diff --git a/Doc/c-api/concrete.rst b/Doc/c-api/concrete.rst
index 6cd4be49ce7..e48056c8e15 100644
--- a/Doc/c-api/concrete.rst
+++ b/Doc/c-api/concrete.rst
@@ -2425,6 +2425,12 @@ change in future releases of Python.
    pointer, *fp*.  The function *close* will be called when the file should be
    closed.  Return *NULL* on failure.
 
+.. cfunction:: PyFile_FromFileEx(FILE *fp, char *name, char *mode, int (*close)(FILE *), int buffering, char *encoding, char *newline)
+
+   Create a new :ctype:`PyFileObject` from the already-open standard C file
+   pointer, *fp*. The functions works similar to *PyFile_FromFile* but takes
+   optional arguments for *buffering*, *encoding* and *newline*. Use -1 resp.
+   *NULL* for default values.
 
 .. cfunction:: FILE* PyFile_AsFile(PyObject *p)
 
diff --git a/Doc/data/refcounts.dat b/Doc/data/refcounts.dat
index 4555301f112..5c3fc990d60 100644
--- a/Doc/data/refcounts.dat
+++ b/Doc/data/refcounts.dat
@@ -338,6 +338,15 @@ PyFile_FromFile:char*:name::
 PyFile_FromFile:char*:mode::
 PyFile_FromFile:int(*:close)::
 
+PyFile_FromFileEx:PyObject*::+1:
+PyFile_FromFileEx:FILE*:fp::
+PyFile_FromFileEx:char*:name::
+PyFile_FromFileEx:char*:mode::
+PyFile_FromFileEx:int(*:close)::
+PyFile_FromFileEx:int:buffering::
+PyFile_FromFileEx:char*:encoding::
+PyFile_FromFileEx:char*:newline::
+
 PyFile_FromString:PyObject*::+1:
 PyFile_FromString:char*:name::
 PyFile_FromString:char*:mode::
diff --git a/Include/fileobject.h b/Include/fileobject.h
index 2d8c397989a..b65d9847d45 100644
--- a/Include/fileobject.h
+++ b/Include/fileobject.h
@@ -9,6 +9,9 @@ extern "C" {
 #define PY_STDIOTEXTMODE "b"
 
 PyAPI_FUNC(PyObject *) PyFile_FromFile(FILE *, char *, char *, int (*)(FILE*));
+PyAPI_FUNC(PyObject *) PyFile_FromFileEx(FILE *, char *, char *,
+					 int (*)(FILE *), int, char *,
+					 char *);
 PyAPI_FUNC(PyObject *) PyFile_GetLine(PyObject *, int);
 PyAPI_FUNC(int) PyFile_WriteObject(PyObject *, PyObject *, int);
 PyAPI_FUNC(int) PyFile_WriteString(const char *, PyObject *);
diff --git a/Lib/io.py b/Lib/io.py
index e7533b5cfcd..07846bfb83f 100644
--- a/Lib/io.py
+++ b/Lib/io.py
@@ -178,6 +178,18 @@ def open(file, mode="r", buffering=None, encoding=None, newline=None):
     return text
 
 
+class OpenWrapper:
+    """Wrapper for __builtin__.open
+
+    Trick so that open won't become a bound method when stored
+    as a class variable (as dumbdbm does).
+
+    See initstdio() in Python/pythonrun.c.
+    """
+    def __new__(cls, *args, **kwargs):
+        return open(*args, **kwargs)
+
+
 class UnsupportedOperation(ValueError, IOError):
     pass
 
diff --git a/Lib/site.py b/Lib/site.py
index 53e859ea857..f1db89c9f0b 100644
--- a/Lib/site.py
+++ b/Lib/site.py
@@ -402,23 +402,6 @@ def execsitecustomize():
             (err.__class__.__name__, err))
 
