diff --git a/packages/components/CHANGELOG.md b/packages/components/CHANGELOG.md
index 779c1b4238290..e5f86ff78bc29 100644
--- a/packages/components/CHANGELOG.md
+++ b/packages/components/CHANGELOG.md
@@ -2,6 +2,10 @@
 
 ## Unreleased
 
+### Bug Fix
+
+-   `Modal`: fix closing when contained iframe is focused ([#51602](https://github.com/WordPress/gutenberg/pull/51602)).
+
 ## 25.9.0 (2023-10-05)
 
 ### Enhancements
diff --git a/packages/components/src/modal/index.tsx b/packages/components/src/modal/index.tsx
index 2746c40fcaab0..041c592166ab7 100644
--- a/packages/components/src/modal/index.tsx
+++ b/packages/components/src/modal/index.tsx
@@ -2,7 +2,12 @@
  * External dependencies
  */
 import classnames from 'classnames';
-import type { ForwardedRef, KeyboardEvent, UIEvent } from 'react';
+import type {
+	ForwardedRef,
+	KeyboardEvent,
+	MutableRefObject,
+	UIEvent,
+} from 'react';
 
 /**
  * WordPress dependencies
@@ -15,12 +20,13 @@ import {
 	useState,
 	forwardRef,
 	useLayoutEffect,
+	createContext,
+	useContext,
 } from '@wordpress/element';
 import {
 	useInstanceId,
 	useFocusReturn,
 	useFocusOnMount,
-	__experimentalUseFocusOutside as useFocusOutside,
 	useConstrainedTabbing,
 	useMergeRefs,
 } from '@wordpress/compose';
@@ -36,8 +42,13 @@ import Button from '../button';
 import StyleProvider from '../style-provider';
 import type { ModalProps } from './types';
 
-// Used to count the number of open modals.
-let openModalCount = 0;
+// Used to track and dismiss the prior modal when another opens unless nested.
+const level0Dismissers: MutableRefObject<
+	ModalProps[ 'onRequestClose' ] | undefined
+>[] = [];
+const ModalContext = createContext( level0Dismissers );
+
+let isBodyOpenClassActive = false;
 
 function UnforwardedModal(
 	props: ModalProps,
@@ -91,7 +102,6 @@ function UnforwardedModal(
 	);
 	const constrainedTabbingRef = useConstrainedTabbing();
 	const focusReturnRef = useFocusReturn();
-	const focusOutsideProps = useFocusOutside( onRequestClose );
 	const contentRef = useRef< HTMLDivElement >( null );
 	const childrenContainerRef = useRef< HTMLDivElement >( null );
 
@@ -120,26 +130,52 @@ function UnforwardedModal(
 		}
 	}, [ contentRef ] );
 
+	// Accessibly isolates/unisolates the modal.
 	useEffect( () => {
 		ariaHelper.modalize( ref.current );
 		return () => ariaHelper.unmodalize();
 	}, [] );
 
+	// Keeps a fresh ref for the subsequent effect.
+	const refOnRequestClose = useRef< ModalProps[ 'onRequestClose' ] >();
 	useEffect( () => {
-		openModalCount++;
+		refOnRequestClose.current = onRequestClose;
+	}, [ onRequestClose ] );
 
-		if ( openModalCount === 1 ) {
-			document.body.classList.add( bodyOpenClassName );
-		}
+	// The list of `onRequestClose` callbacks of open (non-nested) Modals. Only
+	// one should remain open at a time and the list enables closing prior ones.
+	const dismissers = useContext( ModalContext );
+	// Used for the tracking and dismissing any nested modals.
+	const nestedDismissers = useRef< typeof level0Dismissers >( [] );
 
+	// Updates the stack tracking open modals at this level and calls
+	// onRequestClose for any prior and/or nested modals as applicable.
+	useEffect( () => {
+		dismissers.push( refOnRequestClose );
+		const [ first, second ] = dismissers;
+		if ( second ) first?.current?.();
+
+		const nested = nestedDismissers.current;
 		return () => {
-			openModalCount--;
+			nested[ 0 ]?.current?.();
+			dismissers.shift();
+		};
+	}, [ dismissers ] );
 
