diff --git a/src/fastmcp/tools/tool.py b/src/fastmcp/tools/tool.py
index d6e123631f..2347017a73 100644
--- a/src/fastmcp/tools/tool.py
+++ b/src/fastmcp/tools/tool.py
@@ -500,7 +500,6 @@ def from_function(
             input_schema,
             prune_params=prune_params,
             prune_titles=True,
-            dereference=True,
         )
 
         output_schema = None
@@ -561,7 +560,8 @@ def from_function(
                     output_schema = base_schema
 
                 output_schema = compress_schema(
-                    output_schema, prune_titles=True, dereference=True
+                    output_schema,
+                    prune_titles=True,
                 )
 
                 # Resolve root-level $ref to meet MCP spec requirement for type: object
diff --git a/tests/tools/test_tool.py b/tests/tools/test_tool.py
index b9c9ffa1e8..1c24e78346 100644
--- a/tests/tools/test_tool.py
+++ b/tests/tools/test_tool.py
@@ -194,15 +194,18 @@ def create_user(user: UserInput, flag: bool) -> dict:
                 "tags": set(),
                 "enabled": True,
                 "parameters": {
-                    "properties": {
-                        "user": {
+                    "$defs": {
+                        "UserInput": {
                             "properties": {
                                 "name": {"type": "string"},
                                 "age": {"type": "integer"},
                             },
                             "required": ["name", "age"],
                             "type": "object",
-                        },
+                        }
+                    },
+                    "properties": {
+                        "user": {"$ref": "#/$defs/UserInput"},
                         "flag": {"type": "boolean"},
                     },
                     "required": ["user", "flag"],