diff --git a/src/filesystem/__tests__/lib.test.ts b/src/filesystem/__tests__/lib.test.ts
index f7e585af22..c54b8c9ade 100644
--- a/src/filesystem/__tests__/lib.test.ts
+++ b/src/filesystem/__tests__/lib.test.ts
@@ -205,6 +205,36 @@ describe('Lib Functions', () => {
           .rejects.toThrow('Parent directory does not exist');
       });
 
+      it('validates paths with literal tilde in directory names', async () => {
+        // Paths containing ~ as a literal character in directory names should work
+        // This is the scenario from issue #3412
+        if (process.platform === 'win32') {
+          setAllowedDirectories(['C:\\Users\\test']);
+          const testPath = 'C:\\Users\\test\\~MyFolder\\file.txt';
+          mockFs.realpath.mockImplementation(async (path: any) => path.toString());
+          const result = await validatePath(testPath);
+          expect(result).toBe(testPath);
+        } else {
+          setAllowedDirectories(['/home/user']);
+          const testPath = '/home/user/~MyFolder/file.txt';
+          mockFs.realpath.mockImplementation(async (path: any) => path.toString());
+          const result = await validatePath(testPath);
+          expect(result).toBe(testPath);
+        }
+      });
+
+      it('validates paths with tilde used for home expansion combined with tilde in dir name', async () => {
+        // ~/path/~folder should expand ~ to home, preserve ~folder as literal
+        const homedir = os.homedir();
+        if (process.platform !== 'win32') {
+          setAllowedDirectories([homedir]);
+          const expectedPath = path.join(homedir, '~MyFolder', 'file.txt');
+          mockFs.realpath.mockImplementation(async (path: any) => path.toString());
+          const result = await validatePath('~/~MyFolder/file.txt');
+          expect(result).toBe(expectedPath);
+        }
+      });
+
       it('resolves relative paths against allowed directories instead of process.cwd()', async () => {
         const relativePath = 'test-file.txt';
         const originalCwd = process.cwd;
diff --git a/src/filesystem/__tests__/path-utils.test.ts b/src/filesystem/__tests__/path-utils.test.ts
index 5530cba1c3..11f038c4bf 100644
--- a/src/filesystem/__tests__/path-utils.test.ts
+++ b/src/filesystem/__tests__/path-utils.test.ts
@@ -225,6 +225,31 @@ describe('Path Utilities', () => {
     it('leaves other paths unchanged', () => {
       expect(expandHome('C:/test')).toBe('C:/test');
     });
+
+    it('preserves literal tilde in directory names', () => {
+      // Tilde as part of a directory name should NOT be expanded
+      expect(expandHome('/Volumes/Drive/Projects/~MyFolder'))
+        .toBe('/Volumes/Drive/Projects/~MyFolder');
+      expect(expandHome('/home/user/~archive'))
+        .toBe('/home/user/~archive');
+      expect(expandHome('/tmp/~backup/files'))
+        .toBe('/tmp/~backup/files');
+    });
+
+    it('does not expand ~username patterns (treated as literal)', () => {
+      // ~SomeName without a slash could be a literal directory name
+      // We intentionally do NOT try to resolve ~username to avoid
+      // misinterpreting literal directory names starting with ~
+      const result = expandHome('~MyFolder');
+      expect(result).toBe('~MyFolder');
+    });
+
+    it('handles Windows short names with tilde', () => {
+      expect(expandHome('C:\\PROGRA~1\\MyApp'))
+        .toBe('C:\\PROGRA~1\\MyApp');
+      expect(expandHome('/Users/NEMANS~1/FOLDER~2'))
+        .toBe('/Users/NEMANS~1/FOLDER~2');
+    });
   });
 
   describe('WSL path handling (issue #2795 fix)', () => {
diff --git a/src/filesystem/__tests__/roots-utils.test.ts b/src/filesystem/__tests__/roots-utils.test.ts
index 1a39483953..8d260416c7 100644
--- a/src/filesystem/__tests__/roots-utils.test.ts
+++ b/src/filesystem/__tests__/roots-utils.test.ts
@@ -60,6 +60,69 @@ describe('getValidRootDirectories', () => {
     });
   });
 
