diff --git a/news/changelog-1.8.md b/news/changelog-1.8.md
index 2047ffe9e41..ec10b18d463 100644
--- a/news/changelog-1.8.md
+++ b/news/changelog-1.8.md
@@ -83,3 +83,4 @@ All changes included in 1.8:
 
 - ([#11321](https://github.com/quarto-dev/quarto-cli/issues/11321)): Follow [recommendation from LaTeX project](https://latex-project.org/news/latex2e-news/ltnews40.pdf) and use `lualatex` instead of `xelatex` as the default PDF engine.
 - ([#12782](https://github.com/quarto-dev/quarto-cli/pull/12782)): fix bug on `safeRemoveDirSync`'s detection of safe directory boundaries.
+- ([#12853](https://github.com/quarto-dev/quarto-cli/issues/12853)): fix replaceAll() escaping issue with embedded notebooks containing `$` in their Markdown.
\ No newline at end of file
diff --git a/package/src/common/update-html-dependencies.ts b/package/src/common/update-html-dependencies.ts
index 40aed8c6e84..ad7f0147722 100644
--- a/package/src/common/update-html-dependencies.ts
+++ b/package/src/common/update-html-dependencies.ts
@@ -820,47 +820,47 @@ async function updateBootstrapFromBslib(
       for (let line of varContents) {
         line = line.replaceAll(
           "var(--#{$prefix}font-sans-serif)",
-          "$font-family-sans-serif"
+          "$$font-family-sans-serif"
         );
         line = line.replaceAll(
           "var(--#{$prefix}font-monospace)",
-          "$font-family-monospace"
+          "$$font-family-monospace"
         );
         line = line.replaceAll(
           "var(--#{$prefix}success-rgb)",
-          "$success"
+          "$$success"
         );
         line = line.replaceAll(
           "var(--#{$prefix}danger-rgb)",
-          "$danger"
+          "$$danger"
         );
         line = line.replaceAll(
           "var(--#{$prefix}body-color-rgb)",
-          "$body-color"
+          "$$body-color"
         );
         line = line.replaceAll(
           "var(--#{$prefix}body-bg-rgb)",
-          "$body-bg"
+          "$$body-bg"
         );
         line = line.replaceAll(
           "var(--#{$prefix}emphasis-color-rgb)",
-          "$body-emphasis-color"
+          "$$body-emphasis-color"
         );
         line = line.replaceAll(
           /RGBA?\(var\(--#\{\$prefix\}emphasis-color-rgb,(.*?)\).*?\)/gm,
-          "$body-emphasis-color"
+          "$$body-emphasis-color"
         );        
         line = line.replaceAll(
           "var(--#{$prefix}secondary-color)",
-          "$body-secondary-color"
+          "$$body-secondary-color"
         );
         line = line.replaceAll(
           "var(--#{$prefix}secondary-bg)",
-          "$body-secondary-bg"
+          "$$body-secondary-bg"
         );
         line = line.replaceAll(
           "var(--#{$prefix}tertiary-bg)",
-          "$body-tertiary-bg"
+          "$$body-tertiary-bg"
         );
         line = line.replaceAll(
           "var(--#{$prefix}tertiary-color)",
@@ -868,15 +868,15 @@ async function updateBootstrapFromBslib(
         );
         line = line.replaceAll(
           "var(--#{$prefix}emphasis-bg)",
-          "$body-emphasis-bg"
+          "$$body-emphasis-bg"
         );
         line = line.replaceAll(
           "var(--#{$prefix}emphasis-color)",
-          "$body-emphasis-color"
+          "$$body-emphasis-color"
         );
         line = line.replaceAll(
           "$emphasis-color-rgb", 
-          "$body-emphasis-color"
+          "$$body-emphasis-color"
         );
 
