diff --git a/NEWS.md b/NEWS.md
index 7cf63f0b7..6877436d5 100644
--- a/NEWS.md
+++ b/NEWS.md
@@ -40,6 +40,8 @@
 
 5. Non-equi joins combining an equality condition with two inequality conditions on the same column (e.g., `on = .(id == id, val >= lo, val <= hi)`) no longer error, [#7641](https://github.com/Rdatatable/data.table/issues/7641). The internal `chmatchdup` remapping of duplicate `rightcols` was overwriting the original column indices, causing downstream code to reference non-existent columns. Thanks @tarun-t for the report and fix, and @aitap for the diagnosis.
 
+6. By-reference sub-assignments of strings to factor columns now _actually_ match the levels in UTF-8 when required and now don't result in invalid factors being created, [#7648](https://github.com/Rdatatable/data.table/issues/7648), amending a previous incomplete fix to [#6886](https://github.com/Rdatatable/data.table/issues/6886) in v1.17.2. Thanks @BASS-JN for the report and @aitap for the fix.
+
 ### Notes
 
 1. {data.table} now depends on R 3.5.0 (2018).
diff --git a/inst/tests/tests.Rraw b/inst/tests/tests.Rraw
index f144532cf..293eed980 100644
--- a/inst/tests/tests.Rraw
+++ b/inst/tests/tests.Rraw
@@ -20671,9 +20671,11 @@ DT = data.table(factor(rep("\uf8", 3)))
 # identical() to V1's only level but stored in a different CHARSXP
 samelevel = iconv(levels(DT$V1), from = "UTF-8", to = "latin1")
 DT[1, V1 := samelevel]
-test(2311.1, nlevels(DT$V1), 1L) # used to be 2
+# used to fail to look up the new level, resulting in an invalid factor, #7648
+test(2311.1, as.integer(DT$V1), rep(1L, 3))
+test(2311.2, nlevels(DT$V1), 1L) # used to be 2
 DT[1, V1 := factor("a", levels = c("a", samelevel))]
-test(2311.2, nlevels(DT$V1), 2L) # used to be 3
+test(2311.3, nlevels(DT$V1), 2L) # used to be 3
 
 # avoid translateChar*() in OpenMP threads, #6883
 DF = list(rep(iconv("\uf8", from = "UTF-8", to = "latin1"), 2e6))
diff --git a/src/assign.c b/src/assign.c
index 05a55cb5a..1b474072c 100644
--- a/src/assign.c
+++ b/src/assign.c
@@ -806,9 +806,9 @@ const char *memrecycle(const SEXP target, const SEXP where, const int start, con
             newSourceD[i] = val==NA_INTEGER ? NA_INTEGER : -hash_lookup(marks, sourceLevelsD[val-1], 0); // retains NA factor levels here via TL(NA_STRING); e.g. ordered factor
           }
         } else {
-          const SEXP *sourceD = STRING_PTR_RO(source);
           for (int i=0; i<nSource; ++i) {  // convert source integers to refer to target levels
-            const SEXP val = sourceD[i];
+            // for character input, sourceLevelsD corresponds to the source vector pre-converted to UTF-8
+            const SEXP val = sourceLevelsD[i];
             newSourceD[i] = val==NA_STRING ? NA_INTEGER : -hash_lookup(marks, val, 0);
           }
         }