diff --git a/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts b/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts
index 995e2a05819..4968f3cb227 100644
--- a/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts
+++ b/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts
@@ -7,8 +7,8 @@ import * as vscode from 'vscode';
 import { IMdParser } from '../../markdownEngine';
 import { ITextDocument } from '../../types/textDocument';
 import { Mime } from '../../util/mimes';
-import { createInsertUriListEdit } from './shared';
 import { Schemes } from '../../util/schemes';
+import { createInsertUriListEdit } from './shared';
 
 export enum PasteUrlAsMarkdownLink {
 	Always = 'always',
@@ -59,7 +59,7 @@ class PasteUrlEditProvider implements vscode.DocumentPasteEditProvider {
 			return;
 		}
 
-		const edit = createInsertUriListEdit(document, ranges, uriText);
+		const edit = createInsertUriListEdit(document, ranges, uriText, { preserveAbsoluteUris: true });
 		if (!edit) {
 			return;
 		}
@@ -212,8 +212,10 @@ const externalUriSchemes: ReadonlySet<string> = new Set([
 export function findValidUriInText(text: string): string | undefined {
 	const trimmedUrlList = text.trim();
 
-	// Uri must consist of a single sequence of characters without spaces
-	if (!/^\S+$/.test(trimmedUrlList)) {
+	if (
+		!/^\S+$/.test(trimmedUrlList) // Uri must consist of a single sequence of characters without spaces
+		|| !trimmedUrlList.includes(':') // And it must have colon somewhere for the scheme. We will verify the schema again later
+	) {
 		return;
 	}
 
@@ -225,7 +227,21 @@ export function findValidUriInText(text: string): string | undefined {
 		return;
 	}
 
-	if (!externalUriSchemes.has(uri.scheme.toLowerCase()) || uri.authority.length <= 1) {
+	// `Uri.parse` is lenient and will return a `file:` uri even for non-uri text such as `abc`
+	// Make sure that the resolved scheme starts the original text
+	if (!trimmedUrlList.toLowerCase().startsWith(uri.scheme.toLowerCase() + ':')) {
+		return;
+	}
+
+	// Only enable for an allow list of schemes. Otherwise this can be accidentally activated for non-uri text
+	// such as `c:\abc` or `value:foo`
+	if (!externalUriSchemes.has(uri.scheme.toLowerCase())) {
+		return;
+	}
+
+	// Some part of the uri must not be empty
+	// This disables the feature for text such as `http:`
+	if (!uri.authority && uri.path.length < 2 && !uri.query && !uri.fragment) {
 		return;
 	}
 
diff --git a/extensions/markdown-language-features/src/languageFeatures/copyFiles/shared.ts b/extensions/markdown-language-features/src/languageFeatures/copyFiles/shared.ts
index 7881e5938a5..8bfc9ae2ff5 100644
--- a/extensions/markdown-language-features/src/languageFeatures/copyFiles/shared.ts
+++ b/extensions/markdown-language-features/src/languageFeatures/copyFiles/shared.ts
@@ -69,6 +69,7 @@ export function createInsertUriListEdit(
 	document: ITextDocument,
 	ranges: readonly vscode.Range[],
 	urlList: string,
+	options?: UriListSnippetOptions,
 ): { edits: vscode.SnippetTextEdit[]; label: string } | undefined {
 	if (!ranges.length) {
 		return;
@@ -103,6 +104,7 @@ export function createInsertUriListEdit(
 		const snippet = createUriListSnippet(document.uri, entries, {
 			placeholderText: range.isEmpty ? undefined : document.getText(range),
 			placeholderStartIndex: allRangesAreEmpty ? 1 : placeHolderStartIndex,
+			...options,
 		});
 		if (!snippet) {
 			continue;
@@ -134,6 +136,13 @@ interface UriListSnippetOptions {
 	readonly insertAsMedia?: boolean;
 
 	readonly separator?: string;
+
+	/**
+	 * Prevents uris from being made relative to the document.
+	 *
+	 * This is mostly useful for `file:` uris.
+	 */
+	readonly preserveAbsoluteUris?: boolean;
 }
 
 
@@ -168,7 +177,7 @@ export function createUriListSnippet(
 	let placeholderIndex = options?.placeholderStartIndex ?? 1;
 
 	uris.forEach((uri, i) => {
-		const mdPath = getRelativeMdPath(documentDir, uri.uri) ?? uri.str ?? uri.uri.toString();
+		const mdPath = (!options?.preserveAbsoluteUris ? getRelativeMdPath(documentDir, uri.uri) : undefined) ?? uri.str ?? uri.uri.toString();
 
 		const ext = URI.Utils.extname(uri.uri).toLowerCase().replace('.', '');
 		const insertAsMedia = options?.insertAsMedia || (typeof options?.insertAsMedia === 'undefined' && mediaFileExtensions.has(ext));