diff --git a/core/field_variable.js b/core/field_variable.js
index 2f48e627d..0221f2937 100644
--- a/core/field_variable.js
+++ b/core/field_variable.js
@@ -110,7 +110,6 @@ Blockly.FieldVariable.dropdownCreate = function() {
   }
   variableList.sort(goog.string.caseInsensitiveCompare);
   variableList.push(Blockly.Msg.RENAME_VARIABLE);
-  variableList.push(Blockly.Msg.NEW_VARIABLE);
   variableList.push(Blockly.Msg.DELETE_VARIABLE.replace('%1', name));
   // Variables are not language-specific, use the name as both the user-facing
   // text and the internal representation.
@@ -123,8 +122,8 @@ Blockly.FieldVariable.dropdownCreate = function() {
 
 /**
  * Event handler for a change in variable name.
- * Special case the 'New variable...' and 'Rename variable...' options.
- * In both of these special cases, prompt the user for a new name.
+ * Special case the 'Rename variable...' and 'Delete variable...' options.
+ * In the rename case, prompt the user for a new name.
  * @param {string} text The selected dropdown menu option.
  * @return {null|undefined|string} An acceptable new variable name, or null if
  *     change is to be either aborted (cancel button) or has been already
@@ -132,40 +131,17 @@ Blockly.FieldVariable.dropdownCreate = function() {
  * @this {!Blockly.FieldVariable}
  */
 Blockly.FieldVariable.classValidator = function(text) {
-  function promptName(promptText, defaultText) {
-    Blockly.hideChaff();
-    var newVar = window.prompt(promptText, defaultText);
-    // Merge runs of whitespace.  Strip leading and trailing whitespace.
-    // Beyond this, all names are legal.
-    if (newVar) {
-      newVar = newVar.replace(/[\s\xa0]+/g, ' ').replace(/^ | $/g, '');
-      if (newVar == Blockly.Msg.RENAME_VARIABLE ||
-          newVar == Blockly.Msg.NEW_VARIABLE) {
-        // Ok, not ALL names are legal...
-        newVar = null;
-      }
-    }
-    return newVar;
-  }
   var workspace = this.sourceBlock_.workspace;
   if (text == Blockly.Msg.RENAME_VARIABLE) {
     var oldVar = this.getText();
-    text = promptName(Blockly.Msg.RENAME_VARIABLE_TITLE.replace('%1', oldVar),
-                      oldVar);
+    Blockly.hideChaff();
+    text = Blockly.Variables.promptName(
+        Blockly.Msg.RENAME_VARIABLE_TITLE.replace('%1', oldVar), oldVar);
     if (text) {
       Blockly.Variables.renameVariable(oldVar, text, workspace);
     }
     return null;
-  } else if (text == Blockly.Msg.NEW_VARIABLE) {
-    text = promptName(Blockly.Msg.NEW_VARIABLE_TITLE, '');
-    // Since variables are case-insensitive, ensure that if the new variable
-    // matches with an existing variable, the new case prevails throughout.
-    if (text) {
-      Blockly.Variables.renameVariable(text, text, workspace);
-      return text;
-    }
-    return null;
-  } else if (text == Blockly.Msg.DELETE_VARIABLE.replace('%1', this.getText())) {
+  }else if (text == Blockly.Msg.DELETE_VARIABLE.replace('%1', this.getText())) {
     Blockly.Variables.delete(this.getText(), this.sourceBlock_.workspace);
     return null;
   }
diff --git a/core/flyout.js b/core/flyout.js
index e13bc48de..942b0be38 100644
--- a/core/flyout.js
+++ b/core/flyout.js
@@ -608,7 +608,8 @@ Blockly.Flyout.prototype.show = function(xmlList) {
       }
       else if (tagName == 'BUTTON') {
         var label = xml.getAttribute('text');
-        var curButton = new Blockly.FlyoutButton(this.workspace_, label);
+        var curButton = new Blockly.FlyoutButton(this.workspace_,
+            this.targetWorkspace_, label);
         contents.push({type: 'button', button: curButton});
         gaps.push(this.MARGIN);
       }
diff --git a/core/flyout_button.js b/core/flyout_button.js
index 77d18f426..cd251897e 100644
--- a/core/flyout_button.js
+++ b/core/flyout_button.js
@@ -34,16 +34,23 @@ goog.require('goog.math.Coordinate');
  * Class for a button in the flyout.
  * @param {!Blockly.Workspace} workspace The workspace in which to place this
  *     button.
+ * @param {!Blockly.Workspace} targetWorkspace The flyout's target workspace.
  * @param {string} text The text to display on the button.
  * @constructor
  */
-Blockly.FlyoutButton = function(workspace, text) {
+Blockly.FlyoutButton = function(workspace, targetWorkspace, text) {
   /**
    * @type {!Blockly.Workspace}
    * @private
    */
   this.workspace_ = workspace;
 
