diff --git a/src/dune_sexp/dune b/src/dune_sexp/dune
index 4b661198c6e3..d8508fcd1ab7 100644
--- a/src/dune_sexp/dune
+++ b/src/dune_sexp/dune
@@ -1,7 +1,7 @@
 (library
  (name dune_sexp)
  (synopsis "[Internal] S-expression library")
- (libraries stdune)
+ (libraries stdune dune_uutf)
  (instrumentation
   (backend bisect_ppx)))
 
diff --git a/src/dune_sexp/escape.ml b/src/dune_sexp/escape.ml
index 8eb26e4c71cf..0c3b5d54cc08 100644
--- a/src/dune_sexp/escape.ml
+++ b/src/dune_sexp/escape.ml
@@ -1,17 +1,37 @@
 open! Stdune
 
+let utf_8_byte_length u =
+  match Uchar.to_int u with
+  | u when u < 0 -> assert false
+  | u when u <= 0x007F -> 1
+  | u when u <= 0x07FF -> 2
+  | u when u <= 0xFFFF -> 3
+  | u when u <= 0x10FFFF -> 4
+  | _ -> assert false
+;;
+
 let quote_length s =
   let n = ref 0 in
   let len = String.length s in
-  for i = 0 to len - 1 do
-    n
-    := !n
-       +
-       match String.unsafe_get s i with
-       | '\"' | '\\' | '\n' | '\t' | '\r' | '\b' -> 2
-       | '%' -> if i + 1 < len && s.[i + 1] = '{' then 2 else 1
-       | ' ' .. '~' -> 1
-       | _ -> 4
+  let i = ref 0 in
+  while !i < len do
+    (n
+     := !n
+        +
+        match String.unsafe_get s !i with
+        | '\"' | '\\' | '\n' | '\t' | '\r' | '\b' -> 2
+        | '%' -> if !i + 1 < len && s.[!i + 1] = '{' then 2 else 1
+        | ' ' .. '~' -> 1
+        | _ ->
+          let uchar = String.sub s ~pos:!i ~len:(min (len - !i) 4) in
+          (match Uutf.decoder ~encoding:`UTF_8 (`String uchar) |> Uutf.decode with
+           | `Uchar u ->
+             let uchar_len = utf_8_byte_length u in
+             assert (uchar_len > 1 && uchar_len < 5);
+             i := !i + uchar_len - 1;
+             uchar_len
+           | _ -> 4));
+    incr i
   done;
   !n
 ;;
@@ -19,8 +39,9 @@ let quote_length s =
 let escape_to s ~dst:s' ~ofs =
   let n = ref ofs in
   let len = String.length s in
-  for i = 0 to len - 1 do
-    (match String.unsafe_get s i with
+  let i = ref 0 in
+  while !i < len do
+    (match String.unsafe_get s !i with
      | ('\"' | '\\') as c ->
        Bytes.unsafe_set s' !n '\\';
        incr n;
@@ -41,21 +62,36 @@ let escape_to s ~dst:s' ~ofs =
        Bytes.unsafe_set s' !n '\\';
        incr n;
        Bytes.unsafe_set s' !n 'b'
-     | '%' when i + 1 < len && s.[i + 1] = '{' ->
+     | '%' when !i + 1 < len && s.[!i + 1] = '{' ->
        Bytes.unsafe_set s' !n '\\';
        incr n;
        Bytes.unsafe_set s' !n '%'
      | ' ' .. '~' as c -> Bytes.unsafe_set s' !n c
      | c ->
-       let a = Char.code c in
-       Bytes.unsafe_set s' !n '\\';
-       incr n;
-       Bytes.unsafe_set s' !n (Char.unsafe_chr (48 + (a / 100)));
-       incr n;
-       Bytes.unsafe_set s' !n (Char.unsafe_chr (48 + (a / 10 mod 10)));
-       incr n;
-       Bytes.unsafe_set s' !n (Char.unsafe_chr (48 + (a mod 10))));
-    incr n
+       let uchar = String.sub s ~pos:!i ~len:(min (len - !i) 4) in
+       (match Uutf.decoder ~encoding:`UTF_8 (`String uchar) |> Uutf.decode with
+        | `Uchar u ->
+          let uchar_len = utf_8_byte_length u in
+          assert (uchar_len > 1 && uchar_len < 5);
+          Bytes.unsafe_set s' !n (String.unsafe_get s !i);
+          Bytes.unsafe_set s' (!n + 1) (String.unsafe_get s (!i + 1));
+          if uchar_len > 2
+          then Bytes.unsafe_set s' (!n + 2) (String.unsafe_get s (!i + 2));
+          if uchar_len > 3
+          then Bytes.unsafe_set s' (!n + 3) (String.unsafe_get s (!i + 3));
+          n := !n + uchar_len - 1;
+          i := !i + uchar_len - 1
+        | _ ->
+          let a = Char.code c in
+          Bytes.unsafe_set s' !n '\\';
+          incr n;
+          Bytes.unsafe_set s' !n (Char.unsafe_chr (48 + (a / 100)));
+          incr n;
+          Bytes.unsafe_set s' !n (Char.unsafe_chr (48 + (a / 10 mod 10)));
+          incr n;
+          Bytes.unsafe_set s' !n (Char.unsafe_chr (48 + (a mod 10)))));
+    incr n;
+    incr i
   done
 ;;
 
