diff --git a/src/main/java/com/google/devtools/build/lib/remote/PathCanonicalizer.java b/src/main/java/com/google/devtools/build/lib/remote/PathCanonicalizer.java
index 041d0108761f84..7d52d7c8d2839f 100644
--- a/src/main/java/com/google/devtools/build/lib/remote/PathCanonicalizer.java
+++ b/src/main/java/com/google/devtools/build/lib/remote/PathCanonicalizer.java
@@ -174,6 +174,8 @@ PathFragment resolveSymbolicLinks(PathFragment path) throws IOException {
   /** Removes cached information for a path prefix. */
   void clearPrefix(PathFragment pathPrefix) {
     Node node = getRootNode(pathPrefix);
+    NonSymlinkNode parent = null;
+    String parentSegment = null;
     Iterator<String> segments = pathPrefix.segments().iterator();
     boolean hasNext = segments.hasNext();
 
@@ -183,7 +185,13 @@ void clearPrefix(PathFragment pathPrefix) {
 
       switch (node) {
         case SymlinkNode symlinkNode -> {
-          // Path prefix not in trie.
+          // The path prefix passes through a cached symlink. Since the caller is invalidating
+          // entries inside this symlink, the cached resolution itself may be stale (e.g. the
+          // symlink has since been replaced by a directory) and must be dropped so that the next
+          // canonicalization re-reads the on-disk state.
+          if (parent != null) {
+            parent.remove(parentSegment);
+          }
           return;
         }
         case NonSymlinkNode nonSymlinkNode -> {
@@ -191,6 +199,8 @@ void clearPrefix(PathFragment pathPrefix) {
             // Found the path prefix.
             nonSymlinkNode.remove(segment);
           } else {
+            parent = nonSymlinkNode;
+            parentSegment = segment;
             node = nonSymlinkNode.get(segment);
           }
         }
diff --git a/src/main/java/com/google/devtools/build/lib/remote/RemoteActionFileSystem.java b/src/main/java/com/google/devtools/build/lib/remote/RemoteActionFileSystem.java
index 7d04eaffcd0be4..30fbc284810fac 100644
--- a/src/main/java/com/google/devtools/build/lib/remote/RemoteActionFileSystem.java
+++ b/src/main/java/com/google/devtools/build/lib/remote/RemoteActionFileSystem.java
@@ -354,6 +354,7 @@ private PathFragment resolveSymbolicLinksForParent(PathFragment path) throws IOE
 
   @Override
   public boolean delete(PathFragment path) throws IOException {
+    PathFragment originalPath = path;
     try {
       path = resolveSymbolicLinksForParent(path);
     } catch (FileNotFoundException ignored) {
@@ -361,9 +362,13 @@ public boolean delete(PathFragment path) throws IOException {
       return false;
     }
 
-    // No action implementations call renameTo concurrently with other filesystem operations, so
-    // there's no risk of a race condition below.
-    pathCanonicalizer.clearPrefix(path);
+    // Invalidate any cached symlink resolution for the unresolved path. If a parent of `path` is
+    // a symlink that has been (or will be) replaced -- for example, by a concurrent action that
+    // turns a stale executable symlink into a directory for a same-named subpackage -- our trie
+    // would otherwise keep returning the stale target. The resolution above may have populated
+    // such a stale entry, so this must happen *after* the resolution and on the *unresolved*
+    // path: clearing the resolved path would only invalidate a different subtree of the trie.
+    pathCanonicalizer.clearPrefix(originalPath);
 
     boolean deleted = localFs.getPath(path).delete();
     if (isOutput(path)) {
diff --git a/src/test/shell/integration/BUILD b/src/test/shell/integration/BUILD
index 87945d69f8356d..e220780885eb88 100644
--- a/src/test/shell/integration/BUILD
+++ b/src/test/shell/integration/BUILD
@@ -382,6 +382,14 @@ sh_test(
     tags = ["no_windows"],
 )
 
