diff --git a/src/app/api/workflow/__tests__/route.test.ts b/src/app/api/workflow/__tests__/route.test.ts
index c4b5ec5e..d61d18ea 100644
--- a/src/app/api/workflow/__tests__/route.test.ts
+++ b/src/app/api/workflow/__tests__/route.test.ts
@@ -183,21 +183,28 @@ describe("/api/workflow route", () => {
       expect(data.error).toBe("Path is not a directory");
     });
 
-    it("should reject non-existent directory", async () => {
-      mockStat.mockRejectedValue(new Error("ENOENT"));
+    it("should create non-existent directory and continue saving", async () => {
+      const mockWorkflow = { nodes: [], edges: [] };
+      mockStat.mockRejectedValue(Object.assign(new Error("ENOENT"), { code: "ENOENT" }));
+      mockMkdir.mockResolvedValue(undefined);
+      mockWriteFile.mockResolvedValue(undefined);
 
       const request = createMockPostRequest({
         directoryPath: "/nonexistent/dir",
         filename: "workflow",
-        workflow: { nodes: [], edges: [] },
+        workflow: mockWorkflow,
       });
 
       const response = await POST(request);
       const data = await response.json();
 
-      expect(response.status).toBe(400);
-      expect(data.success).toBe(false);
-      expect(data.error).toBe("Directory does not exist");
+      expect(data.success).toBe(true);
+      expect(mockMkdir).toHaveBeenCalledWith("/nonexistent/dir", { recursive: true });
+      expect(mockWriteFile).toHaveBeenCalledWith(
+        "/nonexistent/dir/workflow.json",
+        JSON.stringify(mockWorkflow, null, 2),
+        "utf-8"
+      );
     });
 
     it("should continue saving even if subfolder creation fails", async () => {
diff --git a/src/app/api/workflow/route.ts b/src/app/api/workflow/route.ts
index cb8ed2d6..b95b303e 100644
--- a/src/app/api/workflow/route.ts
+++ b/src/app/api/workflow/route.ts
@@ -35,7 +35,7 @@ export async function POST(request: NextRequest) {
       );
     }
 
-    // Validate directory exists
+    // Ensure project directory exists (supports saving into new subfolders)
     try {
       const stats = await fs.stat(directoryPath);
       if (!stats.isDirectory()) {
@@ -48,13 +48,35 @@ export async function POST(request: NextRequest) {
         );
       }
     } catch (dirError) {
-      logger.warn('file.error', 'Workflow save failed: directory does not exist', {
-        directoryPath,
-      });
-      return NextResponse.json(
-        { success: false, error: "Directory does not exist" },
-        { status: 400 }
-      );
+      const err = dirError as NodeJS.ErrnoException;
+      const isNotFound =
+        err?.code === "ENOENT" ||
+        (typeof err?.message === "string" &&
+          (err.message.includes("ENOENT") || err.message.includes("no such file or directory")));
+
+      if (!isNotFound) {
+        logger.warn('file.error', 'Workflow save failed: directory validation error', {
+          directoryPath,
+          error: dirError instanceof Error ? dirError.message : 'Unknown error',
+        });
+        return NextResponse.json(
+          { success: false, error: "Directory validation failed" },
+          { status: 400 }
+        );
+      }
+
+      try {
+        await fs.mkdir(directoryPath, { recursive: true });
+      } catch (mkdirError) {
+        logger.warn('file.error', 'Workflow save failed: could not create directory', {
+          directoryPath,
+          error: mkdirError instanceof Error ? mkdirError.message : 'Unknown error',
+        });
+        return NextResponse.json(
+          { success: false, error: "Could not create directory" },
+          { status: 400 }
+        );
+      }
     }
 
     // Auto-create subfolders for inputs and generations
diff --git a/src/components/ProjectSetupModal.tsx b/src/components/ProjectSetupModal.tsx
index 4f12c64a..349a09aa 100644
--- a/src/components/ProjectSetupModal.tsx
+++ b/src/components/ProjectSetupModal.tsx
@@ -242,13 +242,7 @@ export function ProjectSetupModal({
       );
       const result = await response.json();
 
-      if (!result.exists) {
-        setError("Project directory does not exist");
-        setIsValidating(false);
-        return;
-      }
-
-      if (!result.isDirectory) {
+      if (result.exists && !result.isDirectory) {
         setError("Project path is not a directory");
         setIsValidating(false);
         return;
diff --git a/src/components/__tests__/ProjectSetupModal.test.tsx b/src/components/__tests__/ProjectSetupModal.test.tsx
index c0317520..64e861bd 100644
--- a/src/components/__tests__/ProjectSetupModal.test.tsx
+++ b/src/components/__tests__/ProjectSetupModal.test.tsx
@@ -339,7 +339,7 @@ describe("ProjectSetupModal", () => {
       expect(onSave).not.toHaveBeenCalled();
     });
 
-    it("should show error when directory does not exist", async () => {
+    it("should allow creating project in a new subfolder path", async () => {
       mockFetch.mockImplementation((url: string) => {
         if (url === "/api/env-status") {
           return Promise.resolve({
@@ -379,9 +379,13 @@ describe("ProjectSetupModal", () => {
       fireEvent.click(screen.getByText("Create"));
 
       await waitFor(() => {
-        expect(screen.getByText("Project directory does not exist")).toBeInTheDocument();
+        expect(onSave).toHaveBeenCalledTimes(1);
       });
-      expect(onSave).not.toHaveBeenCalled();
+      expect(onSave).toHaveBeenCalledWith(
+        expect.any(String),
+        "My Project",
+        "/nonexistent/path"
+      );
     });
 
     it("should show error when path is not absolute", async () => {