diff --git a/src/dune_sexp/lexer.mll b/src/dune_sexp/lexer.mll
index 46aec74b1d5c..83b86d7fee5f 100644
--- a/src/dune_sexp/lexer.mll
+++ b/src/dune_sexp/lexer.mll
@@ -16,11 +16,12 @@ end
 
 type t = with_comments:bool -> Lexing.lexbuf -> Token.t
 
-let error ?(delta = 0) lexbuf message =
+let error ?(delta = 0) ?(delta_stop = 0) lexbuf message =
   let start = Lexing.lexeme_start_p lexbuf in
+  let stop = Lexing.lexeme_end_p lexbuf in
   let loc =
     Loc.create ~start:{ start with pos_cnum = start.pos_cnum + delta }
-      ~stop:(Lexing.lexeme_end_p lexbuf)
+      ~stop:{ stop with pos_cnum = stop.pos_cnum + delta_stop }
   in
   User_error.raise ~loc [ Pp.text message ]
 
@@ -144,6 +145,8 @@ let hexdigit  = ['0'-'9' 'a'-'f' 'A'-'F']
 let atom_char = [^ ';' '(' ')' '"' '\000'-'\032' '\127'-'\255']
 let varname_char = atom_char # [ ':' '%' '{' '}' ]
 
+let non_ascii = ['\128'-'\255']
+
 rule token with_comments = parse
   | newline
     { Lexing.new_line lexbuf; token with_comments lexbuf }
@@ -352,13 +355,38 @@ and template_variable = parse
   }
   | '}' | eof
     { error lexbuf "%{...} forms cannot be empty" }
-  | (varname_char* as skip) (_ as other)
-  | (varname_char+ ':' ((':' | varname_char)*) as skip) (_ as other)
+  | (varname_char* as skip) (non_ascii* as maybe_utf) (_ as other)
+  | (varname_char+ ':' ((':' | varname_char)*) as skip) (non_ascii* as maybe_utf) (_ as other)
   {
-    error
-      ~delta:(String.length skip)
-      lexbuf
-      (Printf.sprintf "The character %C is not allowed inside %%{...} forms" other)
+    let utf_8_byte_length u =
+      match Uchar.to_int u with
+      | u when u < 0 -> assert false
+      | u when u <= 0x007F -> 1
+      | u when u <= 0x07FF -> 2
+      | u when u <= 0xFFFF -> 3
+      | u when u <= 0x10FFFF -> 4
+      | _ -> assert false
+    in
+    let utf_len = String.length maybe_utf in
+    let uchar =
+      if utf_len > 1 then
+        Some (Uutf.decoder ~encoding:`UTF_8 (`String maybe_utf) |> Uutf.decode)
+      else None
+    in
+    match uchar with
+    | Some (`Uchar u) ->
+      let uchar_len = utf_8_byte_length u in
+      let utf_char = String.sub maybe_utf ~pos:0 ~len:uchar_len in
+      error
+        ~delta:(String.length skip)
+        ~delta_stop:(-uchar_len)
+        lexbuf
+        (Printf.sprintf "The character %s is not allowed inside %%{...} forms" utf_char)
+    | _ ->
+      error
+        ~delta:(String.length skip)
+        lexbuf
+        (Printf.sprintf "The character %C is not allowed inside %%{...} forms" other)
   }
 
 {
diff --git a/test/blackbox-tests/test-cases/formatting/non-ascii-characters.t b/test/blackbox-tests/test-cases/formatting/non-ascii-characters.t
index c11fd94e4145..dcf44519b4e2 100644
--- a/test/blackbox-tests/test-cases/formatting/non-ascii-characters.t
+++ b/test/blackbox-tests/test-cases/formatting/non-ascii-characters.t
@@ -1,13 +1,30 @@
-How the non-ASCII characters are handled, this is also related to the issue #9728
+Utf8 characters are handled for now, this is also related to the issue #9728
 
   $ dune format-dune-file <<EOF
-  > ("É")
+  > ("Éff ĎúÑȨ")
   > EOF
-  ("\195\137")
+  ("Éff ĎúÑȨ")
 
   $ dune format-dune-file <<EOF
   > (run foo %{bin:é})
   > EOF
   File "", line 1, characters 15-16:
-  Error: The character '\195' is not allowed inside %{...} forms
+  Error: The character é is not allowed inside %{...} forms
+  [1]
+
+  $ dune format-dune-file <<EOF
+  > (echo "hÉllo")
+  > EOF
+  (echo "hÉllo")
+
+  $ dune format-dune-file <<EOF
+  > (echo "É")
+  > EOF
+  (echo "É")
+
+  $ dune format-dune-file <<EOF
+  > (Écho "hello")
+  > EOF
+  File "", line 1, characters 1-1:
+  Error: Invalid . file
   [1]