diff --git a/packages/playwright-ct-core/src/cliOverrides.ts b/packages/playwright-ct-core/src/cliOverrides.ts
index d57014f636..0e4c328694 100644
--- a/packages/playwright-ct-core/src/cliOverrides.ts
+++ b/packages/playwright-ct-core/src/cliOverrides.ts
@@ -21,6 +21,7 @@ import { resolveDirs } from './viteUtils';
 import { runDevServer } from './devServer';
 import type { FullConfigInternal } from 'playwright/lib/common/config';
 import { removeFolderAndLogToConsole } from 'playwright/lib/runner/testServer';
+import type { FullConfig } from 'playwright/types/test';
 
 export async function clearCacheCommand(config: FullConfigInternal) {
   const dirs = await resolveDirs(config.configDir, config.config);
@@ -34,6 +35,6 @@ export async function findRelatedTestFilesCommand(files: string[],  config: Full
   return { testFiles: affectedTestFiles(files) };
 }
 
-export async function runDevServerCommand(config: FullConfigInternal) {
+export async function runDevServerCommand(config: FullConfig) {
   return await runDevServer(config);
 }
diff --git a/packages/playwright-ct-core/src/devServer.ts b/packages/playwright-ct-core/src/devServer.ts
index 3e833fcd9c..2152a672b3 100644
--- a/packages/playwright-ct-core/src/devServer.ts
+++ b/packages/playwright-ct-core/src/devServer.ts
@@ -17,28 +17,26 @@
 import fs from 'fs';
 import path from 'path';
 import { Watcher } from 'playwright/lib/fsWatcher';
-import { Runner } from 'playwright/lib/runner/runner';
 import type { PluginContext } from 'rollup';
 import { source as injectedSource } from './generated/indexSource';
 import { createConfig, populateComponentsFromTests, resolveDirs, transformIndexFile, frameworkConfig } from './viteUtils';
 import type { ComponentRegistry } from './viteUtils';
-import type { FullConfigInternal } from 'playwright/lib/common/config';
+import type { FullConfig } from 'playwright/test';
 
-export async function runDevServer(config: FullConfigInternal): Promise<() => Promise<void>> {
-  const { registerSourceFile, frameworkPluginFactory } = frameworkConfig(config.config);
-  const runner = new Runner(config);
-  await runner.loadAllTests();
+export async function runDevServer(config: FullConfig): Promise<() => Promise<void>> {
+  const { registerSourceFile, frameworkPluginFactory } = frameworkConfig(config);
   const componentRegistry: ComponentRegistry = new Map();
   await populateComponentsFromTests(componentRegistry);
 
-  const dirs = await resolveDirs(config.configDir, config.config);
+  const configDir = config.configFile ? path.dirname(config.configFile) : config.rootDir;
+  const dirs = await resolveDirs(configDir, config);
   if (!dirs) {
     // eslint-disable-next-line no-console
     console.log(`Template file playwright/index.html is missing.`);
     return async () => {};
   }
   const registerSource = injectedSource + '\n' + await fs.promises.readFile(registerSourceFile, 'utf-8');
-  const viteConfig = await createConfig(dirs, config.config, frameworkPluginFactory, false);
+  const viteConfig = await createConfig(dirs, config, frameworkPluginFactory, false);
   viteConfig.plugins.push({
     name: 'playwright:component-index',
 
@@ -57,8 +55,8 @@ export async function runDevServer(config: FullConfigInternal): Promise<() => Pr
   const projectDirs = new Set<string>();
   const projectOutputs = new Set<string>();
   for (const p of config.projects) {
-    projectDirs.add(p.project.testDir);
-    projectOutputs.add(p.project.outputDir);
+    projectDirs.add(p.testDir);
+    projectOutputs.add(p.outputDir);
   }
 
   const globalWatcher = new Watcher(async () => {
diff --git a/packages/playwright/src/program.ts b/packages/playwright/src/program.ts
index 4b5bea19d3..c9b5a885c3 100644
--- a/packages/playwright/src/program.ts
+++ b/packages/playwright/src/program.ts
@@ -95,13 +95,14 @@ function addDevServerCommand(program: Command) {
   command.description('start dev server');
   command.option('-c, --config <file>', `Configuration file, or a test directory with optional "playwright.config.{m,c}?{js,ts}"`);
   command.action(async options => {
-    const configInternal = await loadConfigFromFileRestartIfNeeded(options.config);
-    if (!configInternal)
+    const config = await loadConfigFromFileRestartIfNeeded(options.config);
+    if (!config)
       return;
-    const { config } = configInternal;
-    const implementation = (config as any)['@playwright/test']?.['cli']?.['dev-server'];
+    const implementation = (config.config as any)['@playwright/test']?.['cli']?.['dev-server'];
     if (implementation) {
-      await implementation(configInternal);
+      const runner = new Runner(config);
+      await runner.loadAllTests();
+      await implementation(config.config);
     } else {
       console.log(`DevServer is not available in the package you are using. Did you mean to use component testing?`);
       gracefullyProcessExitDoNotHang(1);
diff --git a/packages/playwright/src/runner/testServer.ts b/packages/playwright/src/runner/testServer.ts
index 4765bf5089..d0370fcfc3 100644
--- a/packages/playwright/src/runner/testServer.ts
+++ b/packages/playwright/src/runner/testServer.ts
@@ -176,17 +176,16 @@ export class TestServerDispatcher implements TestServerInterface {
   async startDevServer(params: Parameters<TestServerInterface['startDevServer']>[0]): ReturnType<TestServerInterface['startDevServer']> {
     if (this._devServerHandle)
       return { status: 'failed', report: [] };
-    const { reporter, report } = await this._collectingInternalReporter();
-    const config = await this._loadConfigOrReportError(reporter);
+    const { config, report, reporter, status } = await this._innerListTests({});
     if (!config)
-      return { status: 'failed', report };
+      return { status, report };
     const devServerCommand = (config.config as any)['@playwright/test']?.['cli']?.['dev-server'];
     if (!devServerCommand) {
       reporter.onError({ message: 'No dev-server command found in the configuration' });
       return { status: 'failed', report };
     }
     try {
-      this._devServerHandle = await devServerCommand(config);
+      this._devServerHandle = await devServerCommand(config.config);
       return { status: 'passed', report };
     } catch (e) {
       reporter.onError(serializeError(e));
@@ -237,13 +236,21 @@ export class TestServerDispatcher implements TestServerInterface {
   async listTests(params: Parameters<TestServerInterface['listTests']>[0]): ReturnType<TestServerInterface['listTests']> {
     let result: Awaited<ReturnType<TestServerInterface['listTests']>>;
     this._queue = this._queue.then(async () => {
-      result = await this._innerListTests(params);
+      const { config, report, status } = await this._innerListTests(params);
+      if (config)
+        await this._updateWatchedDirs(config);
+      result = { report, status };
     }).catch(printInternalError);
     await this._queue;
     return result!;
   }
 
