diff --git a/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/Helpers/TestApplicationBuilderExtensions.cs b/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/Helpers/TestApplicationBuilderExtensions.cs
index 9ec3739da9..85e32217b9 100644
--- a/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/Helpers/TestApplicationBuilderExtensions.cs
+++ b/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/Helpers/TestApplicationBuilderExtensions.cs
@@ -54,5 +54,5 @@ public static void AddTestRunParametersService(this ITestApplicationBuilder buil
     /// <param name="extension">The extension that will be used as the source of registration for this helper service.</param>
     public static void AddRunSettingsEnvironmentVariableProvider(this ITestApplicationBuilder builder, IExtension extension)
         => builder.TestHostControllers.AddEnvironmentVariableProvider(serviceProvider
-            => new RunSettingsEnvironmentVariableProvider(extension, serviceProvider.GetCommandLineOptions(), serviceProvider.GetFileSystem()));
+            => new RunSettingsEnvironmentVariableProvider(extension, serviceProvider.GetCommandLineOptions(), serviceProvider.GetFileSystem(), serviceProvider.GetEnvironment()));
 }
diff --git a/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/TestHostControllers/RunSettingsEnvironmentVariableProvider.cs b/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/TestHostControllers/RunSettingsEnvironmentVariableProvider.cs
index 72a5fd8152..31cacda715 100644
--- a/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/TestHostControllers/RunSettingsEnvironmentVariableProvider.cs
+++ b/src/Platform/Microsoft.Testing.Extensions.VSTestBridge/TestHostControllers/RunSettingsEnvironmentVariableProvider.cs
@@ -2,6 +2,7 @@
 // Licensed under the MIT license. See LICENSE file in the project root for full license information.
 
 using Microsoft.Testing.Extensions.VSTestBridge.CommandLine;
+using Microsoft.Testing.Platform;
 using Microsoft.Testing.Platform.CommandLine;
 using Microsoft.Testing.Platform.Extensions;
 using Microsoft.Testing.Platform.Extensions.TestHostControllers;
@@ -14,13 +15,15 @@ internal sealed class RunSettingsEnvironmentVariableProvider : ITestHostEnvironm
     private readonly IExtension _extension;
     private readonly ICommandLineOptions _commandLineOptions;
     private readonly IFileSystem _fileSystem;
+    private readonly IEnvironment _environment;
     private XDocument? _runSettings;
 
-    public RunSettingsEnvironmentVariableProvider(IExtension extension, ICommandLineOptions commandLineOptions, IFileSystem fileSystem)
+    public RunSettingsEnvironmentVariableProvider(IExtension extension, ICommandLineOptions commandLineOptions, IFileSystem fileSystem, IEnvironment environment)
     {
         _extension = extension;
         _commandLineOptions = commandLineOptions;
         _fileSystem = fileSystem;
+        _environment = environment;
     }
 
     public string Uid => _extension.Uid;
@@ -33,23 +36,56 @@ public RunSettingsEnvironmentVariableProvider(IExtension extension, ICommandLine
 
     public async Task<bool> IsEnabledAsync()
     {
-        if (!_commandLineOptions.TryGetOptionArgumentList(RunSettingsCommandLineOptionsProvider.RunSettingsOptionName, out string[]? runsettings))
+        string? runSettingsFilePath = null;
+        string? runSettingsContent = null;
+
+        // Try to get runsettings from command line
+        if (_commandLineOptions.TryGetOptionArgumentList(RunSettingsCommandLineOptionsProvider.RunSettingsOptionName, out string[]? runsettings)
+            && runsettings.Length > 0)
         {
-            return false;
+            if (_fileSystem.ExistFile(runsettings[0]))
+            {
+                runSettingsFilePath = runsettings[0];
+            }
         }
 
-        if (!_fileSystem.ExistFile(runsettings[0]))
+        // If not from command line, try environment variable with content
+        if (runSettingsFilePath is null)
         {
-            return false;
+            runSettingsContent = _environment.GetEnvironmentVariable("TESTINGPLATFORM_EXPERIMENTAL_VSTEST_RUNSETTINGS");
         }
 
