diff --git a/gateway/run.py b/gateway/run.py
index 6a14341189..6aa8b221ff 100644
--- a/gateway/run.py
+++ b/gateway/run.py
@@ -286,6 +286,10 @@ if _config_path.exists():
                     # Only bridge explicit absolute paths from config.yaml.
                     if _cfg_key == "cwd" and str(_val) in (".", "auto", "cwd"):
                         continue
+                    # Expand shell tilde in cwd so subprocess.Popen never
+                    # receives a literal "~/" which the kernel rejects.
+                    if _cfg_key == "cwd" and isinstance(_val, str):
+                        _val = os.path.expanduser(_val)
                     if isinstance(_val, list):
                         os.environ[_env_var] = json.dumps(_val)
                     else:
diff --git a/tests/gateway/test_config_cwd_bridge.py b/tests/gateway/test_config_cwd_bridge.py
index 7f6a757500..af967af24b 100644
--- a/tests/gateway/test_config_cwd_bridge.py
+++ b/tests/gateway/test_config_cwd_bridge.py
@@ -41,6 +41,10 @@ def _simulate_config_bridge(cfg: dict, initial_env: dict | None = None):
                 # TERMINAL_CWD.  Mirrors the fix in gateway/run.py.
                 if cfg_key == "cwd" and str(val) in (".", "auto", "cwd"):
                     continue
+                # Expand shell tilde so subprocess.Popen never receives a literal
+                # "~/" which the kernel rejects.
+                if cfg_key == "cwd" and isinstance(val, str):
+                    val = os.path.expanduser(val)
                 if isinstance(val, list):
                     env[env_var] = json.dumps(val)
                 else:
@@ -55,6 +59,8 @@ def _simulate_config_bridge(cfg: dict, initial_env: dict | None = None):
         if alias_env not in env:
             alias_val = cfg.get(alias_key)
             if isinstance(alias_val, str) and alias_val.strip():
+                if alias_key == "cwd":
+                    alias_val = os.path.expanduser(alias_val)
                 env[alias_env] = alias_val.strip()
 
     # --- Replicate lines 144-147: MESSAGING_CWD fallback ---
@@ -205,3 +211,32 @@ class TestNestedTerminalCwdPlaceholderSkip:
         assert result["TERMINAL_ENV"] == "docker"
         assert result["TERMINAL_TIMEOUT"] == "300"
         assert result["TERMINAL_CWD"] == "/from/env"
+
+
+class TestTildeExpansion:
+    """terminal.cwd values containing shell tilde must be expanded.
+
+    subprocess.Popen does not expand shell syntax, so a literal "~/"
+    causes FileNotFoundError.  Regression test for commit 3c42064e.
+    """
+
+    def test_terminal_cwd_tilde_expanded(self):
+        """terminal.cwd: '~/projects' should expand to /home/<user>/projects."""
+        cfg = {"terminal": {"cwd": "~/projects"}}
+        result = _simulate_config_bridge(cfg)
+        assert result["TERMINAL_CWD"] == os.path.expanduser("~/projects")
+
+    def test_top_level_cwd_tilde_expanded(self):
+        """top-level cwd: '~/' should expand to user's home directory."""
+        cfg = {"cwd": "~/"}
+        result = _simulate_config_bridge(cfg)
+        assert result["TERMINAL_CWD"] == os.path.expanduser("~/")
+
+    def test_tilde_with_nested_precedence(self):
+        """Nested terminal.cwd should win over top-level, both expanded."""
+        cfg = {
+            "cwd": "~/top",
+            "terminal": {"cwd": "~/nested"},
+        }
+        result = _simulate_config_bridge(cfg)
+        assert result["TERMINAL_CWD"] == os.path.expanduser("~/nested")
diff --git a/tools/environments/local.py b/tools/environments/local.py
index 4aa6b64e2d..1029545f08 100644
--- a/tools/environments/local.py
+++ b/tools/environments/local.py
@@ -305,6 +305,8 @@ class LocalEnvironment(BaseEnvironment):
     """
 
     def __init__(self, cwd: str = "", timeout: int = 60, env: dict = None):
+        if cwd:
+            cwd = os.path.expanduser(cwd)
         super().__init__(cwd=cwd or os.getcwd(), timeout=timeout, env=env)
         self.init_session()
 
diff --git a/tools/terminal_tool.py b/tools/terminal_tool.py
index 24a6bff40e..395ee8f5b6 100644
--- a/tools/terminal_tool.py
+++ b/tools/terminal_tool.py
@@ -925,6 +925,8 @@ def _get_env_config() -> Dict[str, Any]:
     # /workspace and track the original host path separately. Otherwise keep the
     # normal sandbox behavior and discard host paths.
     cwd = os.getenv("TERMINAL_CWD", default_cwd)
+    if cwd:
+        cwd = os.path.expanduser(cwd)
     host_cwd = None
     host_prefixes = ("/Users/", "/home/", "C:\\", "C:/")
     if env_type == "docker" and mount_docker_cwd: