diff --git a/RELEASE_NOTES.md b/RELEASE_NOTES.md
index 6d2e4d19e..1b7b0fb9a 100644
--- a/RELEASE_NOTES.md
+++ b/RELEASE_NOTES.md
@@ -14,4 +14,4 @@
 
 ## Bug Fixes
 
-<!-- Here goes notable bug fixes that are worth a special mention or explanation -->
+- Fixed issue where actors would restart instead of stopping when exceptions occurred during cancellation. Actors now properly stop and surface the unhandled exception.
\ No newline at end of file
diff --git a/src/frequenz/sdk/actor/_actor.py b/src/frequenz/sdk/actor/_actor.py
index e62c2b638..337b00613 100644
--- a/src/frequenz/sdk/actor/_actor.py
+++ b/src/frequenz/sdk/actor/_actor.py
@@ -44,6 +44,15 @@ class Actor(BackgroundService, abc.ABC):
         This is mostly used for testing purposes and shouldn't be set in production.
     """
 
+    def __init__(self, *, name: str | None = None) -> None:
+        """Create actor instance.
+
+        Args:
+            name: The name of this background service.
+        """
+        super().__init__(name=name)
+        self._is_cancelled = False
+
     def start(self) -> None:
         """Start this actor.
 
@@ -51,6 +60,8 @@ def start(self) -> None:
         """
         if self.is_running:
             return
+
+        self._is_cancelled = False
         self._tasks.clear()
         self._tasks.add(asyncio.create_task(self._run_loop()))
 
@@ -94,6 +105,17 @@ async def _run_loop(self) -> None:
                 _logger.info("Actor %s: Cancelled.", self)
                 raise
             except Exception:  # pylint: disable=broad-except
+                if self._is_cancelled:
+                    # If actor was cancelled, but any tasks have failed with an exception
+                    # other than asyncio.CancelledError, those exceptions are combined
+                    # in an ExceptionGroup or BaseExceptionGroup.
+                    # We have to handle that case separately to stop actor instead
+                    # of restarting it.
+                    _logger.exception(
+                        "Actor %s: Raised an unhandled exception during stop.", self
+                    )
+                    break
+
                 _logger.exception("Actor %s: Raised an unhandled exception.", self)
                 limit_str = "∞" if self._restart_limit is None else self._restart_limit
                 limit_str = f"({n_restarts}/{limit_str})"
@@ -113,3 +135,14 @@ async def _run_loop(self) -> None:
             break
 
         _logger.info("Actor %s: Stopped.", self)
+
+    def cancel(self, msg: str | None = None) -> None:
+        """Cancel actor.
+
+        Cancelled actor can't be started again.
+
+        Args:
+            msg: The message to be passed to the tasks being cancelled.
+        """
+        self._is_cancelled = True
+        return super().cancel(msg)
diff --git a/tests/actor/test_actor.py b/tests/actor/test_actor.py
index 05a9f5f26..3025ff24d 100644
--- a/tests/actor/test_actor.py
+++ b/tests/actor/test_actor.py
@@ -53,6 +53,31 @@ async def _run(self) -> None:
         print(f"{self} done")
 
 
+class RaiseExceptionOnCancelActor(BaseTestActor):
+    """Actor that raises exception during stop."""
+
+    def __init__(
+        self, *, name: str | None = None, recv: Receiver[int], sender: Sender[int]
+    ) -> None:
+        """Create an instance."""
+        super().__init__(name=name)
+        self._recv = recv
+        self._sender = sender
+
+    async def _run(self) -> None:
+        """Start the actor and raise exception after receiving CancelledError."""
+        self.inc_restart_count()
+        if BaseTestActor.restart_count == 1:
+            # This actor should not restart
+            # If it does we just return to avoid infinite await on `stop`
+            return
+        try:
+            async for msg in self._recv:
+                await self._sender.send(msg)
+        except asyncio.CancelledError as exc:
+            raise RuntimeError("Actor should stop.") from exc
+
+
 class RaiseExceptionActor(BaseTestActor):
     """A faulty actor that raises an Exception as soon as it receives a message."""
 
@@ -333,3 +358,45 @@ async def cancel_actor() -> None:
         (*RUN_INFO, "Actor EchoActor[EchoActor]: Cancelled while running."),
         (*RUN_INFO, "All 1 actor(s) finished."),
     ]
+
+
+async def test_actor_stop_if_error_was_raised_during_cancel(
+    actor_auto_restart_once: None,  # pylint: disable=unused-argument
+    caplog: pytest.LogCaptureFixture,
+) -> None:
+    """If actor raises exception during cancellation it should stop.
+
+    And throw unhandled exception to the user..
+    """
+    caplog.set_level("DEBUG", logger="frequenz.sdk.actor._actor")
+    caplog.set_level("DEBUG", logger="frequenz.sdk.actor._run_utils")
+
+    input_chan: Broadcast[int] = Broadcast(name="TestChannel")
+
+    echo_chan: Broadcast[int] = Broadcast(name="echo output")
+    echo_rx = echo_chan.new_receiver()
+
+    actor = RaiseExceptionOnCancelActor(
+        name="test",
+        recv=input_chan.new_receiver(),
+        sender=echo_chan.new_sender(),
+    )
+
+    # Start actor and make sure it is running
+    actor.start()
+    await input_chan.new_sender().send(5)
+    msg = await echo_rx.receive()
+    assert msg == 5
+    assert actor.is_running is True
+
+    await actor.stop()
+    assert actor.restart_count == 0
+
+    assert caplog.record_tuples == [
+        (*ACTOR_INFO, "Actor RaiseExceptionOnCancelActor[test]: Started."),
+        (
+            *ACTOR_ERROR,
+            "Actor RaiseExceptionOnCancelActor[test]: Raised an unhandled exception during stop.",
+        ),
+        (*ACTOR_INFO, "Actor RaiseExceptionOnCancelActor[test]: Stopped."),
+    ]