diff --git a/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/FileWatcher.java b/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/FileWatcher.java
index fe9bfe3c7e8a..1ff08a049430 100644
--- a/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/FileWatcher.java
+++ b/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/FileWatcher.java
@@ -348,14 +348,14 @@ public class FileWatcher {
   public boolean isWatched(@NotNull final VirtualFile file) {
     if (isOperational()) {
       synchronized (myLock) {
-        return !checkWatchable(file.getPresentableUrl(), true, false).isEmpty();
+        return !checkWatchable(file.getPresentableUrl(), true, true).isEmpty();
       }
     }
     return false;
   }
 
   @NotNull
-  private Collection<String> checkWatchable(String reportedPath, boolean isExact, boolean checkRootParents) {
+  private Collection<String> checkWatchable(String reportedPath, boolean isExact, boolean fastPath) {
     if (reportedPath == null) return Collections.emptyList();
 
     myAllPaths.clear();
@@ -372,26 +372,33 @@ public class FileWatcher {
     myWatchedPaths.clear();
     ext:
     for (String path : myAllPaths) {
+      if (fastPath && !myWatchedPaths.isEmpty()) break;
+
+      for (String root : myFlatWatchRoots) {
+        if (FileUtil.pathsEqual(path, root)) {
+          myWatchedPaths.add(path);
+          continue ext;
+        }
+        if (isExact) {
+          String parentPath = new File(path).getParent();
+          if (parentPath != null && FileUtil.pathsEqual(parentPath, root)) {
+            myWatchedPaths.add(path);
+            continue ext;
+          }
+        }
+      }
+
       for (String root : myRecursiveWatchRoots) {
         if (FileUtil.startsWith(path, root)) {
           myWatchedPaths.add(path);
           continue ext;
         }
-        if (checkRootParents && FileUtil.startsWith(root, path)) {
-          myWatchedPaths.add(root);
-          continue ext;
-        }
-      }
-
-      String checkPath = isExact ? new File(path).getParent() : path;
-      for (String root : myFlatWatchRoots) {
-        if (FileUtil.pathsEqual(checkPath, root)) {
-          myWatchedPaths.add(path);
-          continue ext;
-        }
-        if (checkRootParents && FileUtil.startsWith(root, checkPath)) {
-          myWatchedPaths.add(root);
-          continue ext;
+        if (!isExact) {
+          String parentPath = new File(root).getParent();
+          if (parentPath != null && FileUtil.pathsEqual(path, parentPath)) {
+            myWatchedPaths.add(root);
+            continue ext;
+          }
         }
       }
     }
@@ -538,7 +545,7 @@ public class FileWatcher {
 
       synchronized (myLock) {
         boolean exactPath = op != WatcherOp.DIRTY && op != WatcherOp.RECDIRTY;
-        Collection<String> paths = checkWatchable(path, exactPath, true);
+        Collection<String> paths = checkWatchable(path, exactPath, false);
 
         if (paths.isEmpty()) {
           if (LOG.isDebugEnabled()) {
diff --git a/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/LocalFileSystemImpl.java b/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/LocalFileSystemImpl.java
index 41d1be296cb4..54a344365961 100644
--- a/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/LocalFileSystemImpl.java
+++ b/platform/platform-impl/src/com/intellij/openapi/vfs/impl/local/LocalFileSystemImpl.java
@@ -17,6 +17,7 @@ package com.intellij.openapi.vfs.impl.local;
 
 import com.intellij.openapi.application.Application;
 import com.intellij.openapi.application.ApplicationManager;
+import com.intellij.openapi.application.PathManager;
 import com.intellij.openapi.components.ApplicationComponent;
 import com.intellij.openapi.fileEditor.FileDocumentManager;
 import com.intellij.openapi.util.io.FileUtil;
@@ -59,7 +60,18 @@ public final class LocalFileSystemImpl extends LocalFileSystemBase implements Ap
     public WatchRequestImpl(String rootPath, boolean toWatchRecursively) throws FileNotFoundException {
       int index = rootPath.indexOf(JarFileSystem.JAR_SEPARATOR);
       if (index >= 0) rootPath = rootPath.substring(0, index);
+
       File rootFile = new File(FileUtil.toSystemDependentName(rootPath));
+      if (index > 0 || !rootFile.isDirectory()) {
+        File parentFile = rootFile.getParentFile();
+        if (parentFile == null) {
+          throw new FileNotFoundException(rootPath);
+        }
+        if (!parentFile.getPath().equals(PathManager.getSystemPath()) || !rootFile.mkdir()) {
+          rootFile = parentFile;
+        }
+      }
+
       myFSRootPath = rootFile.getAbsolutePath();
       myRootPath = FileUtil.toSystemIndependentName(myFSRootPath);
       myToWatchRecursively = toWatchRecursively;
@@ -266,28 +278,27 @@ public final class LocalFileSystemImpl extends LocalFileSystemBase implements Ap
 
