diff --git a/test/functional/conf_args.py b/test/functional/conf_args.py
new file mode 100755
index 0000000000..61abba8082
--- /dev/null
+++ b/test/functional/conf_args.py
@@ -0,0 +1,49 @@
+#!/usr/bin/env python3
+# Copyright (c) 2017 The Bitcoin Core developers
+# Distributed under the MIT software license, see the accompanying
+# file COPYING or http://www.opensource.org/licenses/mit-license.php.
+"""Test various command line arguments and configuration file parameters."""
+
+import os
+
+from test_framework.test_framework import BitcoinTestFramework
+from test_framework.util import get_datadir_path
+
+class ConfArgsTest(BitcoinTestFramework):
+    def set_test_params(self):
+        self.setup_clean_chain = True
+        self.num_nodes = 1
+
+    def run_test(self):
+        self.stop_node(0)
+        # Remove the -datadir argument so it doesn't override the config file
+        self.nodes[0].args = [arg for arg in self.nodes[0].args if not arg.startswith("-datadir")]
+
+        default_data_dir = get_datadir_path(self.options.tmpdir, 0)
+        new_data_dir = os.path.join(default_data_dir, 'newdatadir')
+        new_data_dir_2 = os.path.join(default_data_dir, 'newdatadir2')
+
+        # Check that using -datadir argument on non-existent directory fails
+        self.nodes[0].datadir = new_data_dir
+        self.assert_start_raises_init_error(0, ['-datadir='+new_data_dir], 'Error: Specified data directory "' + new_data_dir + '" does not exist.')
+
+        # Check that using non-existent datadir in conf file fails
+        conf_file = os.path.join(default_data_dir, "bitcoin.conf")
+        with open(conf_file, 'a', encoding='utf8') as f:
+            f.write("datadir=" + new_data_dir + "\n")
+        self.assert_start_raises_init_error(0, ['-conf='+conf_file], 'Error reading configuration file: specified data directory "' + new_data_dir + '" does not exist.')
+
+        # Create the directory and ensure the config file now works
+        os.mkdir(new_data_dir)
+        self.start_node(0, ['-conf='+conf_file, '-wallet=w1'])
+        self.stop_node(0)
+        assert os.path.isfile(os.path.join(new_data_dir, 'regtest', 'wallets', 'w1'))
+
+        # Ensure command line argument overrides datadir in conf
+        os.mkdir(new_data_dir_2)
+        self.nodes[0].datadir = new_data_dir_2
+        self.start_node(0, ['-datadir='+new_data_dir_2, '-conf='+conf_file, '-wallet=w2'])
+        assert os.path.isfile(os.path.join(new_data_dir_2, 'regtest', 'wallets', 'w2'))
+
+if __name__ == '__main__':
+    ConfArgsTest().main()
diff --git a/test/functional/test_runner.py b/test/functional/test_runner.py
index 58faec521d..bfd1192d3a 100755
--- a/test/functional/test_runner.py
+++ b/test/functional/test_runner.py
@@ -129,6 +129,7 @@ BASE_SCRIPTS= [
     'p2p-acceptblock.py',
     'feature_logging.py',
     'node_network_limited.py',
+    'conf_args.py',
 ]
 
 EXTENDED_SCRIPTS = [