 
-def installnewio():
-    """Install new I/O library as default."""
-    import io
-    # Hack to avoid a nasty recursion issue when Python is invoked
-    # in verbose mode: pre-import the Latin-1 and UTF-8 codecs
-    from encodings import latin_1, utf_8
-    # Trick so that open won't become a bound method when stored
-    # as a class variable (as dumbdbm does)
-    class open:
-        def __new__(cls, *args, **kwds):
-            return io.open(*args, **kwds)
-    __builtin__.open = open
-    sys.__stdin__ = sys.stdin = io.open(0, "r", newline='\n')
-    sys.__stdout__ = sys.stdout = io.open(1, "w", newline='\n')
-    sys.__stderr__ = sys.stderr = io.open(2, "w", newline='\n')
-
-
 def main():
     abs__file__()
     paths_in_sys = removeduppaths()
@@ -433,7 +416,6 @@ def main():
     sethelper()
     aliasmbcs()
     setencoding()
-    installnewio()
     execsitecustomize()
     # Remove sys.setdefaultencoding() so that users cannot change the
     # encoding after initialization.  The test for presence is needed when
diff --git a/Lib/test/test_imp.py b/Lib/test/test_imp.py
index 62b14e071bd..87efc33415e 100644
--- a/Lib/test/test_imp.py
+++ b/Lib/test/test_imp.py
@@ -38,9 +38,16 @@ class LockTests(unittest.TestCase):
                 self.fail("release_lock() without lock should raise "
                             "RuntimeError")
 
+class ImportTests(unittest.TestCase):
+
+    def test_find_module_encoding(self):
+        fd = imp.find_module("heapq")[0]
+        self.assertEqual(fd.encoding, "iso-8859-1")
+
 def test_main():
     test_support.run_unittest(
                 LockTests,
+                ImportTests,
             )
 
 if __name__ == "__main__":
diff --git a/Objects/fileobject.c b/Objects/fileobject.c
index 02675f5f3ef..b6d200d0c21 100644
--- a/Objects/fileobject.c
+++ b/Objects/fileobject.c
@@ -28,22 +28,32 @@ extern "C" {
 PyObject *
 PyFile_FromFile(FILE *fp, char *name, char *mode, int (*close)(FILE *))
 {
-	PyObject *io, *stream, *nameobj;
+	return PyFile_FromFileEx(fp, name, mode, close, -1, NULL, NULL);
+}
+
+PyObject *
+PyFile_FromFileEx(FILE *fp, char *name, char *mode, int (*close)(FILE *),
+	       int buffering, char *encoding, char *newline)
+{
+	PyObject *io, *stream, *nameobj=NULL;
 
 	io = PyImport_ImportModule("io");
 	if (io == NULL)
 		return NULL;
-	stream = PyObject_CallMethod(io, "open", "is", fileno(fp), mode);
-        Py_DECREF(io);
+	stream = PyObject_CallMethod(io, "open", "isiss", fileno(fp), mode,
+				    buffering, encoding, newline);
+	Py_DECREF(io);
 	if (stream == NULL)
 		return NULL;
-        nameobj = PyUnicode_FromString(name);
-        if (nameobj == NULL)
-		PyErr_Clear();
-	else {
-		if (PyObject_SetAttrString(stream, "name", nameobj) < 0)
+	if (name != NULL) {
+		nameobj = PyUnicode_FromString(name);
+		if (nameobj == NULL)
 			PyErr_Clear();
-		Py_DECREF(nameobj);
+		else {
+			if (PyObject_SetAttrString(stream, "name", nameobj) < 0)
+				PyErr_Clear();
+			Py_DECREF(nameobj);
+		}
 	}
 	return stream;
 }
diff --git a/Parser/tokenizer.c b/Parser/tokenizer.c
index 8f67e0e62ab..0ccd02b58d1 100644
--- a/Parser/tokenizer.c
+++ b/Parser/tokenizer.c
@@ -1601,7 +1601,28 @@ PyTokenizer_RestoreEncoding(struct tok_state* tok, int len, int *offset)
 }
 #endif
 