   private void storeRefreshStatusToFiles() {
     if (myWatcher.isOperational()) {
-      // TODO: different ways to mark dirty for all these cases
-      final FileWatcher.DirtyPaths dirtyPaths = myWatcher.getDirtyPaths();
+      FileWatcher.DirtyPaths dirtyPaths = myWatcher.getDirtyPaths();
       markPathsDirty(dirtyPaths.dirtyPaths);
       markFlatDirsDirty(dirtyPaths.dirtyDirectories);
       markRecursiveDirsDirty(dirtyPaths.dirtyPathsRecursive);
     }
   }
 
-  private void markPathsDirty(final List<String> dirtyFiles) {
-    for (String dirtyFile : dirtyFiles) {
-      VirtualFile file = findFileByPathIfCached(dirtyFile);
+  private void markPathsDirty(List<String> dirtyPaths) {
+    for (String dirtyPath : dirtyPaths) {
+      VirtualFile file = findFileByPathIfCached(dirtyPath);
       if (file instanceof NewVirtualFile) {
         ((NewVirtualFile)file).markDirty();
       }
     }
   }
 
-  private void markFlatDirsDirty(final List<String> dirtyFiles) {
-    for (String dirtyFile : dirtyFiles) {
-      VirtualFile file = findFileByPathIfCached(dirtyFile);
+  private void markFlatDirsDirty(List<String> dirtyPaths) {
+    for (String dirtyPath : dirtyPaths) {
+      VirtualFile file = findFileOrParentIfCached(dirtyPath);
       if (file instanceof NewVirtualFile) {
-        final NewVirtualFile nvf = (NewVirtualFile)file;
+        NewVirtualFile nvf = (NewVirtualFile)file;
         nvf.markDirty();
         for (VirtualFile child : nvf.getCachedChildren()) {
           ((NewVirtualFile)child).markDirty();
@@ -296,15 +307,26 @@ public final class LocalFileSystemImpl extends LocalFileSystemBase implements Ap
     }
   }
 
-  private void markRecursiveDirsDirty(final List<String> dirtyFiles) {
-    for (String dirtyFile : dirtyFiles) {
-      VirtualFile file = findFileByPathIfCached(dirtyFile);
+  private void markRecursiveDirsDirty(List<String> dirtyPaths) {
+    for (String dirtyPath : dirtyPaths) {
+      VirtualFile file = findFileOrParentIfCached(dirtyPath);
       if (file instanceof NewVirtualFile) {
         ((NewVirtualFile)file).markDirtyRecursively();
       }
     }
   }
 
+  private VirtualFile findFileOrParentIfCached(String path) {
+    VirtualFile file = findFileByPathIfCached(path);
+    if (file == null) {
+      String parentPath = new File(path).getParent();
+      if (parentPath != null) {
+        file = findFileByPathIfCached(parentPath);
+      }
+    }
+    return file;
+  }
+
   public void markSuspiciousFilesDirty(List<VirtualFile> files) {
     storeRefreshStatusToFiles();
 
diff --git a/platform/platform-tests/testSrc/com/intellij/openapi/vfs/local/FileWatcherTest.java b/platform/platform-tests/testSrc/com/intellij/openapi/vfs/local/FileWatcherTest.java
index 3d2188a0afd5..f5e1ce6dac3c 100644
--- a/platform/platform-tests/testSrc/com/intellij/openapi/vfs/local/FileWatcherTest.java
+++ b/platform/platform-tests/testSrc/com/intellij/openapi/vfs/local/FileWatcherTest.java
@@ -521,6 +521,14 @@ public class FileWatcherTest extends PlatformLangTestCase {
       assertTrue(rootDir2.renameTo(rootDir));
       assertEvent(VFileEvent.class, rootDir.getPath(), rootDir2.getPath());
 
+      myAccept = true;
+      assertTrue(FileUtil.delete(rootDir));
+      assertEvent(VFileDeleteEvent.class, rootDir.getPath());
+
+      myAccept = true;
+      assertTrue(rootDir.mkdirs());
+      assertEvent(VFileCreateEvent.class, rootDir.getPath());
+
       myAccept = true;
       assertTrue(FileUtil.delete(topDir));
       assertEvent(VFileDeleteEvent.class, topDir.getPath());