+sh_test(
+    name = "stale_output_symlink_test",
+    size = "medium",
+    srcs = ["stale_output_symlink_test.sh"],
+    data = [":test-deps"],
+    tags = ["no_windows"],
+)
+
 sh_test(
     name = "starlark_flag_test",
     size = "medium",
diff --git a/src/test/shell/integration/stale_output_symlink_test.sh b/src/test/shell/integration/stale_output_symlink_test.sh
new file mode 100755
index 00000000000000..2315067f4f7373
--- /dev/null
+++ b/src/test/shell/integration/stale_output_symlink_test.sh
@@ -0,0 +1,87 @@
+#!/usr/bin/env bash
+#
+# Copyright 2026 The Bazel Authors. All rights reserved.
+#
+# Licensed under the Apache License, Version 2.0 (the "License");
+# you may not use this file except in compliance with the License.
+# You may obtain a copy of the License at
+#
+#    http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS,
+# WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+# See the License for the specific language governing permissions and
+# limitations under the License.
+#
+# Regression test for https://github.com/bazelbuild/bazel/issues/29480.
+#
+# When an output path was previously created as a symlink (e.g. the executable
+# of an sh_binary), and a later build needs to use that same path as a
+# directory (because a same-named subpackage appeared at that location),
+# Bazel must clean up the stale symlink before placing files underneath, and
+# the per-action filesystem's cached symlink resolution must be invalidated.
+
+CURRENT_DIR="$(cd "$(dirname "${BASH_SOURCE[0]}")" && pwd)"
+source "${CURRENT_DIR}/../integration_test_setup.sh" \
+  || { echo "integration_test_setup.sh not found!" >&2; exit 1; }
+
+function tear_down() {
+  bazel clean
+  bazel shutdown
+  rm -rf tools
+}
+
+function test_symlink_output_replaced_by_subpackage() {
+  add_rules_shell "MODULE.bazel"
+  # The bug only manifests when an action filesystem (RemoteActionFileSystem) is in use, which
+  # happens whenever a disk or remote cache is configured.
+  add_to_bazelrc "build --disk_cache=$TEST_TMPDIR/disk_cache"
+  mkdir -p tools || fail "Can't create tools"
+  cat > tools/wrapper_script.sh << 'EOF'
+#!/bin/bash
+echo hello
+EOF
+  chmod +x tools/wrapper_script.sh
+
+  cat > tools/BUILD.bazel << 'EOF'
+load("@rules_shell//shell:sh_binary.bzl", "sh_binary")
+
+sh_binary(
+    name = "bazel_wrapper",
+    srcs = ["wrapper_script.sh"],
+)
+EOF
+
+  bazel build //tools:bazel_wrapper >&$TEST_log \
+    || fail "Failed first build of //tools:bazel_wrapper"
+
+  # rules_shell creates the executable as a symlink to the source script,
+  # which is what triggers the stale-state path in subsequent builds.
+  local exec_path
+  exec_path=$(bazel info bazel-bin)/tools/bazel_wrapper
+  [[ -L "$exec_path" ]] \
+    || fail "Expected $exec_path to be a symlink, got: $(ls -la "$exec_path" 2>&1)"
+
+  # Move the sh_binary into a same-named subpackage. The output that was
+  # previously a symlinked file at .../tools/bazel_wrapper must now become a
+  # directory at .../tools/bazel_wrapper/ which contains the new outputs.
+  rm tools/BUILD.bazel
+  mkdir -p tools/bazel_wrapper
+  cat > tools/bazel_wrapper/BUILD.bazel << 'EOF'
+load("@rules_shell//shell:sh_binary.bzl", "sh_binary")
+
+sh_binary(
+    name = "bazel_wrapper",
+    srcs = ["//tools:wrapper_script.sh"],
+)
+EOF
+  cat > tools/BUILD.bazel << 'EOF'
+exports_files(["wrapper_script.sh"])
+EOF
+
+  bazel build //tools/bazel_wrapper:bazel_wrapper >&$TEST_log \
+    || fail "Failed second build after moving sh_binary to a subpackage"
+}
+
+run_suite "Stale output symlink tests"