diff --git a/src/handlers/onDidSaveTextDocument.ts b/src/handlers/onDidSaveTextDocument.ts
index 7007768..1ac3329 100644
--- a/src/handlers/onDidSaveTextDocument.ts
+++ b/src/handlers/onDidSaveTextDocument.ts
@@ -265,7 +265,7 @@ export async function onDidSaveTextDocument(document: vscode.TextDocument) {
         }
       }
 
-      // Copy files
+      // Copy files/directories
       for (const [oldPath, newPath] of copiedLines) {
         try {
           // Create directory structure if needed
@@ -274,13 +274,15 @@ export async function onDidSaveTextDocument(document: vscode.TextDocument) {
           if (!fs.existsSync(dirPath)) {
             fs.mkdirSync(dirPath, { recursive: true });
           }
-          if (!isDir) {
-            // Copy the file to the new location
+
+          if (isDir) {
+            fs.cpSync(oldPath, newPath, { recursive: true });
+          } else {
             fs.copyFileSync(oldPath, newPath);
           }
         } catch (error) {
           vscode.window.showErrorMessage(
-            `Failed to copy file: ${formatPath(oldPath)} to ${newPath.replace(
+            `Failed to copy: ${formatPath(oldPath)} to ${newPath.replace(
               currentPath + path.sep,
               ""
             )} - ${error}`
diff --git a/src/test/extension.test.ts b/src/test/extension.test.ts
index 513f4aa..9eabf11 100644
--- a/src/test/extension.test.ts
+++ b/src/test/extension.test.ts
@@ -918,6 +918,52 @@ suite("oil.code", () => {
     });
   });
 
+  test("Copy non-empty directory and rename preserves nested files", async () => {
+    const workspaceUri = vscode.workspace.workspaceFolders![0].uri;
+    const sourceDirUri = vscode.Uri.joinPath(workspaceUri, "test");
+    const sourceFileUri = vscode.Uri.joinPath(sourceDirUri, "test.md");
+    const testContent = `# Test${newline}Nested file content.`;
+
+    await vscode.workspace.fs.createDirectory(sourceDirUri);
+    await vscode.workspace.fs.writeFile(
+      sourceFileUri,
+      Buffer.from(testContent, "utf-8")
+    );
+
+    await vscode.commands.executeCommand("oil-code.open");
+    await waitForDocumentText(["/000 ../", "/001 test/"]);
+
+    const editor = vscode.window.activeTextEditor;
+    assert.ok(editor, "No active editor");
+
+    // Copy and rename non-empty directory.
+    await editor.edit((editBuilder) => {
+      editBuilder.insert(new vscode.Position(2, 0), `${newline}/001 test2/`);
+    });
+
+    await saveFile();
+
+    await waitForDocumentText(["/000 ../", "/001 test/", "/002 test2/"]);
+    await assertProjectFileStructure([
+      "test/",
+      "  test.md",
+      "test2/",
+      "  test.md",
+    ]);
+
+    const copiedFileUri = vscode.Uri.joinPath(workspaceUri, "test2", "test.md");
+    const copiedFileContent = await vscode.workspace.fs.readFile(copiedFileUri);
+    assert.strictEqual(
+      copiedFileContent.toString(),
+      testContent,
+      "Copied directory did not preserve nested file content"
+    );
+
+    editor.selection = new vscode.Selection(2, 0, 2, 0);
+    await vscode.commands.executeCommand("oil-code.select");
+    await waitForDocumentText(["/000 ../", "/003 test.md"]);
+  });
+
   test("Copy and move file in one action", async () => {
     await vscode.commands.executeCommand("oil-code.open");
     await waitForDocumentText("/000 ../");