         line = line.replaceAll(/var\(--#\{\$prefix\}(.*?)\)/gm, "$$$1");
diff --git a/src/core/handlers/embed.ts b/src/core/handlers/embed.ts
index 61bd0e65c16..f8940514b28 100644
--- a/src/core/handlers/embed.ts
+++ b/src/core/handlers/embed.ts
@@ -1,9 +1,8 @@
 /*
-* embed.ts
-*
-* Copyright (C) 2022 by Posit, PBC
-*
-*/
+ * embed.ts
+ *
+ * Copyright (C) 2022-2025 by Posit, PBC
+ */
 
 import { LanguageCellHandlerContext, LanguageHandler } from "./types.ts";
 import { baseHandler, install } from "./base.ts";
diff --git a/src/core/handlers/mermaid.ts b/src/core/handlers/mermaid.ts
index 489879d9890..66aa8bbc9cc 100644
--- a/src/core/handlers/mermaid.ts
+++ b/src/core/handlers/mermaid.ts
@@ -258,7 +258,7 @@ mermaid.initialize(${JSON.stringify(mermaidOpts)});
         const oldId = svg.getAttribute("id") as string;
         svg.setAttribute("id", newMermaidId);
         const style = svg.querySelector("style")!;
-        style.innerHTML = style.innerHTML.replaceAll(oldId, newMermaidId);
+        style.innerHTML = style.innerHTML.replaceAll(oldId, () => newMermaidId);
 
         for (const defNode of svg.querySelectorAll("defs")) {
           const defEl = defNode as Element;
@@ -296,11 +296,11 @@ mermaid.initialize(${JSON.stringify(mermaidOpts)});
           // this string substitution is fraught, but I don't know how else to fix the problem.
           oldSvgSrc = oldSvgSrc.replaceAll(
             `"${idToPatch}"`,
-            `"${to}"`,
+            () => `"${to}"`,
           );
           oldSvgSrc = oldSvgSrc.replaceAll(
             `#${idToPatch}`,
-            `#${to}`,
+            () => `#${to}`,
           );
         }
         svg = mappedDiff(svg, oldSvgSrc);
diff --git a/src/core/jupyter/jupyter-embed.ts b/src/core/jupyter/jupyter-embed.ts
index fc6d3402c11..16586e825de 100644
--- a/src/core/jupyter/jupyter-embed.ts
+++ b/src/core/jupyter/jupyter-embed.ts
@@ -339,7 +339,14 @@ export async function replaceNotebookPlaceholders(
       }
 
       // Replace the placeholders with the rendered markdown
-      markdown = markdown.replaceAll(match[0], nbMarkdown || "");
+      markdown = markdown.replaceAll(
+        match[0],
+        // https://github.com/quarto-dev/quarto-cli/issues/12853
+        // we use a function here to avoid
+        // escaping issues with $ in the markdown
+        // (e.g. $x$ in math mode)
+        () => nbMarkdown ?? "",
+      );
     }
     match = regex.exec(markdown);
   }
diff --git a/src/core/jupyter/jupyter.ts b/src/core/jupyter/jupyter.ts
index 0d3cf4a3b7d..0281c144f67 100644
--- a/src/core/jupyter/jupyter.ts
+++ b/src/core/jupyter/jupyter.ts
@@ -1039,7 +1039,7 @@ export function mdFromContentCell(
           for (let i = 0; i < source.length; i++) {
             source[i] = source[i].replaceAll(
               `attachment:${file}`,
-              imageFile,
+              () => imageFile,
             );
           }
           // only process one supported mime type
diff --git a/src/execute/rmd.ts b/src/execute/rmd.ts
index 0ee1b46c3fa..07589a60bdc 100644
--- a/src/execute/rmd.ts
+++ b/src/execute/rmd.ts
@@ -135,7 +135,10 @@ export const knitrEngine: ExecutionEngine = {
       options.quiet,
       // fixup .rmarkdown file references
       (output) => {
-        output = output.replaceAll(`${inputStem}.rmarkdown`, inputBasename);
+        output = output.replaceAll(
+          `${inputStem}.rmarkdown`,
+          () => inputBasename,
+        );
 
         const m = output.match(/^Quitting from lines (\d+)-(\d+)/m);
         if (m) {
diff --git a/src/format/jats/format-jats-postprocess.ts b/src/format/jats/format-jats-postprocess.ts
index 46f63e19f5a..da9309f36af 100644
--- a/src/format/jats/format-jats-postprocess.ts
+++ b/src/format/jats/format-jats-postprocess.ts
@@ -88,7 +88,7 @@ export const renderSubarticlePostProcessor = (
         // Replace the placeholder with the rendered subarticle
         outputContents = outputContents.replaceAll(
           placeholder,
-          subArtLines.join("\n"),
+          () => subArtLines.join("\n"),
         );
 