-			   
+/* Get -*- encoding -*- from a Python file
+
+   PyTokenizer_FindEncoding returns NULL when it can't find the encoding in
+   the first or second line of the file. In this case the encoding is
+   PyUnicode_GetDefaultEncoding().
+*/
+char *
+PyTokenizer_FindEncoding(FILE *fp) {
+	struct tok_state *tok;
+	char *p_start=NULL, *p_end=NULL;
+
+	if ((tok = PyTokenizer_FromFile(fp, NULL, NULL, NULL)) == NULL) {
+		rewind(fp);
+		return NULL;
+	}
+	while(((tok->lineno <= 2) && (tok->done == E_OK))) {
+		PyTokenizer_Get(tok, &p_start, &p_end);
+	}
+
+	rewind(fp);
+	return tok->encoding;
+}
 
 #ifdef Py_DEBUG
 
diff --git a/Parser/tokenizer.h b/Parser/tokenizer.h
index 72982bde47e..a66d78e7d97 100644
--- a/Parser/tokenizer.h
+++ b/Parser/tokenizer.h
@@ -67,6 +67,7 @@ extern void PyTokenizer_Free(struct tok_state *);
 extern int PyTokenizer_Get(struct tok_state *, char **, char **);
 extern char * PyTokenizer_RestoreEncoding(struct tok_state* tok, 
 					  int len, int *offset);
+extern char * PyTokenizer_FindEncoding(FILE *fp);
 
 #ifdef __cplusplus
 }
diff --git a/Python/import.c b/Python/import.c
index 21dcbd45d7a..323b55a540e 100644
--- a/Python/import.c
+++ b/Python/import.c
@@ -91,6 +91,9 @@ static PyObject *extensions = NULL;
 /* This table is defined in config.c: */
 extern struct _inittab _PyImport_Inittab[];
 
+/* Method from Parser/tokenizer.c */
+extern char * PyTokenizer_FindEncoding(FILE *fp);
+
 struct _inittab *PyImport_Inittab = _PyImport_Inittab;
 
 /* these tables define the module suffixes that Python recognizes */
@@ -2558,6 +2561,7 @@ call_find_module(char *name, PyObject *path)
 	struct filedescr *fdp;
 	char pathname[MAXPATHLEN+1];
 	FILE *fp = NULL;
+	char *encoding = NULL;
 
 	pathname[0] = '\0';
 	if (path == Py_None)
@@ -2566,7 +2570,14 @@ call_find_module(char *name, PyObject *path)
 	if (fdp == NULL)
 		return NULL;
 	if (fp != NULL) {
-		fob = PyFile_FromFile(fp, pathname, fdp->mode, fclose);
+		if (strchr(fdp->mode, 'b') == NULL) {
+			/* Python text file, get encoding from tokenizer */
+			encoding = PyTokenizer_FindEncoding(fp);
+			encoding = (encoding != NULL) ? encoding :
+				   (char*)PyUnicode_GetDefaultEncoding();
+		}
+		fob = PyFile_FromFileEx(fp, pathname, fdp->mode, fclose, -1,
+					(char*)encoding, NULL);
 		if (fob == NULL) {
 			fclose(fp);
 			return NULL;
diff --git a/Python/pythonrun.c b/Python/pythonrun.c
index 4e239c94acc..f641547afd5 100644
--- a/Python/pythonrun.c
+++ b/Python/pythonrun.c
@@ -51,6 +51,7 @@ extern grammar _PyParser_Grammar; /* From graminit.c */
 /* Forward */
 static void initmain(void);
 static void initsite(void);
+static int initstdio(void);
 static PyObject *run_mod(mod_ty, const char *, PyObject *, PyObject *,
 			  PyCompilerFlags *, PyArena *);
 static PyObject *run_pyc_file(FILE *, const char *, PyObject *, PyObject *,
@@ -241,6 +242,9 @@ Py_InitializeEx(int install_sigs)
 		initsigs(); /* Signal handling stuff, including initintr() */
 
 	initmain(); /* Module __main__ */
+	if (initstdio() < 0)
+		Py_FatalError(
+		    "Py_Initialize: can't initialize sys standard streams");
 	if (!Py_NoSiteFlag)
 		initsite(); /* Module site */
 
