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I am affected by the same error with Iterm2 ...
There was a problem opening this repository in iTerm2
An error occurred while trying to open iTerm2 with this repository. Please file a support ticket via the Help menu.
And also the Terminal application (that opens correctly) doesn't correctly point to the repository folder/root
You cannot change the default terminal, but you can create a custom action for another one under Tools/Options/Custom Actions.