         // Move supporting and resource files into place
diff --git a/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/.gitignore b/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/.gitignore
new file mode 100644
index 00000000000..9f3a92498a3
--- /dev/null
+++ b/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/.gitignore
@@ -0,0 +1,221 @@
+# Byte-compiled / optimized / DLL files
+__pycache__/
+*.py[cod]
+*$py.class
+
+# C extensions
+*.so
+
+# Distribution / packaging
+.Python
+build/
+develop-eggs/
+dist/
+downloads/
+eggs/
+.eggs/
+lib/
+lib64/
+parts/
+sdist/
+var/
+wheels/
+share/python-wheels/
+*.egg-info/
+.installed.cfg
+*.egg
+MANIFEST
+
+# PyInstaller
+#  Usually these files are written by a python script from a template
+#  before PyInstaller builds the exe, so as to inject date/other infos into it.
+*.manifest
+*.spec
+
+# Installer logs
+pip-log.txt
+pip-delete-this-directory.txt
+
+# Unit test / coverage reports
+htmlcov/
+.tox/
+.nox/
+.coverage
+.coverage.*
+.cache
+nosetests.xml
+coverage.xml
+*.cover
+*.py,cover
+.hypothesis/
+.pytest_cache/
+cover/
+
+# Translations
+*.mo
+*.pot
+
+# Django stuff:
+*.log
+local_settings.py
+db.sqlite3
+db.sqlite3-journal
+
+# Flask stuff:
+instance/
+.webassets-cache
+
+# Scrapy stuff:
+.scrapy
+
+# Sphinx documentation
+docs/_build/
+
+# PyBuilder
+.pybuilder/
+target/
+
+# Jupyter Notebook
+.ipynb_checkpoints
+.jupyter_cache
+
+# IPython
+profile_default/
+ipython_config.py
+
+# pyenv
+#   For a library or package, you might want to ignore these files since the code is
+#   intended to run in multiple environments; otherwise, check them in:
+# .python-version
+
+# pipenv
+#   According to pypa/pipenv#598, it is recommended to include Pipfile.lock in version control.
+#   However, in case of collaboration, if having platform-specific dependencies or dependencies
+#   having no cross-platform support, pipenv may install dependencies that don't work, or not
+#   install all needed dependencies.
+#Pipfile.lock
+
+# UV
+#   Similar to Pipfile.lock, it is generally recommended to include uv.lock in version control.
+#   This is especially recommended for binary packages to ensure reproducibility, and is more
+#   commonly ignored for libraries.
+#uv.lock
+
+# poetry
+#   Similar to Pipfile.lock, it is generally recommended to include poetry.lock in version control.
+#   This is especially recommended for binary packages to ensure reproducibility, and is more
+#   commonly ignored for libraries.
+#   https://python-poetry.org/docs/basic-usage/#commit-your-poetrylock-file-to-version-control
+#poetry.lock
+
+# pdm
+#   Similar to Pipfile.lock, it is generally recommended to include pdm.lock in version control.
+#pdm.lock
+#   pdm stores project-wide configurations in .pdm.toml, but it is recommended to not include it
+#   in version control.
+#   https://pdm.fming.dev/latest/usage/project/#working-with-version-control
+.pdm.toml
+.pdm-python
+.pdm-build/
+
+# PEP 582; used by e.g. github.com/David-OConnor/pyflow and github.com/pdm-project/pdm
+__pypackages__/
+
+# Celery stuff
+celerybeat-schedule
+celerybeat.pid
+
+# SageMath parsed files
+*.sage.py
+
+# Environments
+.env
+.venv
+env/
+venv/
+ENV/
+env.bak/
+venv.bak/
+
+# Spyder project settings
+.spyderproject
+.spyproject
+