+  describe('tilde path handling', () => {
+    let tildeDirParent: string;
+    let tildeDir: string;
+
+    beforeEach(() => {
+      // Create a directory with a literal tilde in its name
+      tildeDirParent = realpathSync(mkdtempSync(join(tmpdir(), 'mcp-tilde-test-')));
+      tildeDir = join(tildeDirParent, '~MyFolder');
+      mkdirSync(tildeDir);
+    });
+
+    afterEach(() => {
+      rmSync(tildeDirParent, { recursive: true, force: true });
+    });
+
+    it('should handle directories with literal tilde in name via file URI', async () => {
+      const roots: Root[] = [
+        { uri: `file://${tildeDir}`, name: 'Tilde Dir' }
+      ];
+
+      const result = await getValidRootDirectories(roots);
+      expect(result).toHaveLength(1);
+      expect(result[0]).toBe(tildeDir);
+    });
+
+    it('should handle directories with literal tilde in name via plain path', async () => {
+      const roots: Root[] = [
+        { uri: tildeDir, name: 'Tilde Dir' }
+      ];
+
+      const result = await getValidRootDirectories(roots);
+      expect(result).toHaveLength(1);
+      expect(result[0]).toBe(tildeDir);
+    });
+
+    it('should handle file URI with tilde in authority position gracefully', async () => {
+      // file://~/path is malformed (~ becomes the host), should not crash
+      const roots: Root[] = [
+        { uri: `file://~/some/path`, name: 'Bad URI' },
+        { uri: `file://${tildeDir}`, name: 'Good URI' }
+      ];
+
+      const result = await getValidRootDirectories(roots);
+      // The malformed URI should be skipped, the valid one should work
+      expect(result).toContain(tildeDir);
+    });
+
+    it('should handle multiple directories with tildes', async () => {
+      const tildeDir2 = join(tildeDirParent, '~AnotherFolder');
+      mkdirSync(tildeDir2);
+
+      const roots: Root[] = [
+        { uri: `file://${tildeDir}`, name: 'Tilde Dir 1' },
+        { uri: `file://${tildeDir2}`, name: 'Tilde Dir 2' }
+      ];
+
+      const result = await getValidRootDirectories(roots);
+      expect(result).toHaveLength(2);
+      expect(result).toContain(tildeDir);
+      expect(result).toContain(tildeDir2);
+    });
+  });
+
   describe('error handling', () => {
 
     it('should handle various error types', async () => {
diff --git a/src/filesystem/index.ts b/src/filesystem/index.ts
index 7b67e63e58..284924669d 100644
--- a/src/filesystem/index.ts
+++ b/src/filesystem/index.ts
@@ -736,6 +736,14 @@ server.server.oninitialized = async () => {
       const response = await server.server.listRoots();
       if (response && 'roots' in response) {
         await updateAllowedDirectoriesFromRoots(response.roots);
+        if (allowedDirectories.length === 0 && response.roots.length > 0) {
+          console.error(
+            `Warning: Client provided ${response.roots.length} root(s), but none could be validated. ` +
+            `Root URIs: ${response.roots.map(r => r.uri).join(', ')}. ` +
+            `This may happen if the directories do not exist or contain special characters that were not resolved correctly. ` +
+            `Check that the configured paths are accessible and properly formatted.`
+          );
+        }
       } else {
         console.error("Client returned no roots set, keeping current settings");
       }
@@ -745,8 +753,10 @@ server.server.oninitialized = async () => {
   } else {
     if (allowedDirectories.length > 0) {
       console.error("Client does not support MCP Roots, using allowed directories set from server args:", allowedDirectories);
-    }else{
-      throw new Error(`Server cannot operate: No allowed directories available. Server was started without command-line directories and client either does not support MCP roots protocol or provided empty roots. Please either: 1) Start server with directory arguments, or 2) Use a client that supports MCP roots protocol and provides valid root directories.`);
+    } else {
+      const errorMsg = `Server cannot operate: No allowed directories available. Server was started without command-line directories and client either does not support MCP roots protocol or provided empty roots. Please either: 1) Start server with directory arguments, or 2) Use a client that supports MCP roots protocol and provides valid root directories.`;
+      console.error(errorMsg);
+      process.exit(1);
     }
   }
 };
diff --git a/src/filesystem/path-utils.ts b/src/filesystem/path-utils.ts
index 50910b995b..553d2fc162 100644
--- a/src/filesystem/path-utils.ts
+++ b/src/filesystem/path-utils.ts
@@ -106,12 +106,19 @@ export function normalizePath(p: string): string {
 }
 
