This issue can be caused by the default _vimrc file created by the installer on Windows. If you're still using that default file, or if you copied it at some point, then check the function you've assigned to the
diffexpr option. One of the patches between Vim 7.3 and 7.4 introduced new default quoting rules for the cmd.exe shell on Windows. This patch broke the workaround in the MyDiff() function designed to fix the same issue solved by the patch.
The MyDiff() function was fixed by version 7.4.103 by fixing the installer. Here is the MyDiff() function which the latest installer will create for you if you just want to copy it to your _vimrc:
let opt = '-a --binary '
if &diffopt =~ 'icase' | let opt = opt . '-i ' | endif
if &diffopt =~ 'iwhite' | let opt = opt . '-b ' | endif
let arg1 = v:fname_in
if arg1 =~ ' ' | let arg1 = '"' . arg1 . '"' | endif
let arg2 = v:fname_new
if arg2 =~ ' ' | let arg2 = '"' . arg2 . '"' | endif
let arg3 = v:fname_out
if arg3 =~ ' ' | let arg3 = '"' . arg3 . '"' | endif
if $VIMRUNTIME =~ ' '
if &sh =~ '\<cmd'
let l:shxq_sav = ''
let cmd = '"' . $VIMRUNTIME . '\diff"'
let cmd = substitute($VIMRUNTIME, ' ', '" ', '') . '\diff"'
let cmd = $VIMRUNTIME . '\diff'
silent execute '!' . cmd . ' ' . opt . arg1 . ' ' . arg2 . ' > ' . arg3
You can see your full version in Vim using the
:intro commands, or at the splash screen at startup.
Unfortunately if you want an official installer, you will either need to wait until 8.0, or install a nightly build. Nevertheless, you can install Vim from other places or build your own Vim.
Duplicated on Stack Overflow (unusually, on-topic on both sites), if this answer is updated so should the other.