+# Rope project settings
+.ropeproject
+
+# mkdocs documentation
+/site
+
+# mypy
+.mypy_cache/
+.dmypy.json
+dmypy.json
+
+# Pyre type checker
+.pyre/
+
+# pytype static type analyzer
+.pytype/
+
+# Cython debug symbols
+cython_debug/
+
+# PyCharm
+#  JetBrains specific template is maintained in a separate JetBrains.gitignore that can
+#  be found at https://github.com/github/gitignore/blob/main/Global/JetBrains.gitignore
+#  and can be added to the global gitignore or merged into this file.  For a more nuclear
+#  option (not recommended) you can uncomment the following to ignore the entire idea folder.
+#.idea/
+
+# Ruff stuff:
+.ruff_cache/
+
+# PyPI configuration file
+.pypirc
+
+# MACOS
+.DS_Store
+
+# Files generated by invoking Julia with --code-coverage
+*.jl.cov
+*.jl.*.cov
+*.jl.mem
+
+Manifest.toml
+
+.vscode
+
+# System-specific files and directories generated by the BinaryProvider and BinDeps packages
+# They contain absolute paths specific to the host computer, and so should not be committed
+deps/deps.jl
+deps/build.log
+deps/downloads/
+deps/usr/
+deps/src/
+
+# these are all temporary files that will be generated during Quarto render
+/.quarto/
+/_freeze/
+/_site/
+/_output/
+/_book/
+/index_files/
+*.embed_files/
+*.html
+*.gif
+*.json
+/site_libs/
+_tmp_fig.svg
+
+# Files generated from Binder
+.TinyTeX
+.code-server
+.config
+.local
+.yarn
+.jupyter-server-log.txt
+.profile
+.bashrc
+.bash_logout
+.wget-hsts
diff --git a/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/index.qmd b/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/index.qmd
new file mode 100644
index 00000000000..c9c02e65f9b
--- /dev/null
+++ b/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/index.qmd
@@ -0,0 +1,15 @@
+---
+title: Home Page
+format:
+    html: default
+    pdf: default
+---
+
+## From an embedded notebook
+
+{{< embed somefolder/somefile.qmd#plot-phase-space-density echo=true >}}
+
+## Still from an embedded notebook
+
+{{< embed somefolder/somefile.qmd#plot-final-density echo=true >}}
+
diff --git a/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/somefolder/somefile.qmd b/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/somefolder/somefile.qmd
new file mode 100644
index 00000000000..36f2cd1a593
--- /dev/null
+++ b/tests/docs/smoke-all/2025/06/11/issue-12853/quarto-test/somefolder/somefile.qmd
@@ -0,0 +1,50 @@
+# Some File
+
+```{python}
+#| label: import-libraries
+
+import numpy as np
+import matplotlib.pyplot as plt
+from IPython.display import SVG
+```
+
+Some text...
+
+```{python}
+#| label: plot-phase-space-density
+
+from IPython.display import HTML
+from matplotlib.animation import FuncAnimation
+
+N_x = 101
+N_px = 101
+
+x_list = np.linspace(-2, 2, N_x)
+px_list = np.linspace(-2, 2, N_px)
+t_list = np.linspace(0, 2, 50000)
+
+rho_t = np.random.rand(N_x, N_px)
+
+fig, ax = plt.subplots()
+
+img = ax.pcolormesh(x_list, px_list, rho_t**2, shading='gouraud', rasterized=True)
+ax.set_xlabel('Position $x$')
+ax.set_ylabel('Momentum $p_x$')
+
+plt.show()
+```
+
+Other text...
+
+```{python}
+#| label: plot-final-density
+
+fig, ax = plt.subplots()
+
+img = ax.pcolormesh(x_list, px_list, rho_t**2, shading='gouraud', rasterized=True)
+ax.set_xlabel('Position $x$')
+ax.set_ylabel('Momentum $p_x$')
+
+plt.show()
+```
+