 /**
- * Expands home directory tildes in paths
+ * Expands home directory tildes in paths.
+ *
+ * Handles:
+ *   - `~` or `~/path` → current user's home directory
+ *   - Paths with literal `~` in non-leading position (e.g. `/path/~folder`) → unchanged
+ *   - Paths starting with `~` but not followed by `/` (e.g. `~MyFolder`) → unchanged
+ *     (treated as literal directory name, not home directory expansion)
+ *
  * @param filepath The path to expand
  * @returns Expanded path
  */
 export function expandHome(filepath: string): string {
-  if (filepath.startsWith('~/') || filepath === '~') {
+  if (filepath === '~' || filepath.startsWith('~/')) {
     return path.join(os.homedir(), filepath.slice(1));
   }
   return filepath;
diff --git a/src/filesystem/roots-utils.ts b/src/filesystem/roots-utils.ts
index 5e26bb246b..9bda4c5574 100644
--- a/src/filesystem/roots-utils.ts
+++ b/src/filesystem/roots-utils.ts
@@ -1,26 +1,70 @@
 import { promises as fs, type Stats } from 'fs';
 import path from 'path';
-import os from 'os';
-import { normalizePath } from './path-utils.js';
+import { normalizePath, expandHome } from './path-utils.js';
 import type { Root } from '@modelcontextprotocol/sdk/types.js';
 import { fileURLToPath } from "url";
 
+/**
+ * Safely converts a file:// URI to a filesystem path.
+ * Handles edge cases where tilde (~) or other characters in the URI
+ * are misinterpreted as the URI authority/host component.
+ *
+ * @param uri - The file:// URI to convert
+ * @returns The filesystem path, or null if the URI is invalid
+ */
+function safeFileURLToPath(uri: string): string | null {
+  try {
+    return fileURLToPath(uri);
+  } catch {
+    // fileURLToPath can throw when the URI has an unexpected host component.
+    // This happens when a path like "~/folder" is naively concatenated as
+    // "file://~/folder" — the URL parser treats "~" as the hostname.
+    // Try to recover by extracting the path after "file://" and normalizing it.
+    try {
+      const withoutScheme = uri.slice('file://'.length);
+      // If the path starts with / it's absolute (file:///path or file:///~/path)
+      if (withoutScheme.startsWith('/')) {
+        return decodeURIComponent(withoutScheme);
+      }
+      // Otherwise treat the whole part after file:// as a path
+      // (e.g., file://~/folder -> ~/folder)
+      return decodeURIComponent(withoutScheme);
+    } catch {
+      return null;
+    }
+  }
+}
+
 /**
  * Converts a root URI to a normalized directory path with basic security validation.
+ * Handles file:// URIs, plain paths, and paths containing tilde (~) characters
+ * both as home directory shorthand and as literal characters in directory names.
+ *
  * @param rootUri - File URI (file://...) or plain directory path
  * @returns Promise resolving to validated path or null if invalid
  */
 async function parseRootUri(rootUri: string): Promise<string | null> {
   try {
-    const rawPath = rootUri.startsWith('file://') ? fileURLToPath(rootUri) : rootUri;
-    const expandedPath = rawPath.startsWith('~/') || rawPath === '~' 
-      ? path.join(os.homedir(), rawPath.slice(1)) 
-      : rawPath;
+    let rawPath: string;
+    if (rootUri.startsWith('file://')) {
+      const parsed = safeFileURLToPath(rootUri);
+      if (parsed === null) {
+        console.error(`Warning: Could not parse file URI: ${rootUri}`);
+        return null;
+      }
+      rawPath = parsed;
+    } else {
+      rawPath = rootUri;
+    }
+
+    const expandedPath = expandHome(rawPath);
     const absolutePath = path.resolve(expandedPath);
     const resolvedPath = await fs.realpath(absolutePath);
     return normalizePath(resolvedPath);
-  } catch {
-    return null; // Path doesn't exist or other error
+  } catch (error) {
+    const message = error instanceof Error ? error.message : String(error);
+    console.error(`Warning: Could not resolve root path "${rootUri}": ${message}`);
+    return null;
   }
 }