-        using IFileStream fileStream = _fileSystem.NewFileStream(runsettings[0], FileMode.Open, FileAccess.Read);
+        // If not from content env var, try environment variable with file path
+        if (runSettingsFilePath is null && RoslynString.IsNullOrEmpty(runSettingsContent))
+        {
+            string? envVarFilePath = _environment.GetEnvironmentVariable("TESTINGPLATFORM_VSTESTBRIDGE_RUNSETTINGS_FILE");
+            if (!RoslynString.IsNullOrEmpty(envVarFilePath) && _fileSystem.ExistFile(envVarFilePath))
+            {
+                runSettingsFilePath = envVarFilePath;
+            }
+        }
+
+        // If we have a file path, read from file
+        if (runSettingsFilePath is not null)
+        {
+            using IFileStream fileStream = _fileSystem.NewFileStream(runSettingsFilePath, FileMode.Open, FileAccess.Read);
 #if NETCOREAPP
-        _runSettings = await XDocument.LoadAsync(fileStream.Stream, LoadOptions.None, CancellationToken.None).ConfigureAwait(false);
+            _runSettings = await XDocument.LoadAsync(fileStream.Stream, LoadOptions.None, CancellationToken.None).ConfigureAwait(false);
 #else
-        using StreamReader streamReader = new(fileStream.Stream);
-        _runSettings = XDocument.Parse(await streamReader.ReadToEndAsync().ConfigureAwait(false));
+            using StreamReader streamReader = new(fileStream.Stream);
+            _runSettings = XDocument.Parse(await streamReader.ReadToEndAsync().ConfigureAwait(false));
 #endif
+        }
+        else if (!RoslynString.IsNullOrEmpty(runSettingsContent))
+        {
+            // If we have content, parse it directly
+            _runSettings = XDocument.Parse(runSettingsContent);
+        }
+        else
+        {
+            return false;
+        }
+
         return _runSettings.Element("RunSettings")?.Element("RunConfiguration")?.Element("EnvironmentVariables") is not null;
     }
 
