This option alters the behaviour of the Tab key in the file editing panels.
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If checked the Tab key will insert tab characters into the editing panels or, if a selection is set, Tab and Shift+Tab will indent and unindent the selection, respectively.
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If unchecked the Tab key will cycle focus around the controls in the file comparison window. In this case, you can use Ctrl+T to insert tab characters into the editing panels.
In either case, Ctrl+I and Ctrl+U can be used to indent and unindent the selection.