@@ -676,6 +680,81 @@ initsite(void)
 	}
 }
 
+/* Initialize sys.stdin, stdout, stderr and __builtin__.open */
+static int
+initstdio(void)
+{
+	PyObject *iomod = NULL, *wrapper;
+	PyObject *bimod = NULL;
+	PyObject *m;
+	PyObject *std = NULL;
+	int status = 0;
+
+	/* Hack to avoid a nasty recursion issue when Python is invoked
+	   in verbose mode: pre-import the Latin-1 and UTF-8 codecs */
+	if ((m = PyImport_ImportModule("encodings.utf_8")) == NULL) {
+		goto error;
+	}
+	Py_DECREF(m);
+
+	if (!(m = PyImport_ImportModule("encodings.latin_1"))) {
+		goto error;
+	}
+	Py_DECREF(m);
+
+	if (!(bimod = PyImport_ImportModule("__builtin__"))) {
+		goto error;
+	}
+
+	if (!(iomod = PyImport_ImportModule("io"))) {
+		goto error;
+	}
+	if (!(wrapper = PyObject_GetAttrString(iomod, "OpenWrapper"))) {
+		goto error;
+	}
+
+	/* Set __builtin__.open */
+	if (PyObject_SetAttrString(bimod, "open", wrapper) == -1) {
+		goto error;
+	}
+
+	/* Set sys.stdin */
+	if (!(std = PyFile_FromFileEx(stdin, "<stdin>", "r", fclose, -1,
+				      NULL, "\n"))) {
+		goto error;
+	}
+	PySys_SetObject("__stdin__", std);
+	PySys_SetObject("stdin", std);
+	Py_DECREF(std);
+
+	/* Set sys.stdout */
+	if (!(std = PyFile_FromFileEx(stdout, "<stdout>", "w", fclose, -1,
+				      NULL, "\n"))) {
+            goto error;
+        }
+	PySys_SetObject("__stdout__", std);
+	PySys_SetObject("stdout", std);
+	Py_DECREF(std);
+
+	/* Set sys.stderr */
+	if (!(std = PyFile_FromFileEx(stderr, "<stderr>", "w", fclose, -1,
+				      NULL, "\n"))) {
+            goto error;
+        }
+        PySys_SetObject("__stderr__", std);
+	PySys_SetObject("stderr", std);
+	Py_DECREF(std);
+
+        if (0) {
+  error:
+                status = -1;
+        }
+
+	Py_XDECREF(bimod);
+	Py_XDECREF(iomod);
+	return status;
+}
+
 /* Parse input from a file and execute it */
 
 int
@@ -1146,10 +1225,10 @@ PyErr_Display(PyObject *exception, PyObject *value, PyObject *tb)
 	int err = 0;
 	PyObject *f = PySys_GetObject("stderr");
 	Py_INCREF(value);
-	if (f == NULL)
+	if (f == NULL) {
 		_PyObject_Dump(value);
-	if (f == NULL)
 		fprintf(stderr, "lost sys.stderr\n");
+	}
 	else {
 		fflush(stdout);
 		if (tb && tb != Py_None)
@@ -1589,6 +1668,9 @@ void
 Py_FatalError(const char *msg)
 {
 	fprintf(stderr, "Fatal Python error: %s\n", msg);
+	if (PyErr_Occurred()) {
+		PyErr_Print();
+	}
 #ifdef MS_WINDOWS
 	OutputDebugString("Fatal Python error: ");
 	OutputDebugString(msg);