diff --git a/src/js/builtins/shell.ts b/src/js/builtins/shell.ts
index 40f3e7d3a0..f1d19bb84a 100644
--- a/src/js/builtins/shell.ts
+++ b/src/js/builtins/shell.ts
@@ -149,7 +149,7 @@ export function createBunShellTemplateFunction(createShellInterpreter_, createPa
     cwd(newCwd?: string): this {
       this.#throwIfRunning();
       if (typeof newCwd === "undefined" || newCwd === "." || newCwd === "" || newCwd === "./") {
-        newCwd = defaultCwd;
+        newCwd = defaultCwd ?? process.cwd();
       }
       this.#args!.setCwd(newCwd);
       return this;
@@ -277,7 +277,7 @@ export function createBunShellTemplateFunction(createShellInterpreter_, createPa
     cwd(newCwd: string | undefined) {
       if (typeof newCwd === "undefined" || typeof newCwd === "string") {
         if (newCwd === "." || newCwd === "" || newCwd === "./") {
-          newCwd = defaultCwd;
+          newCwd = defaultCwd ?? process.cwd();
         }
 
         this[cwdSymbol] = newCwd;
diff --git a/test/regression/issue/26460.test.ts b/test/regression/issue/26460.test.ts
new file mode 100644
index 0000000000..b62bce7040
--- /dev/null
+++ b/test/regression/issue/26460.test.ts
@@ -0,0 +1,103 @@
+import { expect, test } from "bun:test";
+import { bunEnv, bunExe, tempDir } from "harness";
+
+// Regression test for https://github.com/oven-sh/bun/issues/26460
+// Using $`...`.cwd(".") should work and use the current working directory
+
+test("shell cwd('.') should use current working directory", async () => {
+  using dir = tempDir("shell-cwd-dot", {
+    "test.js": `
+      import { $ } from "bun";
+      const result = await $\`pwd\`.cwd(".").text();
+      console.log(result.trim());
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test.js"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+
+  expect(stderr).toBe("");
+  expect(stdout.trim()).toBe(String(dir));
+  expect(exitCode).toBe(0);
+});
+
+test("shell cwd('') should use current working directory", async () => {
+  using dir = tempDir("shell-cwd-empty", {
+    "test.js": `
+      import { $ } from "bun";
+      const result = await $\`pwd\`.cwd("").text();
+      console.log(result.trim());
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test.js"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+
+  expect(stderr).toBe("");
+  expect(stdout.trim()).toBe(String(dir));
+  expect(exitCode).toBe(0);
+});
+
+test("shell cwd('./') should use current working directory", async () => {
+  using dir = tempDir("shell-cwd-dotslash", {
+    "test.js": `
+      import { $ } from "bun";
+      const result = await $\`pwd\`.cwd("./").text();
+      console.log(result.trim());
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test.js"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+
+  expect(stderr).toBe("");
+  expect(stdout.trim()).toBe(String(dir));
+  expect(exitCode).toBe(0);
+});
+
+test("Shell prototype cwd('.') should use current working directory", async () => {
+  using dir = tempDir("shell-proto-cwd-dot", {
+    "test.js": `
+      import { $ } from "bun";
+      const shell = new $.Shell();
+      shell.cwd(".");
+      const result = await shell\`pwd\`.text();
+      console.log(result.trim());
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test.js"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+
+  expect(stderr).toBe("");
+  expect(stdout.trim()).toBe(String(dir));
+  expect(exitCode).toBe(0);
+});