KDiff3: "There is a line end style conflict"

I am trying to use KDiff3 to solve conflicts on windows. But when run the merge I get:

KDiff3: "There is a line end style conflict"

And nothing is merged/solved:

Even though I selected DOS line ending before running the merge:

Any ideas?

It seems to work if I just save instead of pressing the Merge button. That could be a solution.

Here's a screenshot to walk you through the process that Matt Wilkie described in his answer.

1. Click in the C pane.
2. Choose an encoding other than 'conflict'
3. Save

What worked for me:

• make the output pane active (click in it),
• manually choose both Encoding and Line end style drop down choices,
• save (Ctrl + S).

Without doing all three steps, I just kept getting the same error popup. Choosing Use A everwhere and/or related merge menu items had no effect.