Index: src/org/python/core/PyString.java
===================================================================
--- src/org/python/core/PyString.java	(revision 3133)
+++ src/org/python/core/PyString.java	(working copy)
@@ -2045,7 +2045,7 @@
     
     public PyObject str___mod__(PyObject other){
         StringFormatter fmt = new StringFormatter(string);
-        return createInstance(fmt.format(other));
+        return fmt.format(other);
     }
 
     public PyObject __int__() {
@@ -3535,7 +3535,7 @@
         
     }
 
-    public String formatLong(PyString arg, char type, boolean altFlag) {
+    private String formatLong(PyString arg, char type, boolean altFlag) {
         checkPrecision("long");
         String s = arg.toString();
         int end = s.length();
@@ -3589,11 +3589,11 @@
         return s;
     }
 
-    public String formatInteger(PyObject arg, int radix, boolean unsigned) {
+    private String formatInteger(PyObject arg, int radix, boolean unsigned) {
         return formatInteger(((PyInteger)arg.__int__()).getValue(), radix, unsigned);
     }
 
-    public String formatInteger(long v, int radix, boolean unsigned) {
+    private String formatInteger(long v, int radix, boolean unsigned) {
         checkPrecision("integer");
         if (unsigned) {
             if (v < 0)
@@ -3611,11 +3611,11 @@
         return s;
     }
 
-    public String formatFloatDecimal(PyObject arg, boolean truncate) {
+    private String formatFloatDecimal(PyObject arg, boolean truncate) {
         return formatFloatDecimal(arg.__float__().getValue(), truncate);
     }
 
-    public String formatFloatDecimal(double v, boolean truncate) {
+    private String formatFloatDecimal(double v, boolean truncate) {
         checkPrecision("decimal");
         java.text.NumberFormat format = java.text.NumberFormat.getInstance(
                                            java.util.Locale.US);
@@ -3638,7 +3638,7 @@
         return ret;
     }
 
-    public String formatFloatExponential(PyObject arg, char e,
+    private String formatFloatExponential(PyObject arg, char e,
                                          boolean truncate)
     {
         StringBuffer buf = new StringBuffer();
@@ -3681,9 +3681,10 @@
         return buf.toString();
     }
 
-    public String format(PyObject args) {
+    public PyString format(PyObject args) {
         PyObject dict = null;
         this.args = args;
+        boolean needUnicode = false;
         if (args instanceof PyTuple) {
             argIndex = 0;
         } else {
@@ -3786,6 +3787,9 @@
                 if (precision >= 0 && string.length() > precision) {
                     string = string.substring(0, precision);
                 }
+                if (arg instanceof PyUnicode) {
+                    needUnicode = true;
+                }
                 break;
             case 'i':
             case 'd':
@@ -3877,6 +3881,9 @@
                     string = ((PyString)arg).toString();
                     if (string.length() != 1)
                         throw Py.TypeError("%c requires int or char");
+                    if (arg instanceof PyUnicode) {
+                        needUnicode = true;
+                    }
                     break;
                 }
                 char tmp = (char)((PyInteger)arg.__int__()).getValue();
@@ -3949,7 +3956,10 @@
         {
             throw Py.TypeError("not all arguments converted");
         }
-        return buffer.toString();
+        if (needUnicode) {
+            return new PyUnicode(buffer.toString());
+        }
+        return new PyString(buffer.toString());
     }
 
 }
Index: src/org/python/core/PyUnicode.java
===================================================================
--- src/org/python/core/PyUnicode.java	(revision 3133)
+++ src/org/python/core/PyUnicode.java	(working copy)
@@ -1483,6 +1483,10 @@
        return new PyUnicode(str);
     }
 
+    public PyObject __mod__(PyObject other) {
+        return str___mod__(other).__unicode__();
+    }
+
     final PyUnicode unicode___unicode__() {
         return str___unicode__();
     }
Index: Lib/test/test_str2unicode.py
===================================================================
--- Lib/test/test_str2unicode.py	(revision 3133)
+++ Lib/test/test_str2unicode.py	(working copy)
@@ -1,19 +1,90 @@
 import unittest
 
+
 class TestStrReturnsUnicode(unittest.TestCase):
+
     def test_join(self):
-	self.assertEquals(unicode, type(''.join([u'blah'])))
+        self.assertEquals(unicode, type(''.join([u'blah'])))
 
     def test_replace(self):
-	self.assertEquals(unicode, type('hello'.replace('o', u'o')))
+        self.assertEquals(unicode, type('hello'.replace('o', u'o')))
 