+  /**
+   * @type {!Blockly.Workspace}
+   * @private
+   */
+  this.targetWorkspace_ = targetWorkspace;
+
   /**
    * @type {string}
    * @private
@@ -150,9 +157,10 @@ Blockly.FlyoutButton.prototype.dispose = function() {
  * @param {!Event} e Mouse up event.
  */
 Blockly.FlyoutButton.prototype.onMouseUp = function(e) {
-  console.log("Button was clicked");
   // Don't scroll the page.
   e.preventDefault();
   // Don't propagate mousewheel event (zooming).
   e.stopPropagation();
+
+  Blockly.Variables.createVariable(this.targetWorkspace_);
 };
diff --git a/core/toolbox.js b/core/toolbox.js
index b5b27f869..3f715ed3a 100644
--- a/core/toolbox.js
+++ b/core/toolbox.js
@@ -420,6 +420,18 @@ Blockly.Toolbox.prototype.getClientRect = function() {
   }
 };
 
+/**
+ * Update the flyout's contents without closing it.  Should be used in response
+ * to a change in one of the dynamic categories, such as variables or
+ * procedures.
+ */
+Blockly.Toolbox.prototype.refreshSelection = function() {
+  var selectedItem = this.tree_.getSelectedItem();
+  if (selectedItem && selectedItem.blocks) {
+    this.flyout_.show(selectedItem.blocks);
+  }
+};
+
 // Extending Closure's Tree UI.
 
 /**
diff --git a/core/variables.js b/core/variables.js
index 37a881791..3bc77f0e3 100644
--- a/core/variables.js
+++ b/core/variables.js
@@ -110,29 +110,31 @@ Blockly.Variables.flyoutCategory = function(workspace) {
   var button = goog.dom.createDom('button');
   button.setAttribute('text', 'Create variable');
   xmlList.push(button);
-  for (var i = 0; i < variableList.length; i++) {
-    if (Blockly.Blocks['variables_set']) {
-      // <block type="variables_set" gap="8">
-      //   <field name="VAR">item</field>
-      // </block>
-      var block = goog.dom.createDom('block');
-      block.setAttribute('type', 'variables_set');
-      if (Blockly.Blocks['variables_get']) {
-        block.setAttribute('gap', 8);
-      }
-      var field = goog.dom.createDom('field', null, variableList[i]);
-      field.setAttribute('name', 'VAR');
-      block.appendChild(field);
-      xmlList.push(block);
-    }
+
+  if (Blockly.Blocks['variables_set']) {
+    // <block type="variables_set" gap="20">
+    //   <field name="VAR">item</field>
+    // </block>
+    var block = goog.dom.createDom('block');
+    block.setAttribute('type', 'variables_set');
     if (Blockly.Blocks['variables_get']) {
-      // <block type="variables_get" gap="24">
+      block.setAttribute('gap', 20);
+    }
+    var field = goog.dom.createDom('field', null, variableList[0]);
+    field.setAttribute('name', 'VAR');
+    block.appendChild(field);
+    xmlList.push(block);
+  }
+
+  for (var i = 0; i < variableList.length; i++) {
+    if (Blockly.Blocks['variables_get']) {
+      // <block type="variables_get" gap="8">
       //   <field name="VAR">item</field>
       // </block>
       var block = goog.dom.createDom('block');
       block.setAttribute('type', 'variables_get');
       if (Blockly.Blocks['variables_set']) {
-        block.setAttribute('gap', 24);
+        block.setAttribute('gap', 8);
       }
       var field = goog.dom.createDom('field', null, variableList[i]);
       field.setAttribute('name', 'VAR');
@@ -244,3 +246,44 @@ Blockly.Variables.delete = function(name, workspace) {
 
