--- modules/system/system.module
+++ modules/system/system.module
@@ -3061,33 +3061,38 @@ function system_image_toolkits() {
  *   The URL of the file to grab.
  *
  * @param $destination
- *   Where the file should be saved, if a directory is provided, file is saved
- *   in that directory with its original name.  If a filename is provided,
- *   remote fileis stored to that location.  NOTE: Relative to drupal "files" directory"
+ *   Stream wrapper URI telling Drupal where the file should be placed. If a
+ *   directory path is provided the file is saved into that directory with its
+ *   original name or, if given aswell, a different filename.
+ *   If this value is omitted, Drupal's default files scheme will be used,
+ *   usually "public://".
  *
- * @param $overwrite boolean
- *   Defaults to TRUE, will overwrite existing files of the same name.
+ * @param $managed boolean
+ *   If this is set to TRUE the file API hooks will be invoked and
+ *   the file is registered in the database.
+ *
+ * @param $replace boolean
+ *   Replace behavior when the destination file already exists:
+ *   - FILE_EXISTS_REPLACE - Replace the existing file.
+ *   - FILE_EXISTS_RENAME - Append _{incrementing number} until the filename is
+ *       unique.
+ *   - FILE_EXISTS_ERROR - Do nothing and return FALSE.
  *
  * @return
- *   On success the address the files was saved to, FALSE on failure.
+ *   On success the location the file was saved to, FALSE on failure.
  */
-function system_retrieve_file($url, $destination = NULL, $overwrite = TRUE) {
-  if (!$destination) {
-    $destination = file_directory_path('temporary');
-  }
+function system_retrieve_file($url, $destination = NULL, $managed = FALSE, $replace = FILE_EXISTS_RENAME) {
   $parsed_url = parse_url($url);
-  $local = is_dir(file_directory_path() . '/' . $destination) ? $destination . '/' . basename($parsed_url['path']) : $destination;
-
-  if (!$overwrite && file_exists($local)) {
-    drupal_set_message(t('@remote could not be saved. @local already exists', array('@remote' => $url, '@local' => $local)), 'error');
-    return FALSE;
-  }
-
+  $path = !isset($destination) ? file_build_uri(basename($parsed_url['path'])) : (is_dir(drupal_realpath($destination)) ? str_replace('///', '//', "$destination/") . basename($parsed_url['path']) : $destination);
   $result = drupal_http_request($url);
-  if ($result->code != 200 || !file_save_data($result->data, $local)) {
-    drupal_set_message(t('@remote could not be saved.', array('@remote' => $url)), 'error');
+  if ($result->code != 200) {
+    drupal_set_message(t('HTTP error @errorcode occured when trying to fetch @remote.', array('@errorcode' => $result->code, '@remote' => $url)), 'error');
     return FALSE;
   }
+  $local = $managed ? file_save_data($result->data, $path, $replace) : file_unmanaged_save_data($result->data, $path, $replace);
+  if (!$local) {
+    drupal_set_message(t('@remote could not be saved to @path.', array('@remote' => $url, '@path' => $path)), 'error');
+  }
 
   return $local;
 }
--- modules/system/system.test
+++ modules/system/system.test
@@ -1227,3 +1227,47 @@ class TokenReplaceTestCase extends DrupalWebTestCase {
     $this->assertFalse(strcmp($generated['[node:title]'], $node->title), t('Unsanitized token generated properly.'));
   }
 }
+
+/**
+ * Test http file downloading capability.
+ */
+class RetrieveFileTestCase extends DrupalWebTestCase {
+  public static function getInfo() {
+    return array(
+      'name' => 'HTTP File Retrieval',
+      'description' => 'Checks HTTP file fetching and error handling.',
+      'group' => 'System',
+    );
+  }
+
+  /**
+    * Invokes system_retrieve_file() in several scenarios.
+    */
+  function testFileRetrieving() {
+    // Test 404 handling by trying to fetch a randomly named file.
+    drupal_mkdir($sourcedir = 'public://' . $this->randomName());
+    $filename = $this->randomName();
+    $url = file_create_url($sourcedir . '/' . $filename);
+    $retrieved_file = system_retrieve_file($url);
+    $this->assertFalse($retrieved_file, t('Non-existent file not fetched.'));
+
+    // Actually create that file, download it via HTTP and test the returned path.
+    file_put_contents($sourcedir . '/' . $filename, 'testing');
+    $retrieved_file = system_retrieve_file($url);
+    $this->assertEqual($retrieved_file, 'public://' . $filename, t('Sane path for downloaded file returned (public:// scheme).'));
+    $this->assertTrue(is_file($retrieved_file), t('Downloaded file does exist (public:// scheme).'));
+    $this->assertEqual(filesize($retrieved_file), 7, t('File size of downloaded file is correct (public:// scheme).'));
+    file_unmanaged_delete($retrieved_file);
+
+    // Test downloading file to a different location.
+    drupal_mkdir($targetdir = 'temporary://' . $this->randomName());
+    $retrieved_file = system_retrieve_file($url, $targetdir);
+    $this->assertEqual($retrieved_file, "$targetdir/$filename", t('Sane path for downloaded file returned (temporary:// scheme).'));
+    $this->assertTrue(is_file($retrieved_file), t('Downloaded file does exist (temporary:// scheme).'));
+    $this->assertEqual(filesize($retrieved_file), 7, t('File size of downloaded file is correct (temporary:// scheme).'));
+    file_unmanaged_delete($retrieved_file);
+
+    file_unmanaged_delete_recursive($sourcedir);
+    file_unmanaged_delete_recursive($targetdir);
+  }
+}
\ No newline at end of file