diff --git a/crates/ruff_server/src/session/index/ruff_settings.rs b/crates/ruff_server/src/session/index/ruff_settings.rs
index 64e7fbfe9107b..88ef63fc4bfe3 100644
--- a/crates/ruff_server/src/session/index/ruff_settings.rs
+++ b/crates/ruff_server/src/session/index/ruff_settings.rs
@@ -295,10 +295,14 @@ impl RuffSettingsIndex {
                     return WalkState::Continue;
                 }
 
+                let depth = entry.depth();
                 let directory = entry.into_path();
 
-                // If the directory is excluded from the workspace, skip it.
-                if let Some(file_name) = directory.file_name() {
+                // An explicitly opened workspace root must be indexed even if an ancestor
+                // configuration excludes it. Excluded descendants can still be skipped.
+                if depth > 0
+                    && let Some(file_name) = directory.file_name()
+                {
                     let settings = index
                         .read()
                         .unwrap()
diff --git a/crates/ruff_server/tests/e2e/workspace.rs b/crates/ruff_server/tests/e2e/workspace.rs
index 4e862e97c75de..242901fd6bdfd 100644
--- a/crates/ruff_server/tests/e2e/workspace.rs
+++ b/crates/ruff_server/tests/e2e/workspace.rs
@@ -1,7 +1,9 @@
-use anyhow::Result;
-use insta::assert_json_snapshot;
+use anyhow::{Context, Result};
+use insta::{assert_json_snapshot, assert_snapshot};
 
-use crate::TestServerBuilder;
+use crate::{TestServer, TestServerBuilder};
+
+const SOURCE: &str = "value= \"hello\"\n";
 
 #[test]
 fn selects_the_correct_workspace_settings_for_multi_root_workspaces() -> Result<()> {
@@ -104,6 +106,181 @@ ignore = ["F401"]
     Ok(())
 }
 
