diff --git a/python/packages/autogen-studio/autogenstudio/database/schema_manager.py b/python/packages/autogen-studio/autogenstudio/database/schema_manager.py
index 0762b0890d30..e80948fb2104 100644
--- a/python/packages/autogen-studio/autogenstudio/database/schema_manager.py
+++ b/python/packages/autogen-studio/autogenstudio/database/schema_manager.py
@@ -194,7 +194,11 @@ def _generate_alembic_ini_content(self) -> str:
         """
         Generates content for alembic.ini file.
         """
-        engine_url = str(self.engine.url).replace("%", "%%")
+        # render_as_string(hide_password=False) is required because str(URL) masks the
+        # password as "***" in SQLAlchemy 2.x, which would make Alembic authenticate
+        # with the literal "***" and fail (see issue #7341). "%" must still be escaped
+        # for ConfigParser interpolation.
+        engine_url = self.engine.url.render_as_string(hide_password=False).replace("%", "%%")
         return f"""
 [alembic]
 script_location = {self.alembic_dir}
diff --git a/python/packages/autogen-studio/tests/test_schema_manager.py b/python/packages/autogen-studio/tests/test_schema_manager.py
new file mode 100644
index 000000000000..ad632499a151
--- /dev/null
+++ b/python/packages/autogen-studio/tests/test_schema_manager.py
@@ -0,0 +1,40 @@
+import configparser
+from pathlib import Path
+from types import SimpleNamespace
+
+from sqlalchemy.engine import make_url
+
+from autogenstudio.database.schema_manager import SchemaManager
+
+
+def _alembic_ini_url(engine_uri: str) -> str:
+    """Generate the alembic.ini content for a URI and return the parsed sqlalchemy.url."""
+    # _generate_alembic_ini_content() only reads engine.url, so a lightweight stub
+    # keeps this pure URL-rendering test free of DBAPI driver imports (psycopg/libpq).
+    engine = SimpleNamespace(url=make_url(engine_uri))
+    schema_manager = SchemaManager(engine=engine, base_dir=Path("/tmp/schema_manager_test"))  # type: ignore[arg-type]
+    content = schema_manager._generate_alembic_ini_content()
+    parser = configparser.ConfigParser()
+    parser.read_string(content)
+    return parser.get("alembic", "sqlalchemy.url")
+
+
+def test_alembic_ini_preserves_database_password():
+    """Regression test for #7341: the URL written to alembic.ini must keep the real
+    password. SQLAlchemy 2.x masks passwords in ``str(URL)`` as ``***``, so writing
+    that form into alembic.ini made Alembic authenticate with the literal ``***`` and
+    fail with "password authentication failed" on first-time database initialization
+    even though the application engine itself connected successfully."""
+    ini_url = _alembic_ini_url("postgresql+psycopg://autogen:autogen@postgres:5432/autogen")
+    assert make_url(ini_url).password == "autogen"
+    assert "***" not in ini_url
+
+
+def test_alembic_ini_roundtrips_password_with_special_characters():
+    """Passwords with URL-reserved characters must survive the alembic.ini round trip
+    (URL encoding on render + ConfigParser ``%%`` escaping)."""
+    ini_url = _alembic_ini_url("postgresql+psycopg://alice:p%40ssw0rd@db.example.com:5432/app")
+    parsed = make_url(ini_url)
+    assert parsed.username == "alice"
+    assert parsed.password == "p@ssw0rd"
+    assert parsed.host == "db.example.com"