512);
+              '', "#MAKEFILE#:3: $unterm", 512);
 
 # TEST #3
 # Bogus variable value passed on the command line.
-run_make_test(undef,
-              ['x=$(other'],
-              '#MAKEFILE#:4: *** unterminated variable reference.  Stop.',
-              512);
+run_make_test(undef, ['x=$(other'], "#MAKEFILE#:4: $unterm", 512);
+
+my $nosep = '*** missing separator.  Stop.';
 
 # Whitespace not allowed in variable names
-run_make_test('x y =', '',
-              '#MAKEFILE#:1: *** missing separator.  Stop.', 512);
+run_make_test('x y =', '', "#MAKEFILE#:1: $nosep", 512);
 
-run_make_test('x y=', '',
-              '#MAKEFILE#:1: *** missing separator.  Stop.', 512);
+run_make_test('x y=', '', "#MAKEFILE#:1: $nosep", 512);
 
 # In theory an empty variable should be ignored, but during parsing it's a
 # real token and so this fails.  I'm not 100% sure if this is right or not.
 
-run_make_test('x $X=', '',
-              '#MAKEFILE#:1: *** missing separator.  Stop.', 512);
+run_make_test('x $X=', '', "#MAKEFILE#:1: $nosep", 512);
 
 
 1;