Knowledge conflict often arises in retrieval-augmented generation (RAG) systems, where retrieved documents may be inconsistent with one another or contradict the model's parametric knowledge. Existing benchmarks for investigating the phenomenon have notable limitations, including a narrow focus on the question answering setup, heavy reliance on entity substitution techniques, and a restricted range of conflict types. To address these issues, we propose a knowledge graph (KG)-based framework that generates varied and subtle conflicts between two similar yet distinct contexts, while ensuring interpretability through the explicit relational structure of KGs. Experimental results on our benchmark, MAGIC, provide intriguing insights into the inner workings of LLMs regarding knowledge conflict: both open-source and proprietary models struggle with conflict detection -- especially when multi-hop reasoning is required -- and often fail to pinpoint the exact source of contradictions. Finally, we present in-depth analyses that serve as a foundation for improving LLMs in integrating diverse, sometimes even conflicting, information.