diff --git a/lib/liquid/context.rb b/lib/liquid/context.rb
index 2d739d2..4c9b9b4 100644
--- a/lib/liquid/context.rb
+++ b/lib/liquid/context.rb
@@ -14,13 +14,15 @@ module Liquid
   #   context['bob']  #=> nil  class Context
   class Context
     attr_reader :scopes
-    attr_reader :errors, :registers
+    attr_reader :errors, :registers, :environment
 
-    def initialize(assigns = {}, registers = {}, rethrow_errors = false)
-      @scopes     = [(assigns || {})]
-      @registers  = registers
-      @errors     = []
+    def initialize(environment = {}, instance_assigns = {}, registers = {}, rethrow_errors = false)
+      @environment    = environment
+      @scopes         = [(instance_assigns || {})]
+      @registers      = registers
+      @errors         = []
       @rethrow_errors = rethrow_errors
+      squash_instance_assigns_with_environment
     end
 
     def strainer
@@ -61,9 +63,9 @@ module Liquid
     end
 
     # push new local scope on the stack. use <tt>Context#stack</tt> instead
-    def push
+    def push(new_scope={})
       raise StackLevelError, "Nesting too deep" if @scopes.length > 100
-      @scopes.unshift({})
+      @scopes.unshift(new_scope)
     end
 
     # merge a hash of variables in the current local scope
@@ -86,9 +88,9 @@ module Liquid
     #   end
     #   context['var]  #=> nil
     #
-    def stack(&block)
+    def stack(new_scope={},&block)
       result = nil
-      push
+      push(new_scope)
       begin
         result = yield
       ensure
@@ -96,6 +98,10 @@ module Liquid
       end
       result
     end
+    
+    def clear_instance_assigns
+      @scopes[0] = {}
+    end
 
     # Only allow String, Numeric, Hash, Array, Proc, Boolean or <tt>Liquid::Drop</tt>
     def []=(key, value)
@@ -156,9 +162,14 @@ module Liquid
     # fetches an object starting at the local scope and then moving up
     # the hierachy
     def find_variable(key)
-      scope = @scopes[0..-2].find { |s| s.has_key?(key) } || @scopes.last
-      variable = scope[key]
-      variable = scope[key] = variable.call(self) if variable.is_a?(Proc)
+      scope = @scopes.find { |s| s.has_key?(key) } || environment
+      
+      if scope[key].is_a?(Proc)
+        variable = scope[key] = scope[key].call(self)
+      else
+        variable = scope[key]
+      end
+      
       variable = variable.to_liquid
       variable.context = self if variable.respond_to?(:context=)
       return variable
@@ -217,5 +228,14 @@ module Liquid
 
       object
     end
+    
+    def squash_instance_assigns_with_environment
+      scopes[0].each_key do |k|
+        if environment.has_key?(k)
+          scopes[0][k] = environment[k]
+        end
+      end
+    end
+    
   end
 end
diff --git a/lib/liquid/template.rb b/lib/liquid/template.rb
index fae8ae3..a9ab882 100644
--- a/lib/liquid/template.rb
+++ b/lib/liquid/template.rb
@@ -67,6 +67,10 @@ module Liquid
       @assigns ||= {}
     end
 
+    def instance_assigns
+      @instance_assigns ||= {}
+    end
+
     def errors
       @errors ||= []
     end
@@ -84,16 +88,17 @@ module Liquid
     #
     def render(*args)
       return '' if @root.nil?
-
+      
       context = case args.first
       when Liquid::Context
         args.shift
       when Hash
-        a = args.shift
-        assigns.each { |k,v| a[k] = v unless a.has_key?(k) }
-        Context.new(a, registers, @rethrow_errors)
+        environment = args.shift
+        environment.merge!(assigns) {|k,v1,v2| v1}
+        Context.new(environment, instance_assigns, registers, @rethrow_errors)
       when nil
-        Context.new(assigns.dup, registers, @rethrow_errors)
+        environment = assigns.dup
+        Context.new(environment, instance_assigns, registers, @rethrow_errors)
       else
         raise ArgumentError, "Expect Hash or Liquid::Context as parameter"
       end
diff --git a/test/template_test.rb b/test/template_test.rb
index d96d274..6f49a07 100644
--- a/test/template_test.rb
+++ b/test/template_test.rb
@@ -23,4 +23,35 @@ class TemplateTest < Test::Unit::TestCase
     assert_equal ['  ', '{% comment %}', ' ', '{% endcomment %}', ' '], Template.new.send(:tokenize, "  {% comment %} {% endcomment %} ")    
   end                                                          
   
+  def test_instance_assigns_persist_on_same_template_object_between_parses
+    t = Template.new
+    assert_equal 'from instance assigns', t.parse("{% assign foo = 'from instance assigns' %}{{ foo }}").render
+    assert_equal 'from instance assigns', t.parse("{{ foo }}").render
+  end
+  
+  def test_instance_assigns_persist_on_same_template_parsing_between_renders
+    t = Template.new.parse("{{ foo }}{% assign foo = 'foo' %}{{ foo }}")
+    assert_equal 'foo', t.render
+    assert_equal 'foofoo', t.render
+  end
+  
+  def test_custom_assigns_do_not_persist_on_same_template
+    t = Template.new
+    assert_equal 'from custom assigns', t.parse("{{ foo }}").render('foo' => 'from custom assigns')
+    assert_equal '', t.parse("{{ foo }}").render
+  end
+  
+  def test_custom_assigns_squash_instance_assigns
+    t = Template.new
+    assert_equal 'from instance assigns', t.parse("{% assign foo = 'from instance assigns' %}{{ foo }}").render
+    assert_equal 'from custom assigns', t.parse("{{ foo }}").render('foo' => 'from custom assigns')
+  end
+  
+  def test_persistent_assigns_squash_instance_assigns
+    t = Template.new
+    assert_equal 'from instance assigns', t.parse("{% assign foo = 'from instance assigns' %}{{ foo }}").render
+    t.assigns['foo'] = 'from persistent assigns'
+    assert_equal 'from persistent assigns', t.parse("{{ foo }}").render
+  end
+  
 end
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