directory not accessible after merge from remote

I am trying to merge a remote that refers to a different repository into
the current GVFS enabled repo, but after merging the src/ directory
becomes inaccessible and it is not possible to list or cd to this dir.

Here is what I have done:

$ gvfs clone https://myserver.xx/Sandbox/_git/foo
Clone parameters:
  Repo URL:     https://myserver.xx/Sandbox/_git/foo
  Branch:       Default
  Cache Server: Default
  Local Cache:  C:\.gvfsCache
  Destination:  C:\git\foo
Authenticating...Succeeded
Querying remote for config...Succeeded
Using cache server: None (https://myserver.xx/Sandbox/_git/foo)
Cloning...Succeeded
Fetching commits and trees from origin (no cache server)...Succeeded
Attaching ProjFS to volume...Succeeded
Validating repo...Succeeded
Mounting...Succeeded
Registering for automount...Succeeded
$ cd ./foo/src
$ git remote add -f upstream //net.xx/git/repo.git
Updating upstream
warning: no common commits
remote: Enumerating objects: 1878, done.
remote: Counting objects: 100% (1878/1878), done.
remote: Compressing objects: 100% (661/661), done.
Receiving objects:  90% (1691remote: Total 1878 (delta 1199), reused 1848 (delta 1198)
Receiving objects: 100% (1878/1878), 1.82 MiB | 5.85 MiB/s, done.
Resolving deltas: 100% (1199/1199), done.
From //net.xx/git/repo.git
... (branches)
$ git merge upstream/master --allow-unrelated-histories
CONFLICT (add/add): Merge conflict in .gitignore
Auto-merging .gitignore
Automatic merge failed; fix conflicts and then commit the result.

At this point the last git command never returns. I can taskkill the
git process but afterwards I cannot list contents of src. It is also
not possible to list the contents of C:\git\foo\src from another terminal
cmd or Git bash.

I am unsure how to proceed in finding out what goes wrong here,
any help would be appreciated!

Reproduce the sequence from the issue in a GVFS-enabled repository: clone foo, add the unrelated upstream remote, merge upstream/master, and resolve the .gitignore conflict. Start by observing the hanging git merge and the subsequent inability to list or enter src; done means identifying the failure and restoring directory access after the merge.