diff --git a/heat/api/openstack/v1/stacks.py b/heat/api/openstack/v1/stacks.py
index 237f3e566a..21fdff96a8 100644
--- a/heat/api/openstack/v1/stacks.py
+++ b/heat/api/openstack/v1/stacks.py
@@ -137,7 +137,9 @@ class InstantiationData(object):
         environment global options.
         """
         env = {}
-        if self.PARAM_ENVIRONMENT in self.data:
+        # Don't use merged environment, if environment_files are supplied.
+        if (self.PARAM_ENVIRONMENT in self.data and
+                not self.data.get(self.PARAM_ENVIRONMENT_FILES)):
             env_data = self.data[self.PARAM_ENVIRONMENT]
             with self.parse_error_check('Environment'):
                 if isinstance(env_data, dict):
diff --git a/heat/tests/api/openstack_v1/test_stacks.py b/heat/tests/api/openstack_v1/test_stacks.py
index ed311b519d..9708329f8d 100644
--- a/heat/tests/api/openstack_v1/test_stacks.py
+++ b/heat/tests/api/openstack_v1/test_stacks.py
@@ -167,6 +167,17 @@ blarg: wibble
         data = stacks.InstantiationData(body)
         self.assertEqual(env, data.environment())
 
+    def test_environment_with_env_files(self):
+        env = {'parameters': {'foo': 'bar', 'blarg': 'wibble'}}
+        body = {'environment': env, 'environment_files': ['env.yaml']}
+        expect = {'parameters': {},
+                  'encrypted_param_names': [],
+                  'parameter_defaults': {},
+                  'event_sinks': [],
+                  'resource_registry': {}}
+        data = stacks.InstantiationData(body)
+        self.assertEqual(expect, data.environment())
+
     def test_environment_and_parameters(self):
         body = {'parameters': {'foo': 'bar'},
                 'environment': {'parameters': {'blarg': 'wibble'}}}