diff --git a/cmd/compose/up.go b/cmd/compose/up.go
index cda2678bbb2..9610cc4db87 100644
--- a/cmd/compose/up.go
+++ b/cmd/compose/up.go
@@ -24,6 +24,7 @@ import (
 	"strings"
 	"time"
 
+	"github.com/compose-spec/compose-go/v2/cli"
 	"github.com/compose-spec/compose-go/v2/types"
 	"github.com/docker/cli/cli/command"
 	xprogress "github.com/moby/buildkit/util/progress/progressui"
@@ -111,7 +112,11 @@ func (opts upOptions) OnExit() api.Cascade {
 }
 
 func upCommand(p *ProjectOptions, dockerCli command.Cli, backendOptions *BackendOptions) *cobra.Command {
-	up := upOptions{}
+	up := upOptions{
+		composeOptions: &composeOptions{
+			ProjectOptions: p,
+		},
+	}
 	create := createOptions{}
 	build := buildOptions{ProjectOptions: p}
 	upCmd := &cobra.Command{
@@ -349,6 +354,20 @@ func runUp(
 			Services:       services,
 			NavigationMenu: upOptions.navigationMenu && display.Mode != "plain" && dockerCli.In().IsTerminal(),
 		},
+		ReloadProject: func(ctx context.Context) (*types.Project, error) {
+			project, _, err := upOptions.ProjectOptions.ToProject(ctx, dockerCli, backend, services, cli.WithoutEnvironmentResolution)
+			if err != nil {
+				return nil, err
+			}
+			project, err = project.WithServicesEnvironmentResolved(true)
+			if err != nil {
+				return nil, err
+			}
+			if err := createOptions.Apply(project); err != nil {
+				return nil, err
+			}
+			return upOptions.apply(project, services)
+		},
 	})
 }
 
diff --git a/cmd/compose/watch.go b/cmd/compose/watch.go
index c60b243860e..4851c49b578 100644
--- a/cmd/compose/watch.go
+++ b/cmd/compose/watch.go
@@ -128,5 +128,15 @@ func runWatch(ctx context.Context, dockerCli command.Cli, backendOptions *Backen
 		LogTo:    consumer,
 		Prune:    watchOpts.prune,
 		Services: services,
+		ReloadProject: func(ctx context.Context) (*types.Project, error) {
+			project, _, err := watchOpts.ToProject(ctx, dockerCli, backend, services)
+			if err != nil {
+				return nil, err
+			}
+			if err := applyPlatforms(project, true); err != nil {
+				return nil, err
+			}
+			return project, nil
+		},
 	})
 }
diff --git a/pkg/api/api.go b/pkg/api/api.go
index 1e84cca2bf7..80ea2eaacaa 100644
--- a/pkg/api/api.go
+++ b/pkg/api/api.go
@@ -184,10 +184,14 @@ const WatchLogger = "#watch"
 
 // WatchOptions group options of the Watch API
 type WatchOptions struct {
-	Build    *BuildOptions
-	LogTo    LogConsumer
-	Prune    bool
+	Build *BuildOptions
+	LogTo LogConsumer
+	Prune bool
+	// Services passed in the command line to be watched
 	Services []string
+	// ReloadProject reloads the compose project before recreating services after
+	// a rebuild, so long-running watch sessions use current compose/env_file data.
+	ReloadProject func(ctx context.Context) (*types.Project, error)
 }
 
 // BuildOptions group options of the Build API
@@ -337,6 +341,8 @@ type StopOptions struct {
 type UpOptions struct {
 	Create CreateOptions
 	Start  StartOptions
+	// ReloadProject reloads the compose project for long-running up --watch sessions.
+	ReloadProject func(ctx context.Context) (*types.Project, error)
 }
 
 // DownOptions group options of the Down API
diff --git a/pkg/compose/watch.go b/pkg/compose/watch.go
index c485267c0c1..573eef44e3c 100644
--- a/pkg/compose/watch.go
+++ b/pkg/compose/watch.go
@@ -66,8 +66,9 @@ func NewWatcher(project *types.Project, options api.UpOptions, w WatchFunc, cons
 			return &Watcher{
 				project: project,
 				options: api.WatchOptions{
-					LogTo: consumer,
-					Build: build,
+					LogTo:         consumer,
+					Build:         build,
+					ReloadProject: options.ReloadProject,
 				},
 				watchFn: w,
 				errCh:   make(chan error),
@@ -632,8 +633,51 @@ func (s *composeService) exec(ctx context.Context, project *types.Project, servi
 	return nil
 }
 
