diff --git a/lib/galaxy/tools/__init__.py b/lib/galaxy/tools/__init__.py
index 131294e6a63..10a9b2b217d 100755
--- a/lib/galaxy/tools/__init__.py
+++ b/lib/galaxy/tools/__init__.py
@@ -11,6 +11,7 @@ import pipes
 import re
 import shutil
 import sys
+import string
 import tempfile
 import threading
 import traceback
@@ -214,8 +215,7 @@ class ToolBox( object, Dictifiable ):
             config_elems = []
         else:
             parsing_shed_tool_conf = False
-            # Default to backward compatible config setting.
-            tool_path = self.tool_root_dir
+        tool_path = self.__resolve_tool_path(tool_path, config_filename)
         # Only load the panel_dict under certain conditions.
         load_panel_dict = not self.integrated_tool_panel_config_has_contents
         for _, elem in enumerate( root ):
@@ -243,6 +243,17 @@ class ToolBox( object, Dictifiable ):
                 return shed_config_dict
         return default
 
+    def __resolve_tool_path(self, tool_path, config_filename):
+        if not tool_path:
+            # Default to backward compatible config setting.
+            tool_path = self.tool_root_dir
+        else:
+            # Allow use of __tool_conf_dir__ in toolbox config files.
+            tool_conf_dir = os.path.dirname(config_filename)
+            tool_path_vars = {"tool_conf_dir": tool_conf_dir}
+            tool_path = string.Template(tool_path).safe_substitute(tool_path_vars)
+        return tool_path
+
     def __add_tool_to_tool_panel( self, tool, panel_component, section=False ):
         # See if a version of this tool is already loaded into the tool panel.  The value of panel_component
         # will be a ToolSection (if the value of section=True) or self.tool_panel (if section=False).
diff --git a/test/functional/tools/samples_tool_conf.xml b/test/functional/tools/samples_tool_conf.xml
index 52f3e54bbba..918e7c5a5e9 100644
--- a/test/functional/tools/samples_tool_conf.xml
+++ b/test/functional/tools/samples_tool_conf.xml
@@ -1,5 +1,5 @@
 <?xml version="1.0"?>
-<toolbox tool_path="test/functional/tools">
+<toolbox tool_path="${tool_conf_dir}">
   <tool file="upload.xml"/>
   <tool file="simple_constructs.xml" />
   <tool file="composite.xml" />