diff --git a/CHANGES.md b/CHANGES.md
index 77ff99b078f..1431f0c2101 100644
--- a/CHANGES.md
+++ b/CHANGES.md
@@ -1,6 +1,9 @@
 Unreleased
 ----------
 
+- Allow spaces in the directory argument of the `subdir` stanza (#4943, fixes
+  #4907, @rgrinberg)
+
 - Add a `%{toolchain}` expansion variable (#4899, fixes #3949, @rgrinberg)
 
 - Include dependencies of executables when creating toplevels (either `dune
diff --git a/src/dune_engine/sub_dirs.ml b/src/dune_engine/sub_dirs.ml
index 0cfdecf211f..ec9f9efde9b 100644
--- a/src/dune_engine/sub_dirs.ml
+++ b/src/dune_engine/sub_dirs.ml
@@ -313,7 +313,7 @@ let decode_includes ~context =
     let* loc = loc in
     let* name, path =
       plain_string (fun ~loc s ->
-          (Atom (loc, Dune_lang.Atom.of_string s), s :: path))
+          (Dune_lang.Ast.atom_or_quoted_string loc s, s :: path))
     in
     let+ nodes = fields (decode ~context ~path ~inside_include) in
     let required_version = (2, 7) in
diff --git a/test/blackbox-tests/test-cases/subdir-stanza.t/run.t b/test/blackbox-tests/test-cases/subdir-stanza/basic.t
similarity index 100%
rename from test/blackbox-tests/test-cases/subdir-stanza.t/run.t
rename to test/blackbox-tests/test-cases/subdir-stanza/basic.t
diff --git a/test/blackbox-tests/test-cases/subdir-stanza/gh4907.t b/test/blackbox-tests/test-cases/subdir-stanza/gh4907.t
new file mode 100644
index 00000000000..8b3618a882c
--- /dev/null
+++ b/test/blackbox-tests/test-cases/subdir-stanza/gh4907.t
@@ -0,0 +1,8 @@
+
+  $ cat <<EOF >dune-project
+  > (lang dune 3.0)
+  > EOF
+  $ cat <<EOF >dune
+  > (subdir "foo bar" (rule (with-stdout-to foo (echo foo))))
+  > EOF
+  $ dune build