diff --git a/xarray/core/datatree.py b/xarray/core/datatree.py
index 2b3179cb79d..bd583ac86cb 100644
--- a/xarray/core/datatree.py
+++ b/xarray/core/datatree.py
@@ -895,6 +895,8 @@ def __setitem__(
             # TODO should possibly deal with hashables in general?
             # path-like: a name of a node/variable, or path to a node/variable
             path = NodePath(key)
+            if isinstance(value, Dataset):
+                value = DataTree(dataset=value)
             return self._set_item(path, value, new_nodes_along_path=True)
         else:
             raise ValueError("Invalid format for key")
diff --git a/xarray/tests/test_datatree.py b/xarray/tests/test_datatree.py
index 22c2cae7d02..4e22ba57e2e 100644
--- a/xarray/tests/test_datatree.py
+++ b/xarray/tests/test_datatree.py
@@ -513,14 +513,12 @@ def test_setitem_dataset_on_this_node(self):
         results["."] = data
         assert_identical(results.to_dataset(), data)
 
-    @pytest.mark.xfail(reason="assigning Datasets doesn't yet create new nodes")
     def test_setitem_dataset_as_new_node(self):
         data = xr.Dataset({"temp": [0, 50]})
         folder1 = DataTree(name="folder1")
         folder1["results"] = data
         assert_identical(folder1["results"].to_dataset(), data)
 
-    @pytest.mark.xfail(reason="assigning Datasets doesn't yet create new nodes")
     def test_setitem_dataset_as_new_node_requiring_intermediate_nodes(self):
         data = xr.Dataset({"temp": [0, 50]})
         folder1 = DataTree(name="folder1")