   Blockly.Variables.disposeUses(name, workspace);
 };
+
+/**
+ * Create a new variable on the given workspace.
+ * @param {!Blockly.Workspace} workspace The workspace on which to create the
+ *     variable.
+ * @return {null|undefined|string} An acceptable new variable name, or null if
+ *     change is to be aborted (cancel button), or undefined if an existing
+ *     variable was chosen.
+ */
+Blockly.Variables.createVariable = function(workspace) {
+  var text = Blockly.Variables.promptName(Blockly.Msg.NEW_VARIABLE_TITLE, '');
+  // Since variables are case-insensitive, ensure that if the new variable
+  // matches with an existing variable, the new case prevails throughout.
+  if (text) {
+    workspace.createVariable(text);
+    return text;
+  }
+  return null;
+};
+
+/**
+ * Prompt the user for a new variable name.
+ * @param {string} promptText The string of the prompt.
+ * @param {string} defaultText The default value to show in the prompt's field.
+ * @return {string|null} The new variable name, or null if the user picked
+ *     something illegal.
+ */
+Blockly.Variables.promptName = function(promptText, defaultText) {
+  var newVar = window.prompt(promptText, defaultText);
+  // Merge runs of whitespace.  Strip leading and trailing whitespace.
+  // Beyond this, all names are legal.
+  if (newVar) {
+    newVar = newVar.replace(/[\s\xa0]+/g, ' ').replace(/^ | $/g, '');
+    if (newVar == Blockly.Msg.RENAME_VARIABLE ||
+        newVar == Blockly.Msg.NEW_VARIABLE) {
+      // Ok, not ALL names are legal...
+      newVar = null;
+    }
+  }
+  return newVar;
+};
diff --git a/core/workspace.js b/core/workspace.js
index 4d4d635d2..6e044fcb4 100644
--- a/core/workspace.js
+++ b/core/workspace.js
@@ -217,20 +217,33 @@ Blockly.Workspace.prototype.updateVariableList = function() {
 
 /**
  * Rename a variable by updating its name in the variable list.
+ * TODO: #468
  * @param {string} oldName Variable to rename.
  * @param {string} newName New variable name.
  */
 Blockly.Workspace.prototype.renameVariable = function(oldName, newName) {
   // Find the old name in the list and replace it.
   var variableIndex = this.variableList.indexOf(oldName);
-  if (variableIndex != -1) {
+  var newVariableIndex = this.variableList.indexOf(newName);
+  if (variableIndex != -1 && newVariableIndex == -1) {
     this.variableList[variableIndex] = newName;
+  } else if (variableIndex != -1 && newVariableIndex != -1) {
+    this.variableList.splice(variableIndex, 1);
   } else {
     this.variableList.push(newName);
     console.log('Tried to rename an non-existent variable.');
   }
 };
 
+/**
+ * Create a variables with the given name.
+ * TODO: #468
+ * @param {string} name The new variable's name.
+ */
+Blockly.Workspace.prototype.createVariable = function(name) {
+  this.variableList.push(name);
+};
+
 /**
  * Returns the horizontal offset of the workspace.
  * Intended for LTR/RTL compatibility in XML.
diff --git a/core/workspace_svg.js b/core/workspace_svg.js
index 6f9be212d..d02243551 100644
--- a/core/workspace_svg.js
+++ b/core/workspace_svg.js
@@ -589,6 +589,19 @@ Blockly.WorkspaceSvg.prototype.paste = function(xmlBlock) {
   block.select();
 };
 
+/**
+ * Create a new variable with the given name.  Update the flyout to show the new
+ *     variable immediately.
+ * TODO: #468
+ * @param {string} name The new variable's name.
+ */
+Blockly.WorkspaceSvg.prototype.createVariable = function(name) {
+  Blockly.WorkspaceSvg.superClass_.createVariable.call(this, name);
+  if (this.toolbox_ && this.toolbox_.flyout_) {
+    this.toolbox_.refreshSelection();
+  }
+};
+
 /**
  * Make a list of all the delete areas for this workspace.
  */