The behavior you describe is how the option "Categories as directories" works.
It turns all categories into "directories".
When you say "can't load the template", do you mean "external resources (such as css, js, and image files) are not loading"? If so, there is a very good chance your template is using "page relative" links instead of "site relative" links.
So basically you have three main options:
A) fix your template,
B) use a template which can handle "directories" in the URL,
C) turn off "Categories as directories".
There are a number of different ways to fix your template to work correctly with "directories" in the URL. Here are two:
1) Do what the default template shipped with Zen Cart does. Include the following snippet on every page in the HTML head: <base href="http://mysite.com/">. This tells browsers to pre-pend the "base href" to all relative links. While this will fix the problem, some website scrapers (such as those used by Facebook) do not currently read this HTML element.
2) Correct the behavior of your template to use "site relative" links instead of "page relative" links. This can be done by pre-pending every link to external resources with the website root. Zen Cart stores the website root in two constants: DIR_WS_CATALOG and DIR_WS_HTTPS_CATALOG.
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