diff --git a/packages/playground/env-nested/.env b/packages/playground/env-nested/.env
new file mode 100644
index 00000000000000..2e8565f90df52b
--- /dev/null
+++ b/packages/playground/env-nested/.env
@@ -0,0 +1 @@
+VITE_PARENT_ENV=dont_load_me
\ No newline at end of file
diff --git a/packages/playground/env-nested/__tests__/env-nested.spec.ts b/packages/playground/env-nested/__tests__/env-nested.spec.ts
new file mode 100644
index 00000000000000..1ceebde7a044b7
--- /dev/null
+++ b/packages/playground/env-nested/__tests__/env-nested.spec.ts
@@ -0,0 +1,15 @@
+import { isBuild } from 'testUtils'
+
+const mode = isBuild ? `production` : `development`
+
+test('mode', async () => {
+  expect(await page.textContent('.mode')).toBe(mode)
+})
+
+test('mode file override', async () => {
+  expect(await page.textContent('.mode-file')).toBe(`.env.${mode}`)
+})
+
+test('should not load parent .env file', async () => {
+  expect(await page.textContent('.parent-env')).not.toBe('dont_load_me')
+})
diff --git a/packages/playground/env-nested/envs/.env.development b/packages/playground/env-nested/envs/.env.development
new file mode 100644
index 00000000000000..1557708651f4dc
--- /dev/null
+++ b/packages/playground/env-nested/envs/.env.development
@@ -0,0 +1 @@
+VITE_EFFECTIVE_MODE_FILE_NAME=.env.development
diff --git a/packages/playground/env-nested/envs/.env.production b/packages/playground/env-nested/envs/.env.production
new file mode 100644
index 00000000000000..13c1a2ab36869f
--- /dev/null
+++ b/packages/playground/env-nested/envs/.env.production
@@ -0,0 +1 @@
+VITE_EFFECTIVE_MODE_FILE_NAME=.env.production
diff --git a/packages/playground/env-nested/index.html b/packages/playground/env-nested/index.html
new file mode 100644
index 00000000000000..8f775d5cb30bba
--- /dev/null
+++ b/packages/playground/env-nested/index.html
@@ -0,0 +1,16 @@
+<h1>Nested Environment Variables</h1>
+<p>import.meta.env.MODE: <code class="mode"></code></p>
+<p>
+  import.meta.env.VITE_EFFECTIVE_MODE_FILE_NAME: <code class="mode-file"></code>
+</p>
+<p>Empty import.meta.env.VITE_PARENT_ENV: <code class="parent-env"></code></p>
+
+<script type="module">
+  text('.mode', import.meta.env.MODE)
+  text('.mode-file', import.meta.env.VITE_EFFECTIVE_MODE_FILE_NAME)
+  text('.parent-env', import.meta.env.VITE_PARENT_ENV)
+
+  function text(el, text) {
+    document.querySelector(el).textContent = text
+  }
+</script>
diff --git a/packages/playground/env-nested/package.json b/packages/playground/env-nested/package.json
new file mode 100644
index 00000000000000..8fecc69a41c2f4
--- /dev/null
+++ b/packages/playground/env-nested/package.json
@@ -0,0 +1,11 @@
+{
+  "name": "test-env-nested",
+  "private": true,
+  "version": "0.0.0",
+  "scripts": {
+    "dev": "vite",
+    "build": "vite build",
+    "debug": "node --inspect-brk ../../vite/bin/vite",
+    "preview": "vite preview"
+  }
+}
diff --git a/packages/playground/env-nested/vite.config.js b/packages/playground/env-nested/vite.config.js
new file mode 100644
index 00000000000000..0e46100698650d
--- /dev/null
+++ b/packages/playground/env-nested/vite.config.js
@@ -0,0 +1,5 @@
+const { defineConfig } = require('vite')
+
+module.exports = defineConfig({
+  envDir: './envs'
+})
diff --git a/packages/vite/src/node/config.ts b/packages/vite/src/node/config.ts
index 224c534c497ece..e5f72e6ac65957 100644
--- a/packages/vite/src/node/config.ts
+++ b/packages/vite/src/node/config.ts
@@ -401,11 +401,7 @@ export async function resolveConfig(
   const resolvedBuildOptions = resolveBuildOptions(config.build)
 
   // resolve cache directory
-  const pkgPath = lookupFile(
-    resolvedRoot,
-    [`package.json`],
-    true /* pathOnly */
-  )
+  const pkgPath = lookupFile(resolvedRoot, [`package.json`], { pathOnly: true })
   const cacheDir = config.cacheDir
     ? path.resolve(resolvedRoot, config.cacheDir)
     : pkgPath
@@ -1083,7 +1079,7 @@ export function loadEnv(
   }
 
   for (const file of envFiles) {
-    const path = lookupFile(envDir, [file], true)
+    const path = lookupFile(envDir, [file], { pathOnly: true, rootDir: envDir })
     if (path) {
       const parsed = dotenv.parse(fs.readFileSync(path), {
         debug: process.env.DEBUG?.includes('vite:dotenv') || undefined
diff --git a/packages/vite/src/node/utils.ts b/packages/vite/src/node/utils.ts
index 9cba9c7c79b3a3..935c5c8401071b 100644
--- a/packages/vite/src/node/utils.ts
+++ b/packages/vite/src/node/utils.ts
@@ -298,20 +298,28 @@ export function isDefined<T>(value: T | undefined | null): value is T {
   return value != null
 }
 
+interface LookupFileOptions {
+  pathOnly?: boolean
+  rootDir?: string
+}
+
 export function lookupFile(
   dir: string,
   formats: string[],
-  pathOnly = false
+  options?: LookupFileOptions
 ): string | undefined {
   for (const format of formats) {
     const fullPath = path.join(dir, format)
     if (fs.existsSync(fullPath) && fs.statSync(fullPath).isFile()) {
-      return pathOnly ? fullPath : fs.readFileSync(fullPath, 'utf-8')
+      return options?.pathOnly ? fullPath : fs.readFileSync(fullPath, 'utf-8')
     }
   }
   const parentDir = path.dirname(dir)
-  if (parentDir !== dir) {
-    return lookupFile(parentDir, formats, pathOnly)
+  if (
+    parentDir !== dir &&
+    (!options?.rootDir || parentDir.startsWith(options?.rootDir))
+  ) {
+    return lookupFile(parentDir, formats, options)
   }
 }