-  private async _innerListTests(params: Parameters<TestServerInterface['listTests']>[0]): ReturnType<TestServerInterface['listTests']> {
+  private async _innerListTests(params: Parameters<TestServerInterface['listTests']>[0]): Promise<{
+    report: ReportEntry[],
+    reporter: InternalReporter,
+    status: reporterTypes.FullResult['status'],
+    config?: FullConfigInternal,
+  }> {
     const overrides: ConfigCLIOverrides = {
       repeatEach: 1,
       retries: 0,
@@ -252,7 +259,7 @@ export class TestServerDispatcher implements TestServerInterface {
     const { reporter, report } = await this._collectingInternalReporter();
     const config = await this._loadConfigOrReportError(reporter, overrides);
     if (!config)
-      return { report, status: 'failed' };
+      return { report, reporter, status: 'failed' };
 
     config.cliArgs = params.locations || [];
     config.cliGrep = params.grep;
@@ -266,7 +273,10 @@ export class TestServerDispatcher implements TestServerInterface {
     const status = await taskRunner.run(testRun, 0);
     await reporter.onEnd({ status });
     await reporter.onExit();
+    return { config, report, reporter, status };
+  }
 
+  private async _updateWatchedDirs(config: FullConfigInternal) {
     this._watchedProjectDirs = new Set();
     this._ignoredProjectOutputs = new Set();
     for (const p of config.projects) {
@@ -281,11 +291,10 @@ export class TestServerDispatcher implements TestServerInterface {
     }
 
     if (this._watchTestDirs)
-      await this.updateWatcher(false);
-    return { report, status };
+      await this._updateWatcher(false);
   }
 
-  private async updateWatcher(reportPending: boolean) {
+  private async _updateWatcher(reportPending: boolean) {
     await this._watcher.update([...this._watchedProjectDirs, ...this._watchedTestDependencies], [...this._ignoredProjectOutputs], reportPending);
   }
 
@@ -358,7 +367,7 @@ export class TestServerDispatcher implements TestServerInterface {
       this._watchedTestDependencies.add(fileName);
       dependenciesForTestFile(fileName).forEach(file => this._watchedTestDependencies.add(file));
     }
-    await this.updateWatcher(true);
+    await this._updateWatcher(true);
   }
 
   async findRelatedTestFiles(params: Parameters<TestServerInterface['findRelatedTestFiles']>[0]): ReturnType<TestServerInterface['findRelatedTestFiles']> {
diff --git a/tests/playwright-test/playwright.ct-dev-server.spec.ts b/tests/playwright-test/playwright.ct-dev-server.spec.ts
new file mode 100644
index 0000000000..91edc93740
--- /dev/null
+++ b/tests/playwright-test/playwright.ct-dev-server.spec.ts
@@ -0,0 +1,49 @@
+/**
+ * Copyright (c) Microsoft Corporation.
+ *
+ * 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.
+ */
+
+import { test, expect, playwrightCtConfigText } from './playwright-test-fixtures';
+
+test.describe.configure({ mode: 'parallel' });
+
+test('should run dev-server and use it for tests', async ({ writeFiles, runInlineTest, startCLICommand }) => {
+  await writeFiles({
+    'playwright.config.ts': playwrightCtConfigText,
+    'playwright/index.html': `<script type="module" src="./index.ts"></script>`,
+    'playwright/index.ts': ``,
+    'src/button.tsx': `
+      export const Button = () => <button>Button</button>;
+    `,
+    'src/button.test.tsx': `
+      import { test, expect } from '@playwright/experimental-ct-react';
+      import { Button } from './button';
+
+      test('pass', async ({ mount }) => {
+        const component = await mount(<Button></Button>);
+        await expect(component).toHaveText('Button', { timeout: 1 });
+      });
+    `,
+  });
+
+  const devServerProcess = await startCLICommand({}, 'dev-server');
+  await devServerProcess.waitForOutput('Dev Server listening on');
+
+  const result = await runInlineTest({}, { workers: 1 });
+  expect(result.exitCode).toBe(0);
+  expect(result.passed).toBe(1);
+  expect(result.output).toContain('Dev Server is already running at');
+
+  await devServerProcess.kill();
+});