diff --git a/docs/changelog.rst b/docs/changelog.rst
index 9a811f42..2693201f 100644
--- a/docs/changelog.rst
+++ b/docs/changelog.rst
@@ -12,6 +12,10 @@ Bug fix release.
 - Fix reversal of ``Title`` and ``Name`` in MPD protocol (Fixes: :issue:`1212`
   PR: :issue:`1214`)
 
+- Fix crash if an M3U file in the :confval:`m3u/playlist_dir` directory has a
+  file name not decodable with the current file system encoding. (Fixes:
+  :issue:`1209`)
+
 
 v1.0.7 (2015-06-26)
 ===================
diff --git a/mopidy/m3u/playlists.py b/mopidy/m3u/playlists.py
index 8800e468..33281129 100644
--- a/mopidy/m3u/playlists.py
+++ b/mopidy/m3u/playlists.py
@@ -66,7 +66,7 @@ class M3UPlaylistsProvider(backend.PlaylistsProvider):
         for path in glob.glob(os.path.join(self._playlists_dir, b'*.m3u')):
             relpath = os.path.basename(path)
             uri = translator.path_to_playlist_uri(relpath)
-            name = os.path.splitext(relpath)[0].decode(encoding)
+            name = os.path.splitext(relpath)[0].decode(encoding, 'replace')
             tracks = translator.parse_m3u(path)
             playlists[uri] = Playlist(uri=uri, name=name, tracks=tracks)
 
diff --git a/tests/m3u/test_playlists.py b/tests/m3u/test_playlists.py
index b7ac827f..31d8f100 100644
--- a/tests/m3u/test_playlists.py
+++ b/tests/m3u/test_playlists.py
@@ -1,9 +1,12 @@
+# encoding: utf-8
+
 from __future__ import absolute_import, unicode_literals
 
 import os
 import shutil
 import tempfile
 import unittest
+import urllib
 
 import pykka
 
@@ -108,6 +111,7 @@ class M3UPlaylistsProviderTest(unittest.TestCase):
 
         with open(path) as f:
             m3u = f.read().splitlines()
+
         self.assertEqual(['#EXTM3U', '#EXTINF:60,Test', track.uri], m3u)
 
     def test_latin1_playlist_contents_is_written_to_disk(self):
@@ -142,9 +146,17 @@ class M3UPlaylistsProviderTest(unittest.TestCase):
         self.assertEqual(playlist.name, result.name)
         self.assertEqual(track.uri, result.tracks[0].uri)
 
-    @unittest.SkipTest
-    def test_santitising_of_playlist_filenames(self):
-        pass
+    def test_load_playlist_with_nonfilesystem_encoding_of_filename(self):
+        uri = 'm3u:%s.m3u' % urllib.quote('øæå'.encode('latin-1'))
+        path = playlist_uri_to_path(uri, self.playlists_dir)
+        with open(path, 'wb+') as f:
+            f.write(b'#EXTM3U\n')
+
+        self.core.playlists.refresh()
+
+        self.assertEqual(len(self.core.playlists.as_list()), 1)
+        result = self.core.playlists.lookup(uri)
+        self.assertEqual('\ufffd\ufffd\ufffd', result.name)
 
     @unittest.SkipTest
     def test_playlists_dir_is_created(self):