diff --git a/crates/next-napi-bindings/src/next_api/project.rs b/crates/next-napi-bindings/src/next_api/project.rs
index d8ae4312cbcc31dd885ff8d7cd4b33290fb9136a..f20e9acb3052da83294e415ef90ce03e9cab66e5 100644
--- a/crates/next-napi-bindings/src/next_api/project.rs
+++ b/crates/next-napi-bindings/src/next_api/project.rs
@@ -2343,10 +2343,8 @@ async fn project_trace_source_operation(
 
     let (original_file, line, column, method_name, is_ignored) = match token {
         Token::Original(token) => (
-            match urlencoding::decode(&token.original_file)? {
-                Cow::Borrowed(_) => token.original_file,
-                Cow::Owned(original_file) => RcStr::from(original_file),
-            },
+            // Still percent-encoded, like the URIs it's compared against.
+            token.original_file,
             // JS stack frames are 1-indexed, source map tokens are 0-indexed
             Some(token.original_line + 1),
             Some(token.original_column + 1),
@@ -2361,36 +2359,51 @@ async fn project_trace_source_operation(
         }
     };
 
+    // Turns a percent-encoded URI fragment back into a path for output.
+    fn decode_uri_fragment(value: &str) -> Result<RcStr> {
+        Ok(match urlencoding::decode(value)? {
+            Cow::Borrowed(borrowed) => RcStr::from(borrowed),
+            Cow::Owned(owned) => RcStr::from(owned),
+        })
+    }
+
     let project_root_uri =
         uri_from_file(container.project().project_root_path().owned().await?, None).await? + "/";
+    // Relative paths are computed on decoded inputs: they come from
+    // different encoders that disagree on characters like `[` vs `%5B`.
+    let current_directory_path = decode_uri_fragment(&current_directory_file_url)?;
     let (file, original_file) =
         if let Some(source_file) = original_file.strip_prefix(&project_root_uri) {
             // Client code uses file://
             (
                 RcStr::from(
-                    get_relative_path_to(&current_directory_file_url, &original_file)
-                        // TODO(sokra) remove this to include a ./ here to make it a relative path
-                        .trim_start_matches("./"),
+                    get_relative_path_to(
+                        &current_directory_path,
+                        &decode_uri_fragment(&original_file)?,
+                    )
+                    // TODO(sokra) remove this to include a ./ here to make it a relative path
+                    .trim_start_matches("./"),
                 ),
-                Some(RcStr::from(source_file)),
+                Some(decode_uri_fragment(source_file)?),
             )
         } else if let Some(source_file) = original_file.strip_prefix(&*SOURCE_MAP_PREFIX_PROJECT) {
             // Server code uses turbopack:///[project]
             // TODO should this also be file://?
+            let source_file = decode_uri_fragment(source_file)?;
             (
                 RcStr::from(
                     get_relative_path_to(
-                        &current_directory_file_url,
-                        &format!("{project_root_uri}{source_file}"),
+                        &current_directory_path,
+                        &format!("{}{}", decode_uri_fragment(&project_root_uri)?, source_file),
                     )
                     // TODO(sokra) remove this to include a ./ here to make it a relative path
                     .trim_start_matches("./"),
                 ),
-                Some(RcStr::from(source_file)),
+                Some(source_file),
             )
         } else if let Some(source_file) = original_file.strip_prefix(&*SOURCE_MAP_PREFIX) {
             // TODO(veil): Should the protocol be preserved?
-            (RcStr::from(source_file), None)
+            (decode_uri_fragment(source_file)?, None)
         } else {
             bail!(
                 "Original file ({}) outside project ({})",
diff --git a/packages/next/src/server/dev/middleware-turbopack.ts b/packages/next/src/server/dev/middleware-turbopack.ts
index d733e77aa41ac46c297d1e5c4f154f4dec14815b..5de99c4d43dc9732ce0256718cca887f5fe5c7f4 100644
--- a/packages/next/src/server/dev/middleware-turbopack.ts
+++ b/packages/next/src/server/dev/middleware-turbopack.ts
@@ -130,7 +130,16 @@ function parseFile(fileParam: string | null): string | undefined {
     return undefined
   }
 
-  return devirtualizeReactServerURL(fileParam)
+  const file = devirtualizeReactServerURL(fileParam)
+  // React virtualizes filenames as `'file://' + path`, which is malformed
+  // for paths that need percent-encoding (e.g. a space in the project path)
+  // and then fails both Turbopack's `traceSource` and Node.js' source map
+  // cache lookups. Re-encode through WHATWG URL parsing.
+  // TODO(veil): Revisit if React's virtualization round-trips losslessly.
+  if (file.startsWith('file://') && URL.canParse(file)) {
+    return new URL(file).href
+  }
+  return file
 }
 
 function createStackFrames(