+func projectForRebuild(ctx context.Context, project *types.Project, services []string, options api.WatchOptions) (*types.Project, error) {
+	var err error
+	if options.ReloadProject != nil {
+		project, err = options.ReloadProject(ctx)
+		if err != nil {
+			return nil, fmt.Errorf("reload compose project: %w", err)
+		}
+	}
+	project, err = project.WithSelectedServices(services)
+	if err != nil {
+		return nil, err
+	}
+	for serviceName, service := range project.Services {
+		if !slices.Contains(services, serviceName) {
+			continue
+		}
+		config := service.Develop
+		if config == nil {
+			config, err = loadDevelopmentConfig(service, project)
+			if err != nil {
+				return nil, err
+			}
+		}
+		if config == nil {
+			continue
+		}
+		for _, trigger := range config.Watch {
+			if trigger.Action == types.WatchActionRebuild {
+				service.PullPolicy = types.PullPolicyBuild
+				project.Services[serviceName] = service
+				break
+			}
+		}
+	}
+	return project, nil
+}
+
 func (s *composeService) rebuild(ctx context.Context, project *types.Project, services []string, options api.WatchOptions) error {
 	options.LogTo.Log(api.WatchLogger, fmt.Sprintf("Rebuilding service(s) %q after changes were detected...", services))
+	var err error
+	project, err = projectForRebuild(ctx, project, services, options)
+	if err != nil {
+		options.LogTo.Log(api.WatchLogger, fmt.Sprintf("Failed to reload compose project after update. Error: %v", err))
+		return err
+	}
 	// Work on a copy so concurrent watch events don't race on the shared
 	// BuildOptions pointer carried by WatchOptions.
 	buildOpts := *options.Build
@@ -648,10 +692,7 @@ func (s *composeService) rebuild(ctx context.Context, project *types.Project, se
 		options.LogTo.Log(api.WatchLogger, line)
 	})
 
-	var (
-		imageNameToIdMap map[string]string
-		err              error
-	)
+	var imageNameToIdMap map[string]string
 	err = tracing.SpanWrapFunc("project/build", tracing.ProjectOptions(ctx, project),
 		func(ctx context.Context) error {
 			imageNameToIdMap, err = s.build(ctx, project, buildOpts, nil)
diff --git a/pkg/compose/watch_test.go b/pkg/compose/watch_test.go
index 0c59b884ba6..de62e313fa1 100644
--- a/pkg/compose/watch_test.go
+++ b/pkg/compose/watch_test.go
@@ -180,6 +180,54 @@ func TestWatch_Sync(t *testing.T) {
 	// TODO: there's not a great way to assert that the rebuild attempt happened
 }
 
+func TestProjectForRebuildReloadsLatestConfig(t *testing.T) {
+	staleProject := &types.Project{
+		Name: "myProjectName",
+		Services: types.Services{
+			"web": {
+				Name:        "web",
+				Environment: types.MappingWithEquals{"VALUE": strPtr("initial")},
+				Build:       &types.BuildConfig{},
+				Develop: &types.DevelopConfig{
+					Watch: []types.Trigger{{Action: types.WatchActionRebuild, Path: "test"}},
+				},
+			},
+		},
+	}
+	freshProject := &types.Project{
+		Name: "myProjectName",
+		Services: types.Services{
+			"web": {
+				Name:        "web",
+				Environment: types.MappingWithEquals{"VALUE": strPtr("updated")},
+				Build:       &types.BuildConfig{},
+				Develop: &types.DevelopConfig{
+					Watch: []types.Trigger{{Action: types.WatchActionRebuild, Path: "test"}},
+				},
+			},
+		},
+	}
+
+	reloadCalled := false
+	project, err := projectForRebuild(t.Context(), staleProject, []string{"web"}, api.WatchOptions{
+		ReloadProject: func(ctx context.Context) (*types.Project, error) {
+			reloadCalled = true
+			return freshProject, nil
+		},
+	})
+	assert.NilError(t, err)
+	assert.Assert(t, reloadCalled)
+
+	service, err := project.GetService("web")
+	assert.NilError(t, err)
+	assert.Equal(t, *service.Environment["VALUE"], "updated")
+	assert.Equal(t, service.PullPolicy, types.PullPolicyBuild)
+}
+
+func strPtr(s string) *string {
+	return &s
+}
+
 type fakeSyncer struct {
 	synced chan []*sync.PathMapping
 }
diff --git a/pkg/e2e/fixtures/watch/rebuild-config.yaml b/pkg/e2e/fixtures/watch/rebuild-config.yaml
new file mode 100644
index 00000000000..0d283bd9a8b
--- /dev/null
+++ b/pkg/e2e/fixtures/watch/rebuild-config.yaml
@@ -0,0 +1,10 @@
+services:
+  web:
+    build: .
+    env_file:
+      - ./watch.env
+    command: tail -f /dev/null
+    develop:
+      watch:
+        - path: test
+          action: rebuild
diff --git a/pkg/e2e/watch_test.go b/pkg/e2e/watch_test.go
index f4f78617284..f8ed5be04de 100644
--- a/pkg/e2e/watch_test.go
+++ b/pkg/e2e/watch_test.go
@@ -447,6 +447,79 @@ func TestWatchRebuildIgnoresDependencies(t *testing.T) {
 	c.RunDockerComposeCmdNoCheck(t, "-p", projectName, "kill", "-s", "9")
 }
 
