diff --git a/python/src/com/jetbrains/python/inspections/unresolvedReference/PyUnresolvedReferencesInspection.kt b/python/src/com/jetbrains/python/inspections/unresolvedReference/PyUnresolvedReferencesInspection.kt
index db4a9735972e..4b69c8ff6cfe 100644
--- a/python/src/com/jetbrains/python/inspections/unresolvedReference/PyUnresolvedReferencesInspection.kt
+++ b/python/src/com/jetbrains/python/inspections/unresolvedReference/PyUnresolvedReferencesInspection.kt
@@ -18,7 +18,9 @@ import com.intellij.openapi.roots.ModuleRootManager
 import com.intellij.openapi.util.Key
 import com.intellij.openapi.util.registry.Registry
 import com.intellij.openapi.vfs.VirtualFile
+import com.intellij.openapi.vfs.findFile
 import com.intellij.profile.codeInspection.InspectionProjectProfileManager
+import com.intellij.psi.PsiDirectory
 import com.intellij.psi.PsiElement
 import com.intellij.psi.PsiReference
 import com.intellij.psi.search.FilenameIndex
@@ -26,6 +28,7 @@ import com.intellij.psi.search.GlobalSearchScope
 import com.intellij.psi.util.PsiTreeUtil
 import com.intellij.psi.util.QualifiedName
 import com.intellij.util.containers.ContainerUtil
+import com.jetbrains.python.PyNames
 import com.jetbrains.python.PyPsiBundle
 import com.jetbrains.python.PyPsiPackageUtil
 import com.jetbrains.python.ast.PyAstFromImportStatement
@@ -161,11 +164,21 @@ class PyUnresolvedReferencesInspection : PyUnresolvedReferencesInspectionBase()
         }
 
         val resolveResult: List<PsiElement> = resolveInRoot(qname, containingDirectory, context)
-        if (!resolveResult.isEmpty()) {
-          if (Registry.`is`("python.source.root.suggest.quickfix.auto.apply")) {
+        if (resolveResult.size != 1) {
+          continue
+        }
+        if (Registry.`is`("python.source.root.suggest.quickfix.auto.apply")) {
+          val resolvedPsi = resolveResult.first()
+          val isPsiDirectoryWithInitPy = resolvedPsi is PsiDirectory && resolvedPsi.getVirtualFile().findChild(PyNames.INIT_DOT_PY) == null
+          if (!isPsiDirectoryWithInitPy) {
+            // If we resolved to a directory, it must contain "__init__.py". Otherwise, we might have false positives.
+            // See PY-86985
+            // Quick fix remains available in that case
             project.getService(PySourceRootDetectionService::class.java).onSourceRootDetected(containingDirectory)
           }
-          return PyMarkDirectoryAsSourceRootQuickFix(project, containingDirectory)
+        }
+        return PyMarkDirectoryAsSourceRootQuickFix(project, containingDirectory).also {
+
         }
       }
       return null
diff --git a/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_no_init.py b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_no_init.py
new file mode 100644
index 000000000000..a1ca1cd4f166
--- /dev/null
+++ b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_no_init.py
@@ -0,0 +1 @@
+import <error descr="No module named 'qwerty'">qwerty</error>
\ No newline at end of file
diff --git a/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_no_init_after.py b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_no_init_after.py
new file mode 100644
index 000000000000..1a0ace5f21c8
--- /dev/null
+++ b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_no_init_after.py
@@ -0,0 +1 @@
+import qwerty
\ No newline at end of file
diff --git a/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_with_init.py b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_with_init.py
new file mode 100644
index 000000000000..59da5fda7435
--- /dev/null
+++ b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_with_init.py
@@ -0,0 +1 @@
+import qwerty_with_init
\ No newline at end of file
diff --git a/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_with_init_after.py b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_with_init_after.py
new file mode 100644
index 000000000000..59da5fda7435
--- /dev/null
+++ b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/foo/abc_folder_with_init_after.py
@@ -0,0 +1 @@
+import qwerty_with_init
\ No newline at end of file
diff --git a/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/qwerty_with_init/__init__.py b/python/testData/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest/mysrc/qwerty_with_init/__init__.py
new file mode 100644
index 000000000000..e69de29bb2d1
diff --git a/python/testSrc/com/jetbrains/python/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest.kt b/python/testSrc/com/jetbrains/python/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest.kt
index ae27b8b6c013..cb6c6799f822 100644
--- a/python/testSrc/com/jetbrains/python/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest.kt
+++ b/python/testSrc/com/jetbrains/python/quickFixes/PyMarkDirectoryAsSourceRootQuickFixTest.kt
@@ -100,6 +100,23 @@ class PyMarkDirectoryAsSourceRootQuickFixTest: PyQuickFixTestCase() {
     testSourceRoot(expectedSourceRootPaths = emptySet())
   }
 
+  fun testNoQuickFixBecauseResolvedToFolderWithoutInitPy() {
+    testSourceRoot(expectedSourceRootPaths = emptySet())
+    openAndHighlightFile("mysrc/foo/abc_folder_no_init.py")
+    testSourceRoot(expectedSourceRootPaths = emptySet())
+    findAndExecuteSourcesQuickFix(isQuickFixExpected = true)
+    testSourceRoot(expectedSourceRootPaths = setOf("/src/mysrc"))
+  }
+
+  fun testNoQuickFixBecauseResolvedToFolderWithInitPy() {
+    testSourceRoot(expectedSourceRootPaths = emptySet())
+    openAndHighlightFile("mysrc/foo/abc_folder_with_init.py")
+    testSourceRoot(expectedSourceRootPaths = setOf("/src/mysrc"))
+    // quick fix is not expected because it will be already automatically applied
+    findAndExecuteSourcesQuickFix(isQuickFixExpected = false)
+    testSourceRoot(expectedSourceRootPaths = setOf("/src/mysrc"))
+  }
+
   private fun testSourceRoot(expectedSourceRootPaths: Set<String>) {
     val moduleRootManager = ModuleRootManager.getInstance(myFixture.module)
     val detectedSourceRoots = moduleRootManager.sourceRoots.map {