diff --git a/.bumpversion.cfg b/.bumpversion.cfg
index 40da845d..c017edbe 100644
--- a/.bumpversion.cfg
+++ b/.bumpversion.cfg
@@ -1,7 +1,7 @@
 [bumpversion]
 commit = True
 tag = False
-current_version = 1.11.1
+current_version = 1.12.0
 message = release: {new_version}
 
 [bumpversion:file:pyproject.toml]
diff --git a/CHANGELOG.md b/CHANGELOG.md
index 09c3382b..4c65c251 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -1,5 +1,8 @@
 # Changelog
 
+## 1.12.0 (2025-08-29)
+- Set `PYO3_BUILD_EXTENSION_MODULE` environment variable when building PyO3 extensions. [#540](https://github.com/PyO3/setuptools-rust/pull/540)
+
 ## 1.11.1 (2025-04-04)
 ### Fixed
 - Fix finding cargo artifacts when filenames are empty. [#521](https://github.com/PyO3/setuptools-rust/pull/521)
diff --git a/pyproject.toml b/pyproject.toml
index c0d4a971..79be14ad 100644
--- a/pyproject.toml
+++ b/pyproject.toml
@@ -1,6 +1,6 @@
 [project]
 name = "setuptools-rust"
-version = "1.11.1"
+version = "1.12.0"
 description = "Setuptools Rust extension plugin"
 readme = "README.md"
 requires-python = ">=3.9"
diff --git a/setuptools_rust/build.py b/setuptools_rust/build.py
index 4f6d2932..0462564b 100644
--- a/setuptools_rust/build.py
+++ b/setuptools_rust/build.py
@@ -147,7 +147,7 @@ def build_extension(
         target_triple = self._detect_rust_target(forced_target_triple, ext.env)
         rustc_cfgs = get_rustc_cfgs(target_triple, ext.env)
 
-        env = _prepare_build_environment(ext.env)
+        env = _prepare_build_environment(ext.env, ext)
 
         if not os.path.exists(ext.path):
             raise FileError(
@@ -609,7 +609,7 @@ def _replace_vendor_with_unknown(target: str) -> Optional[str]:
     return "-".join(components)
 
 
-def _prepare_build_environment(env: Env) -> Dict[str, str]:
+def _prepare_build_environment(env: Env, ext: RustExtension) -> Dict[str, str]:
     """Prepares environment variables to use when executing cargo build."""
 
     base_executable = None
@@ -636,6 +636,10 @@ def _prepare_build_environment(env: Env) -> Dict[str, str]:
             "PYO3_PYTHON": env_vars.get("PYO3_PYTHON", executable),
         }
     )
+
+    if ext.binding == Binding.PyO3:
+        env_vars.setdefault("PYO3_BUILD_EXTENSION_MODULE", "1")
+
     return env_vars
 
 
diff --git a/setuptools_rust/version.py b/setuptools_rust/version.py
index 1229fa4e..7f2ff1f3 100644
--- a/setuptools_rust/version.py
+++ b/setuptools_rust/version.py
@@ -1,4 +1,4 @@
-__version__ = version = "1.11.1"
+__version__ = version = "1.12.0"
 __version_tuple__ = version_tuple = tuple(
     map(lambda x: int(x[1]) if x[0] < 3 else x[1], enumerate(__version__.split(".")))
 )