diff --git a/django/template/loaders/app_directories.py b/django/template/loaders/app_directories.py
index 24a1beec16..975b8ad95f 100644
--- a/django/template/loaders/app_directories.py
+++ b/django/template/loaders/app_directories.py
@@ -4,6 +4,7 @@ packages.
 """
 
 import os
+import sys
 
 from django.conf import settings
 from django.core.exceptions import ImproperlyConfigured
@@ -11,6 +12,7 @@ from django.template import TemplateDoesNotExist
 from django.utils._os import safe_join
 
 # At compile time, cache the directories to search.
+fs_encoding = sys.getfilesystemencoding() or sys.getdefaultencoding()
 app_template_dirs = []
 for app in settings.INSTALLED_APPS:
     i = app.rfind('.')
@@ -27,7 +29,7 @@ for app in settings.INSTALLED_APPS:
         raise ImproperlyConfigured, 'ImportError %s: %s' % (app, e.args[0])
     template_dir = os.path.join(os.path.dirname(mod.__file__), 'templates')
     if os.path.isdir(template_dir):
-        app_template_dirs.append(template_dir)
+        app_template_dirs.append(template_dir.decode(fs_encoding))
 
 # It won't change, so convert it to a tuple to save memory.
 app_template_dirs = tuple(app_template_dirs)
diff --git a/django/utils/_os.py b/django/utils/_os.py
index 39ba9f2112..d75714bce1 100644
--- a/django/utils/_os.py
+++ b/django/utils/_os.py
@@ -1,6 +1,26 @@
-from os.path import join, normcase, abspath, sep
+import os
+from os.path import join, normcase, normpath, abspath, isabs, sep
 from django.utils.encoding import force_unicode
 
+# Define our own abspath function that can handle joining 
+# unicode paths to a current working directory that has non-ASCII
+# characters in it.  This isn't necessary on Windows since the 
+# Windows version of abspath handles this correctly.  The Windows
+# abspath also handles drive letters differently than the pure 
+# Python implementation, so it's best not to replace it.
+if os.name == 'nt':
+    abspathu = abspath
+else:
+    def abspathu(path):
+        """
+        Version of os.path.abspath that uses the unicode representation
+        of the current working directory, thus avoiding a UnicodeDecodeError
+        in join when the cwd has non-ASCII characters.
+        """
+        if not isabs(path):
+            path = join(os.getcwdu(), path)
+        return normpath(path)
+
 def safe_join(base, *paths):
     """
     Joins one or more path components to the base path component intelligently.
@@ -13,8 +33,8 @@ def safe_join(base, *paths):
     # insensitive operating systems (like Windows).
     base = force_unicode(base)
     paths = [force_unicode(p) for p in paths]
-    final_path = normcase(abspath(join(base, *paths)))
-    base_path = normcase(abspath(base))
+    final_path = normcase(abspathu(join(base, *paths)))
+    base_path = normcase(abspathu(base))
     base_path_len = len(base_path)
     # Ensure final_path starts with base_path and that the next character after
     # the final path is os.sep (or nothing, in which case final_path must be