+func TestWatchRebuildUsesLatestProjectConfig(t *testing.T) {
+	c := NewCLI(t)
+	const projectName = "test_watch_rebuild_config"
+	const serviceName = "web"
+
+	defer c.cleanupWithDown(t, projectName, "--rmi=local")
+
+	tmpdir := t.TempDir()
+	composeFilePath := filepath.Join(tmpdir, "compose.yaml")
+	CopyFile(t, filepath.Join("fixtures", "watch", "rebuild-config.yaml"), composeFilePath)
+	assert.NilError(t, os.WriteFile(filepath.Join(tmpdir, "Dockerfile"), []byte("FROM alpine\nRUN mkdir /data\nCOPY test /data/web\n"), 0o600))
+
+	envFilePath := filepath.Join(tmpdir, "watch.env")
+	assert.NilError(t, os.WriteFile(envFilePath, []byte("VALUE=initial\n"), 0o600))
+	testFile := filepath.Join(tmpdir, "test")
+	assert.NilError(t, os.WriteFile(testFile, []byte("initial"), 0o600))
+
+	cmd := c.NewDockerComposeCmd(t, "-p", projectName, "-f", composeFilePath, "up", "--build", "--watch")
+	buffer := bytes.NewBuffer(nil)
+	cmd.Stdout = buffer
+	cmd.Stderr = buffer
+	watch := icmd.StartCmd(cmd)
+	assert.NilError(t, watch.Error)
+	t.Cleanup(func() {
+		if watch.Cmd.Process != nil {
+			_ = watch.Cmd.Process.Kill()
+		}
+	})
+
+	poll.WaitOn(t, func(l poll.LogT) poll.Result {
+		if strings.Contains(buffer.String(), "Watch enabled") {
+			return poll.Success()
+		}
+		return poll.Continue("waiting for watch to start: %v", buffer.String())
+	}, poll.WithTimeout(120*time.Second))
+
+	poll.WaitOn(t, func(l poll.LogT) poll.Result {
+		res := c.RunDockerComposeCmdNoCheck(t, "-p", projectName, "exec", serviceName, "printenv", "VALUE")
+		if strings.Contains(res.Stdout(), "initial") {
+			return poll.Success()
+		}
+		return poll.Continue("expected initial VALUE before rebuild, got: %v", res.Combined())
+	}, poll.WithTimeout(30*time.Second), poll.WithDelay(time.Second))
+
+	logCutoff := buffer.Len()
+	assert.NilError(t, os.WriteFile(envFilePath, []byte("VALUE=updated\n"), 0o600))
+	assert.NilError(t, os.WriteFile(testFile, []byte("updated"), 0o600))
+
+	poll.WaitOn(t, func(l poll.LogT) poll.Result {
+		out := buffer.String()
+		if len(out) <= logCutoff {
+			return poll.Continue("no rebuild output yet")
+		}
+		if strings.Contains(out[logCutoff:], `service(s) ["web"] successfully built`) {
+			return poll.Success()
+		}
+		return poll.Continue("waiting for rebuild to finish: %v", out[logCutoff:])
+	}, poll.WithTimeout(120*time.Second), poll.WithDelay(time.Second))
+
+	poll.WaitOn(t, func(l poll.LogT) poll.Result {
+		if watch.Cmd.ProcessState != nil {
+			return poll.Error(fmt.Errorf("watch process exited early: %s", watch.Cmd.ProcessState))
+		}
+		res := c.RunDockerComposeCmdNoCheck(t, "-p", projectName, "exec", serviceName, "printenv", "VALUE")
+		if strings.Contains(res.Stdout(), "updated") {
+			return poll.Success()
+		}
+		return poll.Continue("expected updated VALUE after rebuild, got: %v", res.Combined())
+	}, poll.WithTimeout(120*time.Second), poll.WithDelay(time.Second))
+
+	c.RunDockerComposeCmdNoCheck(t, "-p", projectName, "kill", "-s", "9")
+}
+
 func TestWatchIncludes(t *testing.T) {
 	c := NewCLI(t)
 	const projectName = "test_watch_includes"