+    def test_string_formatting_s(self):
+        self.assertEquals(unicode, type('%s' % u'x'))
+        self.assertEquals(unicode, type('%s %s' % (u'x', 'y')))
+        self.assertEquals(unicode, type('%(x)s' % {'x' : u'x'}))
 
+    def test_string_formatting_r(self):
+        self.assertEquals(unicode, type('%r' % u'x'))
+        self.assertEquals(unicode, type('%r %r' % (u'x', 'y')))
+        self.assertEquals(unicode, type('%(x)r' % {'x' : u'x'}))
+
+    def test_string_formatting_c(self):    
+        self.assertEquals(unicode, type('%c' % u'x'))
+        self.assertEquals(unicode, type('%c %c' % (u'x', 'y')))
+        self.assertEquals(unicode, type('%(x)c' % {'x' : u'x'}))
+
+
 class TestStrReturnsStr(unittest.TestCase):
+
     def test_join(self):
-	self.assertEquals(str, type(''.join(['blah'])))
+        self.assertEquals(str, type(''.join(['blah'])))
 
     def test_replace(self):
-	self.assertEquals(str, type('hello'.replace('o', 'oo')))
+        self.assertEquals(str, type('hello'.replace('o', 'oo')))
 
+    def test_string_formatting_s(self):
+        self.assertEquals(str, type('%s' % 'x'))
+        self.assertEquals(str, type('%s %s' % ('x', 'y')))
+        self.assertEquals(str, type('%(x)s' % {'x' : 'xxx'}))
+
+    def test_string_formatting_r(self):
+        self.assertEquals(str, type('%r' % 'x'))
+        self.assertEquals(str, type('%r %r' % ('x', 'y')))
+        self.assertEquals(str, type('%(x)r' % {'x' : 'x'}))
+        
+    def test_string_formatting_c(self):
+        self.assertEquals(str, type('%c' % 'x'))
+        self.assertEquals(str, type('%c %c' % ('x', 'y')))
+        self.assertEquals(str, type('%(x)c' % {'x' : 'x'}))
+
+
+class TestUnicodeReturnsUnicode(unittest.TestCase):
+
+    def test_join(self):
+        self.assertEquals(unicode, type(u''.join([u'blah'])))
+        self.assertEquals(unicode, type(u''.join(['blah'])))
+
+    def test_replace(self):
+        self.assertEquals(unicode, type(u'hello'.replace('o', u'o')))
+        self.assertEquals(unicode, type(u'hello'.replace(u'o', 'o')))
+        self.assertEquals(unicode, type(u'hello'.replace(u'o', u'o')))
+        self.assertEquals(unicode, type(u'hello'.replace('o', 'o')))
+
+    def test_string_formatting_s(self):
+        self.assertEquals(unicode, type(u'%s' % u'x'))
+        self.assertEquals(unicode, type(u'%s' % 'x'))
+        self.assertEquals(unicode, type(u'%s %s' % (u'x', 'y')))
+        self.assertEquals(unicode, type(u'%s %s' % ('x', 'y')))
+        self.assertEquals(unicode, type(u'%(x)s' % {'x' : u'x'}))
+        self.assertEquals(unicode, type(u'%(x)s' % {'x' : 'x'}))
+
+    def test_string_formatting_r(self):
+        self.assertEquals(unicode, type(u'%r' % u'x'))
+        self.assertEquals(unicode, type(u'%r' % 'x'))
+        self.assertEquals(unicode, type(u'%r %r' % (u'x', 'y')))
+        self.assertEquals(unicode, type(u'%r %r' % ('x', 'y')))
+        self.assertEquals(unicode, type(u'%(x)r' % {'x' : u'x'}))
+        self.assertEquals(unicode, type(u'%(x)r' % {'x' : 'x'}))
+
+    def test_string_formatting_c(self):
+        self.assertEquals(unicode, type(u'%c' % u'x'))
+        self.assertEquals(unicode, type(u'%c' % 'x'))
+        self.assertEquals(unicode, type(u'%c %c' % (u'x', 'y')))
+        self.assertEquals(unicode, type(u'%c %c' % ('x', 'y')))
+        self.assertEquals(unicode, type(u'%(x)c' % {'x' : u'x'}))
+        self.assertEquals(unicode, type(u'%(x)c' % {'x' : 'x'}))
+
+
 if __name__ == '__main__':
     unittest.main()