diff --git a/src/libexpr/primops.cc b/src/libexpr/primops.cc
index 8c6aeffac..dde7c0fe7 100644
--- a/src/libexpr/primops.cc
+++ b/src/libexpr/primops.cc
@@ -115,7 +115,7 @@ StringMap EvalState::realiseContext(const NixStringContext & context)
     return res;
 }
 
-static SourcePath realisePath(EvalState & state, const PosIdx pos, Value & v, bool resolveSymlinks = true)
+static SourcePath realisePath(EvalState & state, const PosIdx pos, Value & v, std::optional<SymlinkResolution> resolveSymlinks = SymlinkResolution::Full)
 {
     NixStringContext context;
 
@@ -127,7 +127,7 @@ static SourcePath realisePath(EvalState & state, const PosIdx pos, Value & v, bo
             auto realPath = state.toRealPath(rewriteStrings(path.path.abs(), rewrites), context);
             path = {path.accessor, CanonPath(realPath)};
         }
-        return resolveSymlinks ? path.resolveSymlinks() : path;
+        return resolveSymlinks ? path.resolveSymlinks(*resolveSymlinks) : path;
     } catch (Error & e) {
         e.addTrace(state.positions[pos], "while realising the context of path '%s'", path);
         throw;
@@ -167,7 +167,7 @@ static void mkOutputString(
    argument. */
 static void import(EvalState & state, const PosIdx pos, Value & vPath, Value * vScope, Value & v)
 {
-    auto path = realisePath(state, pos, vPath, false);
+    auto path = realisePath(state, pos, vPath, std::nullopt);
     auto path2 = path.path.abs();
 
     // FIXME
@@ -1521,13 +1521,16 @@ static void prim_pathExists(EvalState & state, const PosIdx pos, Value * * args,
     try {
         auto & arg = *args[0];
 
-        auto path = realisePath(state, pos, arg);
-
         /* SourcePath doesn't know about trailing slash. */
+        state.forceValue(arg, pos);
         auto mustBeDir = arg.type() == nString
             && (arg.string_view().ends_with("/")
                 || arg.string_view().ends_with("/."));
 
+        auto symlinkResolution =
+            mustBeDir ? SymlinkResolution::Full : SymlinkResolution::Ancestors;
+        auto path = realisePath(state, pos, arg, symlinkResolution);
+
         auto st = path.maybeLstat();
         auto exists = st && (!mustBeDir || st->type == SourceAccessor::tDirectory);
         v.mkBool(exists);
@@ -1765,7 +1768,7 @@ static std::string_view fileTypeToString(InputAccessor::Type type)
 
 static void prim_readFileType(EvalState & state, const PosIdx pos, Value * * args, Value & v)
 {
-    auto path = realisePath(state, pos, *args[0], false);
+    auto path = realisePath(state, pos, *args[0], std::nullopt);
     /* Retrieve the directory entry type and stringize it. */
     v.mkString(fileTypeToString(path.lstat().type));
 }
diff --git a/src/libutil/source-path.cc b/src/libutil/source-path.cc
index 341daf39c..66c95405f 100644
--- a/src/libutil/source-path.cc
+++ b/src/libutil/source-path.cc
@@ -62,7 +62,7 @@ bool SourcePath::operator<(const SourcePath & x) const
     return std::tie(*accessor, path) < std::tie(*x.accessor, x.path);
 }
 
-SourcePath SourcePath::resolveSymlinks() const
+SourcePath SourcePath::resolveSymlinks(SymlinkResolution mode) const
 {
     auto res = SourcePath(accessor);
 
@@ -72,6 +72,8 @@ SourcePath SourcePath::resolveSymlinks() const
     for (auto & c : path)
         todo.push_back(std::string(c));
 
+    bool resolve_last = mode == SymlinkResolution::Full;
+
     while (!todo.empty()) {
         auto c = *todo.begin();
         todo.pop_front();
@@ -81,14 +83,16 @@ SourcePath SourcePath::resolveSymlinks() const
             res.path.pop();
         else {
             res.path.push(c);
-            if (auto st = res.maybeLstat(); st && st->type == InputAccessor::tSymlink) {
-                if (!linksAllowed--)
-                    throw Error("infinite symlink recursion in path '%s'", path);
-                auto target = res.readLink();
-                res.path.pop();
-                if (hasPrefix(target, "/"))
-                    res.path = CanonPath::root;
-                todo.splice(todo.begin(), tokenizeString<std::list<std::string>>(target, "/"));
+            if (resolve_last || !todo.empty()) {
+                if (auto st = res.maybeLstat(); st && st->type == InputAccessor::tSymlink) {
+                    if (!linksAllowed--)
+                        throw Error("infinite symlink recursion in path '%s'", path);
+                    auto target = res.readLink();
+                    res.path.pop();
+                    if (hasPrefix(target, "/"))
+                        res.path = CanonPath::root;
+                    todo.splice(todo.begin(), tokenizeString<std::list<std::string>>(target, "/"));
+                }
             }
         }
     }
diff --git a/src/libutil/source-path.hh b/src/libutil/source-path.hh
index bde07b08f..b4cfa9ce8 100644
--- a/src/libutil/source-path.hh
+++ b/src/libutil/source-path.hh
@@ -11,6 +11,22 @@
 
 namespace nix {
 
+enum class SymlinkResolution {
+    /**
+     * Resolve symlinks in the ancestors only.
+     *
+     * Only the last component of the result is possibly a symlink.
+     */
+    Ancestors,
+
+    /**
+     * Resolve symlinks fully, realpath(3)-style.
+     *
+     * No component of the result will be a symlink.
+     */
+    Full,
+};
+
 /**
  * An abstraction for accessing source files during
  * evaluation. Currently, it's just a wrapper around `CanonPath` that
@@ -103,11 +119,11 @@ struct SourcePath
     bool operator<(const SourcePath & x) const;
 
     /**
-     * Resolve any symlinks in this `SourcePath` (including its
-     * parents). The result is a `SourcePath` in which no element is a
-     * symlink.
+     * Resolve any symlinks in this `SourcePath` according to the
+     * given resolution mode.
      */
-    SourcePath resolveSymlinks() const;
+    SourcePath resolveSymlinks(
+        SymlinkResolution mode = SymlinkResolution::Full) const;
 };
 
 std::ostream & operator << (std::ostream & str, const SourcePath & path);
diff --git a/tests/functional/lang/eval-okay-pathexists.nix b/tests/functional/lang/eval-okay-pathexists.nix
index 31697f66a..022b22fea 100644
--- a/tests/functional/lang/eval-okay-pathexists.nix
+++ b/tests/functional/lang/eval-okay-pathexists.nix
@@ -29,3 +29,6 @@ builtins.pathExists (./lib.nix)
 && builtins.pathExists (builtins.toPath { outPath = builtins.toString ./lib.nix; })
 && builtins.pathExists ./lib.nix
 && !builtins.pathExists ./bla.nix
+&& builtins.pathExists ./symlink-resolution/foo/overlays/overlay.nix
+&& builtins.pathExists ./symlink-resolution/broken
+&& builtins.pathExists (builtins.toString ./symlink-resolution/foo/overlays + "/.")
diff --git a/tests/functional/lang/symlink-resolution/broken b/tests/functional/lang/symlink-resolution/broken
new file mode 120000
index 000000000..e07da690b
--- /dev/null
+++ b/tests/functional/lang/symlink-resolution/broken
@@ -0,0 +1 @@
+nonexistent
\ No newline at end of file