-			if ( openModalCount === 0 ) {
+	const isLevel0 = dismissers === level0Dismissers;
+	// Adds/removes the value of bodyOpenClassName to body element.
+	useEffect( () => {
+		if ( ! isBodyOpenClassActive ) {
+			isBodyOpenClassActive = true;
+			document.body.classList.add( bodyOpenClassName );
+		}
+		return () => {
+			if ( isLevel0 && dismissers.length === 0 ) {
 				document.body.classList.remove( bodyOpenClassName );
+				isBodyOpenClassActive = false;
 			}
 		};
-	}, [ bodyOpenClassName ] );
+	}, [ bodyOpenClassName, dismissers, isLevel0 ] );
 
 	// Calls the isContentScrollable callback when the Modal children container resizes.
 	useLayoutEffect( () => {
@@ -200,12 +236,9 @@ function UnforwardedModal(
 		onPointerUp: React.PointerEventHandler< HTMLDivElement >;
 	} = {
 		onPointerDown: ( event ) => {
-			if ( event.isPrimary && event.target === event.currentTarget ) {
+			if ( event.target === event.currentTarget ) {
 				pressTarget = event.target;
-				// Avoids loss of focus yet also leaves `useFocusOutside`
-				// practically useless with its only potential trigger being
-				// programmatic focus movement. TODO opt for either removing
-				// the hook or enhancing it such that this isn't needed.
+				// Avoids focus changing so that focus return works as expected.
 				event.preventDefault();
 			}
 		},
@@ -222,7 +255,7 @@ function UnforwardedModal(
 		},
 	};
 
-	return createPortal(
+	const modal = (
 		// eslint-disable-next-line jsx-a11y/no-static-element-interactions
 		<div
 			ref={ useMergeRefs( [ ref, forwardedRef ] ) }
@@ -253,9 +286,6 @@ function UnforwardedModal(
 					aria-labelledby={ contentLabel ? undefined : headingId }
 					aria-describedby={ aria.describedby }
 					tabIndex={ -1 }
-					{ ...( shouldCloseOnClickOutside
-						? focusOutsideProps
-						: {} ) }
 					onKeyDown={ onKeyDown }
 				>
 					<div
@@ -320,7 +350,13 @@ function UnforwardedModal(
 					</div>
 				</div>
 			</StyleProvider>
-		</div>,
+		</div>
+	);
+
+	return createPortal(
+		<ModalContext.Provider value={ nestedDismissers.current }>
+			{ modal }
+		</ModalContext.Provider>,
 		document.body
 	);
 }
diff --git a/packages/components/src/modal/test/index.tsx b/packages/components/src/modal/test/index.tsx
index 69f28508c1405..9073735e94dbe 100644
--- a/packages/components/src/modal/test/index.tsx
+++ b/packages/components/src/modal/test/index.tsx
@@ -167,6 +167,35 @@ describe( 'Modal', () => {
 		expect( onRequestClose ).not.toHaveBeenCalled();
 	} );
 
+	it( 'should request closing of nested modal when outer modal unmounts', async () => {
+		const user = userEvent.setup();
+		const onRequestClose = jest.fn();
+
+		const RequestCloseOfNested = () => {
+			const [ isShown, setIsShown ] = useState( true );
+			return (
+				<>
+					{ isShown && (
+						<Modal
+							onKeyDown={ ( { key } ) => {
+								if ( key === 'o' ) setIsShown( false );
+							} }
+							onRequestClose={ noop }
+						>
+							<Modal onRequestClose={ onRequestClose }>
+								<p>Nested modal content</p>
+							</Modal>
+						</Modal>
+					) }
+				</>
+			);
+		};
+		render( <RequestCloseOfNested /> );
+
+		await user.keyboard( 'o' );
+		expect( onRequestClose ).toHaveBeenCalled();
+	} );
+
 	it( 'should accessibly hide and show siblings including outer modals', async () => {
 		const user = userEvent.setup();