+#[test]
+fn nested_workspace_root_is_not_excluded_by_an_ancestor() -> Result<()> {
+    let mut server = nested_workspace_server(&["sub"], WorkspaceExclusion::Exclude)?;
+
+    assert_snapshot!(
+        open_and_format(&mut server, "sub/test.py", SOURCE)
+            .context("nested workspace should be formatted")?,
+        @"value = 'hello'"
+    );
+    // Explicitly opening `sub` does not override its own exclusion of `foo`.
+    assert!(open_and_format(&mut server, "sub/foo/test.py", SOURCE).is_none());
+
+    Ok(())
+}
+
+#[test]
+fn nested_workspace_root_is_not_excluded_by_an_ancestor_in_a_multi_root_workspace() -> Result<()> {
+    const ISSUE_SOURCE: &str = r#"print("This line is long enough to wrap.")
+"#;
+
+    let mut server = TestServerBuilder::new()?
+        .with_workspace(".")?
+        .with_workspace("sub")?
+        .with_file(
+            ".ruff.toml",
+            r#"target-version = "py312"
+line-length = 40
+
+extend-exclude = [
+    "sub",
+]
+"#,
+        )?
+        .with_file(
+            "sub/.ruff.toml",
+            r#"target-version = "py312"
+line-length = 40
+
+extend-exclude = [
+    "foo",
+]
+"#,
+        )?
+        .with_file("test.py", ISSUE_SOURCE)?
+        .with_file("sub/test.py", ISSUE_SOURCE)?
+        .with_file("sub/foo/test.py", ISSUE_SOURCE)?
+        .build();
+
+    assert_snapshot!(
+        open_and_format(&mut server, "test.py", ISSUE_SOURCE)
+            .context("parent workspace should be formatted")?,
+        @r#"
+    print(
+        "This line is long enough to wrap."
+    )
+    "#
+    );
+    assert_snapshot!(
+        open_and_format(&mut server, "sub/test.py", ISSUE_SOURCE)
+            .context("nested workspace should be formatted")?,
+        @r#"
+    print(
+        "This line is long enough to wrap."
+    )
+    "#
+    );
+    assert!(open_and_format(&mut server, "sub/foo/test.py", ISSUE_SOURCE).is_none());
+
+    Ok(())
+}
+
+#[test]
+fn nested_workspace_remains_excluded_without_explicit_registration() -> Result<()> {
+    let mut server = nested_workspace_server(&["."], WorkspaceExclusion::ExtendExclude)?;
+
+    assert!(open_and_format(&mut server, "sub/test.py", SOURCE).is_none());
+    assert!(open_and_format(&mut server, "sub/foo/test.py", SOURCE).is_none());
+
+    Ok(())
+}
+
+#[test]
+fn unrelated_file_outside_workspace_uses_fallback_configuration() -> Result<()> {
+    let mut server = nested_workspace_server(&["sub"], WorkspaceExclusion::ExtendExclude)?;
+
+    assert_snapshot!(
+        open_and_format(&mut server, "unrelated/test.py", SOURCE)
+            .context("unrelated file should use fallback formatting")?,
+        @r#"value = "hello""#
+    );
+
+    Ok(())
+}
+
+#[test]
+fn single_file_mode_does_not_index_nested_configuration() -> Result<()> {
+    let mut server = TestServerBuilder::new()?
+        .with_file("nested/.ruff.toml", "[format]\nquote-style = \"single\"\n")?
+        .with_file("nested/test.py", SOURCE)?
+        .with_file("unrelated/test.py", SOURCE)?
+        .build();
+
+    assert_snapshot!(
+        open_and_format(&mut server, "nested/test.py", SOURCE)
+            .context("nested file should use fallback formatting")?,
+        @r#"value = "hello""#
+    );
+    assert_snapshot!(
+        open_and_format(&mut server, "unrelated/test.py", SOURCE)
+            .context("unrelated file should use fallback formatting")?,
+        @r#"value = "hello""#
+    );
+
+    Ok(())
+}
+
+#[derive(Clone, Copy)]
+enum WorkspaceExclusion {
+    Exclude,
+    ExtendExclude,
+}
+
+/// Creates a test server for the following temporary workspace:
+///
+/// ```text
+/// <temp_dir>/
+/// ├── .ruff.toml              # exclude or extend-exclude = ["sub"]
+/// ├── test.py
+/// ├── sub/
+/// │   ├── .ruff.toml          # extend-exclude = ["foo"]
+/// │   │                       # format.quote-style = "single"
+/// │   ├── test.py
+/// │   └── foo/
+/// │       └── test.py
+/// └── unrelated/
+///     └── test.py
+/// ```
+fn nested_workspace_server(
+    workspaces: &[&str],
+    exclusion: WorkspaceExclusion,
+) -> Result<TestServer> {
+    let mut builder = TestServerBuilder::new()?;
+    for workspace in workspaces {
+        builder = builder.with_workspace(workspace)?;
+    }
+
+    let server = builder
+        .with_file(
+            ".ruff.toml",
+            match exclusion {
+                WorkspaceExclusion::Exclude => "exclude = [\"sub\"]\n",
+                WorkspaceExclusion::ExtendExclude => "extend-exclude = [\"sub\"]\n",
+            },
+        )?
+        .with_file(
+            "sub/.ruff.toml",
+            "extend-exclude = [\"foo\"]\n[format]\nquote-style = \"single\"\n",
+        )?
+        .with_file("test.py", SOURCE)?
+        .with_file("sub/test.py", SOURCE)?
+        .with_file("sub/foo/test.py", SOURCE)?
+        .with_file("unrelated/test.py", SOURCE)?
+        .build();
+
+    Ok(server)
+}
+
+fn open_and_format(server: &mut TestServer, path: &str, source: &str) -> Option<String> {
+    server.open_text_document(path, source, 1);
+    server
+        .format_request(path)
+        .and_then(|edits| edits.into_iter().next())
+        .map(|edit| edit.new_text)
+}
+
 #[test]
 fn unavailable_document_diagnostic_returns_empty_response() -> Result<()> {
     let mut server = TestServerBuilder::new()?.with_workspace(".")?.build();