diff --git a/.changeset/rude-flies-reflect.md b/.changeset/rude-flies-reflect.md
new file mode 100644
index 0000000000..6ca6c7fad5
--- /dev/null
+++ b/.changeset/rude-flies-reflect.md
@@ -0,0 +1,5 @@
+---
+'@lion/ui': patch
+---
+
+[overlays] no hiding of nested overlays having `hideOnEsc` configured
diff --git a/packages/ui/components/overlays/src/OverlayController.js b/packages/ui/components/overlays/src/OverlayController.js
index 39ffc26508..664969a86c 100644
--- a/packages/ui/components/overlays/src/OverlayController.js
+++ b/packages/ui/components/overlays/src/OverlayController.js
@@ -4,13 +4,13 @@ import { overlayShadowDomStyle } from './overlayShadowDomStyle.js';
 import { _adoptStyleUtils } from './utils/adopt-styles.js';
 
 /**
- * @typedef {import('@lion/ui/types/overlays.js').OverlayConfig} OverlayConfig
+ * @typedef {'setup'|'init'|'teardown'|'before-show'|'show'|'hide'|'add'|'remove'} OverlayPhase
  * @typedef {import('@lion/ui/types/overlays.js').ViewportConfig} ViewportConfig
- * @typedef {import('@popperjs/core').createPopper} Popper
+ * @typedef {import('@lion/ui/types/overlays.js').OverlayConfig} OverlayConfig
  * @typedef {import('@popperjs/core').Options} PopperOptions
  * @typedef {import('@popperjs/core').Placement} Placement
+ * @typedef {import('@popperjs/core').createPopper} Popper
  * @typedef {{ createPopper: Popper }} PopperModule
- * @typedef {'setup'|'init'|'teardown'|'before-show'|'show'|'hide'|'add'|'remove'} OverlayPhase
  */
 
 /**
@@ -1148,7 +1148,20 @@ export class OverlayController extends EventTarget {
 
   /** @private */
   __escKeyHandler(/** @type {KeyboardEvent} */ ev) {
-    return ev.key === 'Escape' && this.hide();
+    // @ts-expect-error
+    if (ev.key !== 'Escape' || ev._hasAlreadyHandledEscape) return;
+
+    this.hide();
+
+    const shouldNotCloseParents = this.hidesOnEsc && !this.hidesOnOutsideEsc;
+    if (shouldNotCloseParents) {
+      // We could do ev.stopPropagation() here, but we don't want to hide info for
+      // the outside world about user interactions. Instead, we piggyback
+      // on the event so our parent overlay can read it.
+      // @ts-expect-error
+      // eslint-disable-next-line no-param-reassign
+      ev._hasAlreadyHandledEscape = true;
+    }
   }
 
   /**
diff --git a/packages/ui/components/overlays/test/OverlayController.test.js b/packages/ui/components/overlays/test/OverlayController.test.js
index 3978d2fe98..55a1cf9202 100644
--- a/packages/ui/components/overlays/test/OverlayController.test.js
+++ b/packages/ui/components/overlays/test/OverlayController.test.js
@@ -1,24 +1,26 @@
 /* eslint-disable no-new */
+import { OverlayController, overlays, OverlayMixin } from '@lion/ui/overlays.js';
+import { mimicClick } from '@lion/ui/overlays-test-helpers.js';
+import { LitElement } from 'lit';
+import sinon from 'sinon';
 import {
-  aTimeout,
+  unsafeStatic,
+  fixtureSync,
   defineCE,
-  expect,
+  aTimeout,
   fixture,
+  expect,
   html,
-  unsafeStatic,
-  fixtureSync,
 } from '@open-wc/testing';
-import sinon from 'sinon';
-import { OverlayController, overlays } from '@lion/ui/overlays.js';
-import { mimicClick } from '@lion/ui/overlays-test-helpers.js';
-import { keyCodes } from '../src/utils/key-codes.js';
-import { simulateTab } from '../src/utils/simulate-tab.js';
-import { _adoptStyleUtils } from '../src/utils/adopt-styles.js';
+
 import { createShadowHost } from '../test-helpers/createShadowHost.js';
+import { _adoptStyleUtils } from '../src/utils/adopt-styles.js';
+import { simulateTab } from '../src/utils/simulate-tab.js';
+import { keyCodes } from '../src/utils/key-codes.js';
 
 /**
- * @typedef {import('../types/OverlayConfig.js').OverlayConfig} OverlayConfig
  * @typedef {import('../types/OverlayConfig.js').ViewportPlacement} ViewportPlacement
+ * @typedef {import('../types/OverlayConfig.js').OverlayConfig} OverlayConfig
  */
 
 const wrappingDialogNodeStyle = 'display: none; z-index: 9999; padding: 0px;';
@@ -617,6 +619,35 @@ describe('OverlayController', () => {
         await aTimeout(0);
         expect(ctrl.isShown).to.be.true;
       });
+
+      it('does not hide when [escape] while the overlay has a child open', async () => {
+        const childContent = /** @type {HTMLElement} */ (
+          await fixture(html`<div id="child">child</div>`)
+        );
+        const childOverlay = new OverlayController({
+          ...withGlobalTestConfig(),
+          contentNode: childContent,
+          hidesOnEsc: true,
+        });
+
+        const parentContent = /** @type {HTMLElement} */ (
+          await fixture(html`<div id="parent">parent${childContent}</div>`)
+        );
+        const parentOverlay = new OverlayController({
+          ...withGlobalTestConfig(),
+          contentNode: parentContent,
+          hidesOnEsc: true,
+        });
+
+        await parentOverlay.show();
+        await childOverlay.show();
+
+        childContent.dispatchEvent(new KeyboardEvent('keyup', { key: 'Escape', bubbles: true }));
+        await aTimeout(0);
+
+        expect(childOverlay.isShown).to.be.false;
+        expect(parentOverlay.isShown).to.be.true;
+      });
     });
 
     describe('hidesOnOutsideEsc', () => {