Index: universe/kauri-template/src/test/resources/org/kauriproject/template/variable_from_src_result.xml
===================================================================
--- universe/kauri-template/src/test/resources/org/kauriproject/template/variable_from_src_result.xml	(revision 1434)
+++ universe/kauri-template/src/test/resources/org/kauriproject/template/variable_from_src_result.xml	(working copy)
@@ -1,4 +1,4 @@
 <?xml version="1.0" encoding="UTF-8"?>
 <root xmlns:ktl="http://kauriproject.org/template">
-  Hello world!,local,overwriteTest2 - external value
+  Hello world!,Hello world!,local,overwriteTest2 - external value
 </root>
\ No newline at end of file
Index: universe/kauri-template/src/test/resources/org/kauriproject/template/variable_from_src.xml
===================================================================
--- universe/kauri-template/src/test/resources/org/kauriproject/template/variable_from_src.xml	(revision 1434)
+++ universe/kauri-template/src/test/resources/org/kauriproject/template/variable_from_src.xml	(working copy)
@@ -1,8 +1,9 @@
 <?xml version="1.0" encoding="UTF-8"?>
 <root xmlns:ktl="http://kauriproject.org/template">
-  <ktl:variable name="data" src="data.json"/>
+  <ktl:variable name="data" src="data.json" value="ignore"/>
+  <ktl:variable name="data2" src="nodata.json" value="${data}"/>
   <ktl:variable name="overwriteTest1" value="local"/>
   <ktl:variable name="overwriteTest2" value="local" overwrite="false"/>
 
-  ${data.message},${overwriteTest1},${overwriteTest2}
+  ${data.message},${data2.message},${overwriteTest1},${overwriteTest2}
 </root>
\ No newline at end of file
Index: universe/kauri-template/src/main/java/org/kauriproject/template/VariableBlock.java
===================================================================
--- universe/kauri-template/src/main/java/org/kauriproject/template/VariableBlock.java	(revision 1434)
+++ universe/kauri-template/src/main/java/org/kauriproject/template/VariableBlock.java	(working copy)
@@ -58,6 +58,8 @@
         return new EndStep(locator);
     }
 
+    private static final Object NO_VALUE = new Object();
+
     class StartStep extends Step {
 
         // variable stuff
@@ -100,16 +102,14 @@
             overwrite = !"false".equalsIgnoreCase(attributes.getValue(OVERWRITE));
         }
 
+        
         @Override
         public Step executeAndProceed(ExecutionContext context, TemplateResult result) throws SAXException {
             TemplateContext tmplContext = context.getTemplateContext();
             if (overwrite || !tmplContext.containsKey(name)) {
+                Object value = NO_VALUE;
                 if (valueExpression != null) {
-                    final Object value = valueExpression.evaluate(context.getTemplateContext());
-                    tmplContext.put(name, value);
-                } else if (srcExpression != null) {
-                    Object data = loadFromSrc(context);
-                    tmplContext.put(name, data);
+                    value = valueExpression.evaluate(context.getTemplateContext());
                 } else {
                     // use element body as value
                     ByteArrayOutputStream bos = new ByteArrayOutputStream();
@@ -122,21 +122,28 @@
                     }
                     buffer.endDocument();
                     buffer.flush();
-                    String value;
                     try {
                         bos.flush();
-                        value = bos.toString("UTF-8");
+                        final String content = bos.toString("UTF-8");
+                        if (content != null && content.length() > 0)
+                            value = content; 
                     } catch (IOException ex) {
                         throw new TemplateException("Error building variable value.", ex);
                     }
+                }
 
-                    tmplContext.put(name, value);
+                // value retrieved from @value or body can be overwritten by loaded data from @src
+                if (srcExpression != null) {
+                    value = loadFromSrc(context, value);
                 }
+
+                tmplContext.put(name, value);
             }
+
             return endStep.getCompiledNext();
         }
 
-        private Object loadFromSrc(ExecutionContext context) {
+        private Object loadFromSrc(ExecutionContext context, Object fallbackValue) {
             String src = (String)srcExpression.evaluate(context.getTemplateContext());
             String accept = acceptExpression != null ? (String)acceptExpression.evaluate(context.getTemplateContext()) : null;
             Source source = null;
@@ -151,6 +158,9 @@
                     return loadString(source);
                 }
             } catch (Throwable e) {
+                if (fallbackValue != NO_VALUE)
+                    return fallbackValue;
+                // else
                 throw new TemplateException("Some error occured while loading data for variable " + name + " from URI " + src, e);
             } finally {
                 if (source != null) {