diff --git a/src/vs/platform/terminal/common/terminalEnvironment.ts b/src/vs/platform/terminal/common/terminalEnvironment.ts
index 1d24a24f60d..7f7ab14a2db 100644
--- a/src/vs/platform/terminal/common/terminalEnvironment.ts
+++ b/src/vs/platform/terminal/common/terminalEnvironment.ts
@@ -3,6 +3,8 @@
  *  Licensed under the MIT License. See License.txt in the project root for license information.
  *--------------------------------------------------------------------------------------------*/
 
+import { OperatingSystem, OS } from 'vs/base/common/platform';
+
 export function escapeNonWindowsPath(path: string): string {
 	let newPath = path;
 	if (newPath.indexOf('\\') !== 0) {
@@ -35,3 +37,20 @@ export function collapseTildePath(path: string | undefined, userHome: string | u
 	}
 	return `~${separator}${path.slice(userHome.length + 1)}`;
 }
+
+/**
+ * Sanitizes a cwd string, removing any wrapping quotes and making the Windows drive letter
+ * uppercase.
+ * @param cwd The directory to sanitize.
+ */
+export function sanitizeCwd(cwd: string): string {
+	// Sanity check that the cwd is not wrapped in quotes (see #160109)
+	if (cwd.match(/^['"].*['"]$/)) {
+		cwd = cwd.substring(1, cwd.length - 1);
+	}
+	// Make the drive letter uppercase on Windows (see #9448)
+	if (OS === OperatingSystem.Windows && cwd && cwd[1] === ':') {
+		return cwd[0].toUpperCase() + cwd.substring(1);
+	}
+	return cwd;
+}
diff --git a/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts b/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts
index 47ebe176985..b1a1e4498f9 100644
--- a/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts
+++ b/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts
@@ -20,6 +20,7 @@ import { BufferMarkCapability } from 'vs/platform/terminal/common/capabilities/b
 // eslint-disable-next-line local/code-import-patterns
 import type { ITerminalAddon, Terminal } from 'xterm-headless';
 import { URI } from 'vs/base/common/uri';
+import { sanitizeCwd } from 'vs/platform/terminal/common/terminalEnvironment';
 
 
 /**
@@ -383,6 +384,7 @@ export class ShellIntegrationAddon extends Disposable implements IShellIntegrati
 	}
 
 	private _updateCwd(value: string) {
+		value = sanitizeCwd(value);
 		this._createOrGetCwdDetection().updateCwd(value);
 		const commandDetection = this.capabilities.get(TerminalCapability.CommandDetection);
 		commandDetection?.setCwd(value);
diff --git a/src/vs/platform/terminal/test/common/terminalEnvironment.test.ts b/src/vs/platform/terminal/test/common/terminalEnvironment.test.ts
index 2c58f9ec1fd..5f8aaca7e15 100644
--- a/src/vs/platform/terminal/test/common/terminalEnvironment.test.ts
+++ b/src/vs/platform/terminal/test/common/terminalEnvironment.test.ts
@@ -4,7 +4,8 @@
  *--------------------------------------------------------------------------------------------*/
 
 import { strictEqual } from 'assert';
-import { collapseTildePath } from 'vs/platform/terminal/common/terminalEnvironment';
+import { OperatingSystem, OS } from 'vs/base/common/platform';
+import { collapseTildePath, sanitizeCwd } from 'vs/platform/terminal/common/terminalEnvironment';
 
 suite('terminalEnvironment', () => {
 	suite('collapseTildePath', () => {
@@ -37,4 +38,15 @@ suite('terminalEnvironment', () => {
 			strictEqual(collapseTildePath('/foo/bar/baz', '/foo/', '/'), '~/bar/baz');
 		});
 	});
+	suite('sanitizeCwd', () => {
+		if (OS === OperatingSystem.Windows) {
+			test('should make the Windows drive letter uppercase', () => {
+				strictEqual(sanitizeCwd('c:\\foo\\bar'), 'C:\\foo\\bar');
+			});
+		}
+		test('should remove any wrapping quotes', () => {
+			strictEqual(sanitizeCwd('\'/foo/bar\''), '/foo/bar');
+			strictEqual(sanitizeCwd('"/foo/bar"'), '/foo/bar');
+		});
+	});
 });
diff --git a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
index 5a17c3c3f69..290023e91b6 100644
--- a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
+++ b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
@@ -14,7 +14,8 @@ import { IConfigurationResolverService } from 'vs/workbench/services/configurati
 import { sanitizeProcessEnvironment } from 'vs/base/common/processes';
 import { ILogService } from 'vs/platform/log/common/log';
 import { IShellLaunchConfig, ITerminalEnvironment, TerminalSettingId, TerminalSettingPrefix } from 'vs/platform/terminal/common/terminal';
-import { IProcessEnvironment, isWindows, locale, OperatingSystem, OS, platform, Platform } from 'vs/base/common/platform';
+import { IProcessEnvironment, isWindows, locale, platform, Platform } from 'vs/base/common/platform';
+import { sanitizeCwd } from 'vs/platform/terminal/common/terminalEnvironment';
 
 export function mergeEnvironments(parent: IProcessEnvironment, other: ITerminalEnvironment | undefined): void {
 	if (!other) {
@@ -190,7 +191,7 @@ export async function getCwd(
 	if (shell.cwd) {
 		const unresolved = (typeof shell.cwd === 'object') ? shell.cwd.fsPath : shell.cwd;
 		const resolved = await _resolveCwd(unresolved, variableResolver);
-		return _sanitizeCwd(resolved || unresolved);
+		return sanitizeCwd(resolved || unresolved);
 	}
 
 	let cwd: string | undefined;
@@ -213,7 +214,7 @@ export async function getCwd(
 		cwd = root ? root.fsPath : userHome || '';
 	}
 
-	return _sanitizeCwd(cwd);
+	return sanitizeCwd(cwd);
 }
 
 async function _resolveCwd(cwd: string, variableResolver: VariableResolver | undefined, logService?: ILogService): Promise<string | undefined> {
@@ -228,18 +229,6 @@ async function _resolveCwd(cwd: string, variableResolver: VariableResolver | und
 	return cwd;
 }
 
-function _sanitizeCwd(cwd: string): string {
-	// Sanity check that the cwd is not wrapped in quotes (see #160109)
-	if (cwd.match(/$['"].*['"]^/)) {
-		cwd = cwd.substring(1, cwd.length - 1);
-	}
-	// Make the drive letter uppercase on Windows (see #9448)
-	if (OS === OperatingSystem.Windows && cwd && cwd[1] === ':') {
-		return cwd[0].toUpperCase() + cwd.substr(1);
-	}
-	return cwd;
-}
-
 export type TerminalShellSetting = (
 	TerminalSettingId.AutomationShellWindows
 	| TerminalSettingId.AutomationShellMacOs