diff --git a/.gitignore b/.gitignore
index 660ecdae526..d55d25c0270 100644
--- a/.gitignore
+++ b/.gitignore
@@ -67,3 +67,4 @@ cli/azd/extensions/microsoft.azd.ai.builder/microsoft.azd.ai.builder
 cli/azd/extensions/microsoft.azd.ai.builder/microsoft.azd.ai.builder.exe
 cli/azd/extensions/microsoft.azd.demo/microsoft.azd.demo
 cli/azd/extensions/microsoft.azd.demo/microsoft.azd.demo.exe
+cli/azd/azd-test
diff --git a/cli/azd/cmd/root.go b/cli/azd/cmd/root.go
index c317f7f99ba..c00ef586e31 100644
--- a/cli/azd/cmd/root.go
+++ b/cli/azd/cmd/root.go
@@ -26,6 +26,7 @@ import (
 	"github.com/azure/azure-dev/cli/azd/internal/cmd/show"
 	"github.com/azure/azure-dev/cli/azd/internal/telemetry"
 	"github.com/azure/azure-dev/cli/azd/pkg/output"
+	"github.com/azure/azure-dev/cli/azd/pkg/ux"
 	"github.com/spf13/cobra"
 )
 
@@ -80,6 +81,44 @@ func NewRootCmd(
 
 				prevDir = current
 
+				// Check if the directory exists
+				if _, err := os.Stat(opts.Cwd); os.IsNotExist(err) {
+					// Directory doesn't exist, prompt user to create it
+					shouldCreate := true // Default to Yes
+
+					if !opts.NoPrompt {
+						// Prompt the user
+						defaultValue := true
+						confirm := ux.NewConfirm(&ux.ConfirmOptions{
+							Message: fmt.Sprintf(
+								"Directory '%s' does not exist. Would you like to create it?",
+								opts.Cwd,
+							),
+							DefaultValue: &defaultValue,
+						})
+
+						result, err := confirm.Ask(cmd.Context())
+						if err != nil {
+							return fmt.Errorf("failed to prompt for directory creation: %w", err)
+						}
+
+						if result == nil {
+							return fmt.Errorf("no response received for directory creation prompt")
+						}
+
+						shouldCreate = *result
+					}
+
+					if !shouldCreate {
+						return fmt.Errorf("directory '%s' does not exist and creation was declined", opts.Cwd)
+					}
+
+					// Create the directory
+					if err := os.MkdirAll(opts.Cwd, 0755); err != nil {
+						return fmt.Errorf("failed to create directory '%s': %w", opts.Cwd, err)
+					}
+				}
+
 				if err := os.Chdir(opts.Cwd); err != nil {
 					return fmt.Errorf("failed to change directory to %s: %w", opts.Cwd, err)
 				}
diff --git a/cli/azd/go.mod b/cli/azd/go.mod
index e546991bbfa..f51c6a9552f 100644
--- a/cli/azd/go.mod
+++ b/cli/azd/go.mod
@@ -52,7 +52,6 @@ require (
 	github.com/google/uuid v1.6.0
 	github.com/gorilla/websocket v1.5.3
 	github.com/joho/godotenv v1.5.1
-	github.com/magefile/mage v1.15.0
 	github.com/mark3labs/mcp-go v0.41.1
 	github.com/mattn/go-colorable v0.1.14
 	github.com/mattn/go-isatty v0.0.20
diff --git a/cli/azd/go.sum b/cli/azd/go.sum
index 9a9a668bb40..b245f675535 100644
--- a/cli/azd/go.sum
+++ b/cli/azd/go.sum
@@ -284,8 +284,6 @@ github.com/ledongthuc/pdf v0.0.0-20220302134840-0c2507a12d80 h1:6Yzfa6GP0rIo/kUL
 github.com/ledongthuc/pdf v0.0.0-20220302134840-0c2507a12d80/go.mod h1:imJHygn/1yfhB7XSJJKlFZKl/J+dCPAknuiaGOshXAs=
 github.com/lucasb-eyer/go-colorful v1.3.0 h1:2/yBRLdWBZKrf7gB40FoiKfAWYQ0lqNcbuQwVHXptag=
 github.com/lucasb-eyer/go-colorful v1.3.0/go.mod h1:R4dSotOR9KMtayYi1e77YzuveK+i7ruzyGqttikkLy0=
-github.com/magefile/mage v1.15.0 h1:BvGheCMAsG3bWUDbZ8AyXXpCNwU9u5CB6sM+HNb9HYg=
-github.com/magefile/mage v1.15.0/go.mod h1:z5UZb/iS3GoOSn0JgWuiw7dxlurVYTu+/jHXqQg881A=
 github.com/mailru/easyjson v0.9.1 h1:LbtsOm5WAswyWbvTEOqhypdPeZzHavpZx96/n553mR8=
 github.com/mailru/easyjson v0.9.1/go.mod h1:1+xMtQp2MRNVL/V1bOzuP3aP8VNwRW55fQUto+XFtTU=
 github.com/mark3labs/mcp-go v0.41.1 h1:w78eWfiQam2i8ICL7AL0WFiq7KHNJQ6UB53ZVtH4KGA=
diff --git a/cli/azd/test/functional/init_test.go b/cli/azd/test/functional/init_test.go
index b284aabc9b7..f63ecc39857 100644
--- a/cli/azd/test/functional/init_test.go
+++ b/cli/azd/test/functional/init_test.go
@@ -291,6 +291,56 @@ func Test_CLI_Init_CanUseTemplate(t *testing.T) {
 	require.FileExists(t, filepath.Join(dir, "README.md"))
 }
 
+// Test_CLI_Init_WithCwdAutoCreate tests the automatic directory creation when using -C/--cwd flag.
+func Test_CLI_Init_WithCwdAutoCreate(t *testing.T) {
+	tests := []struct {
+		name   string
+		subDir string // subdirectory to create within temp dir (using -C flag)
+		args   []string
+	}{
+		{
+			name:   "single level directory",
+			subDir: "new-project",
+			args:   []string{"init", "-t", "azure-samples/todo-nodejs-mongo", "--no-prompt"},
+		},
+		{
+			name:   "nested directory",
+			subDir: "parent/child/project",
+			args:   []string{"init", "-t", "azure-samples/todo-nodejs-mongo", "--no-prompt"},
+		},
+	}
+
+	for _, tt := range tests {
+		t.Run(tt.name, func(t *testing.T) {
+			ctx, cancel := newTestContext(t)
+			defer cancel()
+
+			// Create a parent temp directory
+			parentDir := tempDirWithDiagnostics(t)
+			cli := azdcli.NewCLI(t)
+			cli.WorkingDirectory = parentDir
+
+			// Add -C flag with the subdirectory path
+			targetDir := filepath.Join(parentDir, tt.subDir)
+			args := append([]string{"-C", tt.subDir}, tt.args...)
+
+			// Directory should not exist before running the command
+			require.NoDirExists(t, targetDir)
+
+			// Run the command
+			// Note: We expect an error because --no-prompt will fail on environment name prompt
+			// but the directory creation should succeed before that
+			cli.RunCommand(ctx, args...)
+
+			// Verify the directory was created
+			require.DirExists(t, targetDir)
+
+			// Verify that the template was initialized in the created directory
+			require.FileExists(t, filepath.Join(targetDir, azdcontext.ProjectFileName))
+		})
+	}
+}
+
 // verifyEnvInitialized is a helper function that returns a verification function.
 // This avoids duplicating the verification logic in the test table.
 func verifyEnvInitialized(envName string) func(t *testing.T, dir string) {