When I uncheck "Allow SourceTree to modify your global Mercurial and Git configuration files" the external diff feature (e.g. hitting command-D) is still available in the UI but no longer works. Turning the option back on allows the feature to work again.

If the feature cannot be enabled, the options shouldn't be available (or should be disabled) in the UI. Also, it is not clear that permissions to modify the .gitconfig are required for the external diff feature to work (I eventually figured it out after a week of head scratching, the preferences panel for external diff does get disabled, but it is not clear why).

All that said, my .gitconfig still has the following (similar entries for merging, except the Kaleidoscope and SourceTree commands are the same for merge):

[diff]
	tool = Kaleidoscope
[difftool]
	prompt = false
[difftool "Kaleidoscope"]
	cmd = ksdiff --partial-changeset --relative-path \"$MERGED\" -- \"$LOCAL\" \"$REMOTE\"
[difftool "sourcetree"]
	cmd = /usr/local/bin/ksdiff -w \"$LOCAL\" \"$REMOTE\"
	path = 

If the difftool "sourcetree" section exists and is correct, shouldn't SourceTree just honor it and allow launching the external diff even if the the option to modify the config file is off? The preferences panel correctly identifies the correct difftool (just changing it is disabled).