diff --git a/src/mcp/server/fastmcp/resources/templates.py b/src/mcp/server/fastmcp/resources/templates.py
index 89a8ceb36b..14e2ca4bc5 100644
--- a/src/mcp/server/fastmcp/resources/templates.py
+++ b/src/mcp/server/fastmcp/resources/templates.py
@@ -6,6 +6,7 @@
 import re
 from collections.abc import Callable
 from typing import TYPE_CHECKING, Any
+from urllib.parse import unquote
 
 from pydantic import BaseModel, Field, validate_call
 
@@ -83,12 +84,16 @@ def from_function(
         )
 
     def matches(self, uri: str) -> dict[str, Any] | None:
-        """Check if URI matches template and extract parameters."""
+        """Check if URI matches template and extract parameters.
+
+        Extracted parameters are URL-decoded to handle percent-encoded characters.
+        """
         # Convert template to regex pattern
         pattern = self.uri_template.replace("{", "(?P<").replace("}", ">[^/]+)")
         match = re.match(f"^{pattern}$", uri)
         if match:
-            return match.groupdict()
+            # URL-decode all extracted parameter values
+            return {key: unquote(value) for key, value in match.groupdict().items()}
         return None
 
     async def create_resource(
diff --git a/tests/issues/test_973_url_decoding.py b/tests/issues/test_973_url_decoding.py
new file mode 100644
index 0000000000..32d5a16cc5
--- /dev/null
+++ b/tests/issues/test_973_url_decoding.py
@@ -0,0 +1,78 @@
+"""Test that URL-encoded parameters are decoded in resource templates.
+
+Regression test for https://github.com/modelcontextprotocol/python-sdk/issues/973
+"""
+
+from mcp.server.fastmcp.resources import ResourceTemplate
+
+
+def test_template_matches_decodes_space():
+    """Test that %20 is decoded to space."""
+
+    def search(query: str) -> str:  # pragma: no cover
+        return f"Results for: {query}"
+
+    template = ResourceTemplate.from_function(
+        fn=search,
+        uri_template="search://{query}",
+        name="search",
+    )
+
+    params = template.matches("search://hello%20world")
+    assert params is not None
+    assert params["query"] == "hello world"
+
+
+def test_template_matches_decodes_accented_characters():
+    """Test that %C3%A9 is decoded to e with accent."""
+
+    def search(query: str) -> str:  # pragma: no cover
+        return f"Results for: {query}"
+
+    template = ResourceTemplate.from_function(
+        fn=search,
+        uri_template="search://{query}",
+        name="search",
+    )
+
+    params = template.matches("search://caf%C3%A9")
+    assert params is not None
+    assert params["query"] == "café"
+
+
+def test_template_matches_decodes_complex_phrase():
+    """Test complex French phrase from the original issue."""
+
+    def search(query: str) -> str:  # pragma: no cover
+        return f"Results for: {query}"
+
+    template = ResourceTemplate.from_function(
+        fn=search,
+        uri_template="search://{query}",
+        name="search",
+    )
+
+    params = template.matches("search://stick%20correcteur%20teint%C3%A9%20anti-imperfections")
+    assert params is not None
+    assert params["query"] == "stick correcteur teinté anti-imperfections"
+
+
+def test_template_matches_preserves_plus_sign():
+    """Test that plus sign remains as plus (not converted to space).
+
+    In URI encoding, %20 is space. Plus-as-space is only for
+    application/x-www-form-urlencoded (HTML forms).
+    """
+
+    def search(query: str) -> str:  # pragma: no cover
+        return f"Results for: {query}"
+
+    template = ResourceTemplate.from_function(
+        fn=search,
+        uri_template="search://{query}",
+        name="search",
+    )
+
+    params = template.matches("search://hello+world")
+    assert params is not None
+    assert params["query"] == "hello+world"