Something strange is going on here. This is fixed in really old changes. See for example
Change I36e6abf5: (Bug 39485) Encode params for ItemByLabel and ItemByTitle
Also there are old bugs about this; Bug 39485 - Add item link is broken on Special:ItemByTitle, Bug 42149 - Broken link in the invitation for users to update the item
Version: unspecified
Severity: major
Looks good to me, cannot reproduce. Is this still the case? (if so, set status back to NEW)
Yes, it is happening in production right now:
https://www.wikidata.org/wiki/Special:ItemDisambiguation/en/train_line
ItemByLabel is now called ItemDisambiguation. You can see that both the link and visible text are broken.
And the message is straight from code: https://www.wikidata.org/w/index.php?title=Special%3AAllMessages&prefix=Wikibase-itemdisambiguation-create&filter=unmodified&lang=en&limit=50
That fix looks correct. Looking at the code, it seems to have been lost in a merge somewhere along the way.
Change 71763 had a related patch set uploaded by Aude:
(bug 42358) url encode label in item disambiguation create item link
Change 71763 merged by jenkins-bot:
(bug 42358) url encode label in item disambiguation create item link