diff --git a/parts/linux/cloud-init/artifacts/localdns.sh b/parts/linux/cloud-init/artifacts/localdns.sh
index 7f22a6518fb..f05e8c3837c 100644
--- a/parts/linux/cloud-init/artifacts/localdns.sh
+++ b/parts/linux/cloud-init/artifacts/localdns.sh
@@ -388,6 +388,36 @@ add_iptable_rules_to_skip_conntrack_from_pods(){
     done
 }
 
+# Wait for localdns IP to be removed from resolv.conf after networkctl reload.
+# Arguments:
+#   $1: max_wait_seconds - Maximum time to wait for the change (default: 5).
+wait_for_localdns_removed_from_resolv_conf() {
+    local max_wait_seconds="${1:-5}"
+    local sleep_interval=0.25
+    local max_iterations=$((max_wait_seconds * 4))  # 4 iterations per second with 0.25s sleep
+    local iteration=0
+
+    echo "Waiting for localdns (${LOCALDNS_NODE_LISTENER_IP}) to be removed from resolv.conf..."
+
+    while [ "$iteration" -lt "$max_iterations" ]; do
+        local current_dns
+        current_dns=$(awk '/^nameserver/ {print $2}' "$RESOLV_CONF" 2>/dev/null | paste -sd' ')
+
+        # Use word boundary matching (-w) with fixed string (-F) to avoid partial IP matches.
+        if ! grep -qwF "$LOCALDNS_NODE_LISTENER_IP" <<< "$current_dns"; then
+            echo "DNS configuration refreshed successfully. Current DNS: ${current_dns}"
+            return 0
+        fi
+
+        sleep $sleep_interval
+        iteration=$((iteration + 1))
+    done
+
+    echo "Timed out waiting for localdns to be removed from resolv.conf after ${max_wait_seconds} seconds."
+    echo "Current DNS: $(awk '/^nameserver/ {print $2}' "$RESOLV_CONF" 2>/dev/null | paste -sd' ')"
+    return 1
+}
+
 # Disable DNS provided by DHCP and point the system at localdns.
 disable_dhcp_use_clusterlistener() {
     mkdir -p "${NETWORK_DROPIN_DIR}"
@@ -621,6 +651,19 @@ initialize_network_variables || exit $ERR_LOCALDNS_FAIL
 # ---------------------------------------------------------------------------------------------------------------------
 cleanup_iptables_and_dns || exit $ERR_LOCALDNS_FAIL
 
+# During startup, wait for the DNS configuration to be fully refreshed.
+# This ensures systemd-resolved has removed localdns from resolv.conf before we read upstream DNS servers.
+# The wait is necessary because networkctl reload is async - there's a delay before systemd-resolved
+# updates /run/systemd/resolve/resolv.conf. The next step (replace_azurednsip_in_corefile) reads
+# resolv.conf to get upstream DNS servers. Without this wait, we might still see 169.254.10.10
+# (localdns IP) as a nameserver, which would create a circular dependency in the corefile.
+# Note: the shutdown path does not need this wait because it doesn't read from resolv.conf afterward -
+# it just cleans up and exits, so systemd-resolved can complete the update asynchronously.
+if ! wait_for_localdns_removed_from_resolv_conf 5; then
+    echo "Error: DNS configuration was not refreshed within timeout."
+    exit $ERR_LOCALDNS_FAIL
+fi
+
 # Replace AzureDNSIP in corefile with VNET DNS ServerIPs.
 # ---------------------------------------------------------------------------------------------------------------------
 replace_azurednsip_in_corefile || exit $ERR_LOCALDNS_FAIL
diff --git a/spec/parts/linux/cloud-init/artifacts/localdns_spec.sh b/spec/parts/linux/cloud-init/artifacts/localdns_spec.sh
index 374aee1233a..95a5c555364 100644
--- a/spec/parts/linux/cloud-init/artifacts/localdns_spec.sh
+++ b/spec/parts/linux/cloud-init/artifacts/localdns_spec.sh
@@ -1110,4 +1110,155 @@ EOF
             The status should be success
         End
     End
+
+
+# This section tests - wait_for_localdns_removed_from_resolv_conf
+# This function is defined in parts/linux/cloud-init/artifacts/localdns.sh file.
