diff --git a/crates/project_panel/src/project_panel.rs b/crates/project_panel/src/project_panel.rs
index db0222d4095..36a25ec5f7d 100644
--- a/crates/project_panel/src/project_panel.rs
+++ b/crates/project_panel/src/project_panel.rs
@@ -2041,10 +2041,8 @@ impl ProjectPanel {
                 return;
             };
 
-            if let Some(worktree) = self
-                .project
-                .read(cx)
-                .worktree_for_id(edit_state.worktree_id, cx)
+            let project = self.project.read(cx);
+            if let Some(worktree) = project.worktree_for_id(edit_state.worktree_id, cx)
                 && let Some(entry) = worktree.read(cx).entry_for_id(edit_state.entry_id)
             {
                 let mut already_exists = false;
@@ -2054,12 +2052,18 @@ impl ProjectPanel {
                         already_exists = true;
                     }
                 } else {
-                    let new_path = if let Some(parent) = entry.path.clone().parent() {
-                        parent.join(&filename)
-                    } else {
-                        filename.to_owned()
+                    let new_path = match entry.path.clone().parent() {
+                        Some(parent) => parent.join(&filename),
+                        None => filename.to_owned(),
                     };
-                    if let Some(existing) = worktree.read(cx).entry_for_path(&new_path)
+
+                    // We skip the collision check for worktree roots as the
+                    // lookup resolves paths relative to the root itself,
+                    // whereas renaming the root should resolve it against its
+                    // parent directory. Otherwise, renaming `bar/` to `foo/`
+                    // would report a false collision with `bar/foo/`.
+                    if !project.entry_is_worktree_root(entry.id, cx)
+                        && let Some(existing) = worktree.read(cx).entry_for_path(&new_path)
                         && existing.id != entry.id
                     {
                         already_exists = true;
@@ -2142,12 +2146,19 @@ impl ProjectPanel {
             });
             changes = vec![Change::Created(new_project_path)];
         } else {
-            let new_path = if let Some(parent) = entry.path.parent() {
-                parent.join(&filename).into()
-            } else {
-                filename.clone()
+            let new_path = match entry.path.parent() {
+                Some(parent) => parent.join(&filename).into(),
+                None => filename.clone(),
             };
-            if let Some(existing) = worktree.read(cx).entry_for_path(&new_path) {
+
+            // We skip the collision check for worktree roots as the lookup
+            // resolves paths relative to the root itself, whereas renaming the
+            // root should resolve it against its parent directory. Otherwise,
+            // renaming `bar/` to `foo/` would report a false collision with
+            // `bar/foo/`.
+            if !self.project.read(cx).entry_is_worktree_root(entry.id, cx)
+                && let Some(existing) = worktree.read(cx).entry_for_path(&new_path)
+            {
                 if existing.id == entry.id && refocus {
                     window.focus(&self.focus_handle, cx);
                 }
diff --git a/crates/project_panel/src/project_panel_tests.rs b/crates/project_panel/src/project_panel_tests.rs
index 607e385f988..d75248288bc 100644
--- a/crates/project_panel/src/project_panel_tests.rs
+++ b/crates/project_panel/src/project_panel_tests.rs
@@ -4620,7 +4620,7 @@ async fn test_rename_root_of_worktree(cx: &mut gpui::TestAppContext) {
         &["v root1  <== selected", "    v dir1", "          file1.txt",],
     );
 
-    // Rename root1 to new_root1
+    // Rename root1 to match the name of its child directory.
     panel.update_in(cx, |panel, window, cx| panel.rename(&Rename, window, cx));
 
     assert_eq!(
@@ -4635,30 +4635,25 @@ async fn test_rename_root_of_worktree(cx: &mut gpui::TestAppContext) {
     let confirm = panel.update_in(cx, |panel, window, cx| {
         panel
             .filename_editor
-            .update(cx, |editor, cx| editor.set_text("new_root1", window, cx));
-        panel.confirm_edit(true, window, cx).unwrap()
+            .update(cx, |editor, cx| editor.set_text("dir1", window, cx));
+
+        panel
+            .confirm_edit(true, window, cx)
+            .expect("should be able to rename `root1` to `dir1`")
     });
     confirm.await.unwrap();
     cx.run_until_parked();
     assert_eq!(
         visible_entries_as_strings(&panel, 0..20, cx),
-        &[
-            "v new_root1  <== selected",
-            "    v dir1",
-            "          file1.txt",
-        ],
+        &["v dir1  <== selected", "    v dir1", "          file1.txt",],
         "Should update worktree name"
     );
 
     // Ensure internal paths have been updated
-    select_path(&panel, "new_root1/dir1/file1.txt", cx);
+    select_path(&panel, "dir1/dir1/file1.txt", cx);
     assert_eq!(
         visible_entries_as_strings(&panel, 0..20, cx),
-        &[
-            "v new_root1",
-            "    v dir1",
-            "          file1.txt  <== selected",
-        ],
+        &["v dir1", "    v dir1", "          file1.txt  <== selected",],
         "Files in renamed worktree are selectable"
     );
 }