diff --git a/.changeset/calm-lamps-occur.md b/.changeset/calm-lamps-occur.md
new file mode 100644
index 00000000000..2d55f84d7e7
--- /dev/null
+++ b/.changeset/calm-lamps-occur.md
@@ -0,0 +1,6 @@
+---
+"@pnpm/resolve-dependencies": patch
+"pnpm": patch
+---
+
+It should be possible to use a chain of local file dependencies [#4611](https://github.com/pnpm/pnpm/issues/4611).
diff --git a/packages/core/test/install/local.ts b/packages/core/test/install/local.ts
index d4535c14dd6..985f93f93ed 100644
--- a/packages/core/test/install/local.ts
+++ b/packages/core/test/install/local.ts
@@ -1,7 +1,8 @@
 import { promises as fs } from 'fs'
 import path from 'path'
 import { LOCKFILE_VERSION } from '@pnpm/constants'
-import { prepareEmpty } from '@pnpm/prepare'
+import { Lockfile } from '@pnpm/lockfile-file'
+import { prepareEmpty, preparePackages } from '@pnpm/prepare'
 import { addDistTag } from '@pnpm/registry-mock'
 import fixtures from '@pnpm/test-fixtures'
 import {
@@ -11,6 +12,7 @@ import {
 } from '@pnpm/core'
 import rimraf from '@zkochan/rimraf'
 import normalizePath from 'normalize-path'
+import readYamlFile from 'read-yaml-file'
 import symlinkDir from 'symlink-dir'
 import { testDefaults } from '../utils'
 
@@ -239,3 +241,51 @@ test('frozen-lockfile: installation fails if the integrity of a tarball dependen
     install(manifest, await testDefaults({ frozenLockfile: true }))
   ).rejects.toThrow(/Got unexpected checksum/)
 })
+
+test('deep local', async () => {
+  const manifest1 = {
+    name: 'project-1',
+    version: '1.0.0',
+    dependencies: {
+      'project-2': 'file:../project-2',
+    },
+    dependenciesMeta: {
+      'project-2': {
+        injected: true,
+      },
+    },
+  }
+  preparePackages([
+    {
+      location: 'project-1',
+      package: manifest1,
+    },
+    {
+      location: 'project-2',
+      package: {
+        name: 'project-2',
+        version: '1.0.0',
+        dependencies: {
+          'project-3': 'file:./project-3',
+        },
+        dependenciesMeta: {
+          'project-3': {
+            injected: true,
+          },
+        },
+      },
+    },
+    {
+      location: 'project-2/project-3',
+      package: {
+        name: 'project-3',
+        version: '1.0.0',
+      },
+    },
+  ])
+  process.chdir('../project-1')
+  await install(manifest1, await testDefaults())
+
+  const lockfile = await readYamlFile<Lockfile>('pnpm-lock.yaml')
+  expect(Object.keys(lockfile.packages ?? {})).toStrictEqual(['file:../project-2', 'file:../project-2/project-3'])
+})
diff --git a/packages/resolve-dependencies/src/resolveDependencies.ts b/packages/resolve-dependencies/src/resolveDependencies.ts
index 00eb133e776..d6c6a99dd50 100644
--- a/packages/resolve-dependencies/src/resolveDependencies.ts
+++ b/packages/resolve-dependencies/src/resolveDependencies.ts
@@ -159,6 +159,7 @@ export type PkgAddress = {
   pkg: PackageManifest
   version?: string
   updated: boolean
+  rootDir: string
 } & ({
   isLinkedDependency: true
   version: string
@@ -199,7 +200,7 @@ export interface ResolvedPackage {
   }
 }
 
-type ParentPkg = Pick<PkgAddress, 'nodeId' | 'installable' | 'depPath'>
+type ParentPkg = Pick<PkgAddress, 'nodeId' | 'installable' | 'depPath' | 'rootDir'>
 
 interface ResolvedDependenciesOptions {
   currentDepth: number
@@ -625,7 +626,7 @@ async function resolveDependency (
         (!wantedDependency.pref.startsWith('file:') || !wantedDependency.injected)
       )
         ? ctx.lockfileDir
-        : ctx.prefix,
+        : options.parentPkg.rootDir,
       registry: wantedDependency.alias && pickRegistryForPackage(ctx.registries, wantedDependency.alias, wantedDependency.pref) || ctx.registries.default,
       // Unfortunately, even when run with --lockfile-only, we need the *real* package.json
       // so fetching of the tarball cannot be ever avoided. Related issue: https://github.com/pnpm/pnpm/issues/1176
@@ -823,6 +824,9 @@ async function resolveDependency (
     }
   }
 
+  const rootDir = pkgResponse.body.resolution.type === 'directory'
+    ? path.resolve(ctx.lockfileDir, pkgResponse.body.resolution['directory'])
+    : ctx.prefix
   return {
     alias: wantedDependency.alias || pkg.name,
     depIsLinked,
@@ -831,6 +835,7 @@ async function resolveDependency (
     nodeId,
     normalizedPref: options.currentDepth === 0 ? pkgResponse.body.normalizedPref : undefined,
     pkgId: pkgResponse.body.id,
+    rootDir,
 
     // Next fields are actually only needed when isNew = true
     installable,
diff --git a/packages/resolve-dependencies/src/resolveDependencyTree.ts b/packages/resolve-dependencies/src/resolveDependencyTree.ts
index ed9acc895eb..9a4f480ffda 100644
--- a/packages/resolve-dependencies/src/resolveDependencyTree.ts
+++ b/packages/resolve-dependencies/src/resolveDependencyTree.ts
@@ -133,6 +133,7 @@ export default async function<T> (
         nodeId: `>${importer.id}>`,
         optional: false,
         depPath: importer.id,
+        rootDir: importer.rootDir,
       },
       proceed,
       resolvedDependencies: {