+#------------------------------------------------------------------------------------------------------------------------------------
+    Describe 'wait_for_localdns_removed_from_resolv_conf'
+        setup() {
+            Include "./parts/linux/cloud-init/artifacts/localdns.sh"
+            TEST_DIR="/tmp/localdnstest-$$"
+            RESOLV_CONF="${TEST_DIR}/run/systemd/resolve/resolv.conf"
+            mkdir -p "$(dirname "$RESOLV_CONF")"
+        }
+        cleanup() {
+            rm -rf "$TEST_DIR"
+        }
+        BeforeEach 'setup'
+        AfterEach 'cleanup'
+
+        #------------------------- wait_for_localdns_removed_from_resolv_conf ------------------------------------------
+        It 'should return success immediately if localdns IP is absent'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 10.0.0.1
+nameserver 10.0.0.2
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 5
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+            The stdout should include "Current DNS: 10.0.0.1 10.0.0.2"
+        End
+
+        It 'should timeout if localdns IP is still present'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 169.254.10.10
+nameserver 10.0.0.1
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be failure
+            The stdout should include "Timed out waiting for localdns to be removed from resolv.conf after 2 seconds"
+            The stdout should include "Current DNS:"
+        End
+
+        It 'should return success if resolv.conf is empty'
+            > "$RESOLV_CONF"
+            When run wait_for_localdns_removed_from_resolv_conf 5
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should use default timeout of 5 seconds when not specified'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 10.0.0.1
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should handle resolv.conf not existing gracefully'
+            rm -f "$RESOLV_CONF"
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should not match partial IP addresses'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 169.254.10.100
+EOF
+            # 169.254.10.100 should NOT match 169.254.10.10
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should detect localdns IP among multiple nameservers'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 10.0.0.1
+nameserver 169.254.10.10
+nameserver 10.0.0.2
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be failure
+            The stdout should include "Timed out waiting for localdns to be removed"
+        End
+
+        It 'should succeed when localdns IP is removed during wait (async removal)'
+            # Start with localdns IP present
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 169.254.10.10
+nameserver 10.0.0.1
+EOF
+            # Create background process that removes localdns IP after 2 seconds
+            (sleep 2 && echo "nameserver 10.0.0.1" > "$RESOLV_CONF") &
+            When run wait_for_localdns_removed_from_resolv_conf 5
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should ignore commented lines in resolv.conf'
+            cat > "$RESOLV_CONF" <<EOF
+# nameserver 169.254.10.10
+nameserver 10.0.0.1
+# This is a comment
+nameserver 10.0.0.2
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should timeout when only localdns IP is present'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 169.254.10.10
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be failure
+            The stdout should include "Timed out waiting for localdns to be removed"
+        End
+
+        It 'should handle IPv6 nameservers mixed with IPv4'
+            cat > "$RESOLV_CONF" <<EOF
+nameserver 10.0.0.1
+nameserver 2001:4860:4860::8888
+nameserver 10.0.0.2
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+
+        It 'should handle resolv.conf with search and options directives'
+            cat > "$RESOLV_CONF" <<EOF
+search example.com local
+nameserver 10.0.0.1
+nameserver 10.0.0.2
+options timeout:2 attempts:3
+EOF
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+            The stdout should include "Current DNS: 10.0.0.1 10.0.0.2"
+        End
+
+        It 'should handle whitespace variations in resolv.conf'
+            # Use tabs and extra spaces
+            printf "nameserver\t10.0.0.1\nnameserver   10.0.0.2\n" > "$RESOLV_CONF"
+            When run wait_for_localdns_removed_from_resolv_conf 2
+            The status should be success
+            The stdout should include "DNS configuration refreshed successfully"
+        End
+    End
 End