diff --git a/test/UnitTests/Microsoft.Testing.Extensions.VSTestBridge.UnitTests/TestHostControllers/RunSettingsEnvironmentVariableProviderTests.cs b/test/UnitTests/Microsoft.Testing.Extensions.VSTestBridge.UnitTests/TestHostControllers/RunSettingsEnvironmentVariableProviderTests.cs
new file mode 100644
index 0000000000..766fbca07b
--- /dev/null
+++ b/test/UnitTests/Microsoft.Testing.Extensions.VSTestBridge.UnitTests/TestHostControllers/RunSettingsEnvironmentVariableProviderTests.cs
@@ -0,0 +1,245 @@
+// Copyright (c) Microsoft Corporation. All rights reserved.
+// Licensed under the MIT license. See LICENSE file in the project root for full license information.
+
+using Microsoft.Testing.Extensions.VSTestBridge.TestHostControllers;
+using Microsoft.Testing.Extensions.VSTestBridge.UnitTests.Helpers;
+using Microsoft.Testing.Platform.CommandLine;
+using Microsoft.Testing.Platform.Extensions.TestHostControllers;
+using Microsoft.Testing.Platform.Helpers;
+
+using Moq;
+
+namespace Microsoft.Testing.Extensions.VSTestBridge.UnitTests.TestHostControllers;
+
+[TestClass]
+public sealed class RunSettingsEnvironmentVariableProviderTests
+{
+    private const string RunSettingsWithEnvironmentVariables = """
+        <?xml version="1.0" encoding="utf-8"?>
+        <RunSettings>
+            <RunConfiguration>
+                <EnvironmentVariables>
+                    <TEST_ENV>TestValue</TEST_ENV>
+                    <ANOTHER_VAR>AnotherValue</ANOTHER_VAR>
+                </EnvironmentVariables>
+            </RunConfiguration>
+        </RunSettings>
+        """;
+
+    private const string RunSettingsWithoutEnvironmentVariables = """
+        <?xml version="1.0" encoding="utf-8"?>
+        <RunSettings>
+            <RunConfiguration>
+            </RunConfiguration>
+        </RunSettings>
+        """;
+
+    [TestMethod]
+    public async Task IsEnabledAsync_WhenCommandLineOptionProvided_ReturnsTrue()
+    {
+        // Arrange
+        const string filePath = "test.runsettings";
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = [filePath];
+                return true;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+        fileSystem.Setup(x => x.ExistFile(filePath)).Returns(true);
+        var fileStream = new Mock<IFileStream>();
+        var stream = new MemoryStream(Encoding.UTF8.GetBytes(RunSettingsWithEnvironmentVariables));
+        fileStream.Setup(x => x.Stream).Returns(stream);
+        fileSystem.Setup(x => x.NewFileStream(filePath, FileMode.Open, FileAccess.Read)).Returns(fileStream.Object);
+
+        var environment = new Mock<IEnvironment>();
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        // Act
+        bool result = await provider.IsEnabledAsync();
+
+        // Assert
+        Assert.IsTrue(result);
+    }
+
+    [TestMethod]
+    public async Task IsEnabledAsync_WhenCommandLineOptionProvidedButNoEnvironmentVariables_ReturnsFalse()
+    {
+        // Arrange
+        const string filePath = "test.runsettings";
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = [filePath];
+                return true;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+        fileSystem.Setup(x => x.ExistFile(filePath)).Returns(true);
+        var fileStream = new Mock<IFileStream>();
+        var stream = new MemoryStream(Encoding.UTF8.GetBytes(RunSettingsWithoutEnvironmentVariables));
+        fileStream.Setup(x => x.Stream).Returns(stream);
+        fileSystem.Setup(x => x.NewFileStream(filePath, FileMode.Open, FileAccess.Read)).Returns(fileStream.Object);
+
+        var environment = new Mock<IEnvironment>();
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        // Act
+        bool result = await provider.IsEnabledAsync();
+
+        // Assert
+        Assert.IsFalse(result);
+    }
+
+    [TestMethod]
+    public async Task IsEnabledAsync_WhenEnvironmentVariableWithContentProvided_ReturnsTrue()
+    {
+        // Arrange
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = null;
+                return false;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+
+        var environment = new Mock<IEnvironment>();
+        environment.Setup(x => x.GetEnvironmentVariable("TESTINGPLATFORM_EXPERIMENTAL_VSTEST_RUNSETTINGS"))
+            .Returns(RunSettingsWithEnvironmentVariables);
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        // Act
+        bool result = await provider.IsEnabledAsync();
+
+        // Assert
+        Assert.IsTrue(result);
+    }
+
+    [TestMethod]
+    public async Task IsEnabledAsync_WhenEnvironmentVariableWithContentProvidedButNoEnvironmentVariables_ReturnsFalse()
+    {
+        // Arrange
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = null;
+                return false;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+
+        var environment = new Mock<IEnvironment>();
+        environment.Setup(x => x.GetEnvironmentVariable("TESTINGPLATFORM_EXPERIMENTAL_VSTEST_RUNSETTINGS"))
+            .Returns(RunSettingsWithoutEnvironmentVariables);
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        // Act
+        bool result = await provider.IsEnabledAsync();
+
+        // Assert
+        Assert.IsFalse(result);
+    }
+
+    [TestMethod]
+    public async Task IsEnabledAsync_WhenEnvironmentVariableWithFilePathProvided_ReturnsTrue()
+    {
+        // Arrange
+        const string filePath = "test.runsettings";
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = null;
+                return false;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+        fileSystem.Setup(x => x.ExistFile(filePath)).Returns(true);
+        var fileStream = new Mock<IFileStream>();
+        var stream = new MemoryStream(Encoding.UTF8.GetBytes(RunSettingsWithEnvironmentVariables));
+        fileStream.Setup(x => x.Stream).Returns(stream);
+        fileSystem.Setup(x => x.NewFileStream(filePath, FileMode.Open, FileAccess.Read)).Returns(fileStream.Object);
+
+        var environment = new Mock<IEnvironment>();
+        environment.Setup(x => x.GetEnvironmentVariable("TESTINGPLATFORM_VSTESTBRIDGE_RUNSETTINGS_FILE"))
+            .Returns(filePath);
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        // Act
+        bool result = await provider.IsEnabledAsync();
+
+        // Assert
+        Assert.IsTrue(result);
+    }
+
+    [TestMethod]
+    public async Task IsEnabledAsync_WhenNoRunsettingsProvided_ReturnsFalse()
+    {
+        // Arrange
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = null;
+                return false;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+
+        var environment = new Mock<IEnvironment>();
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        // Act
+        bool result = await provider.IsEnabledAsync();
+
+        // Assert
+        Assert.IsFalse(result);
+    }
+
+    [TestMethod]
+    public async Task UpdateAsync_SetsEnvironmentVariablesFromRunsettings()
+    {
+        // Arrange
+        var commandLineOptions = new Mock<ICommandLineOptions>();
+        commandLineOptions.Setup(x => x.TryGetOptionArgumentList("settings", out It.Ref<string[]?>.IsAny))
+            .Returns((string optionName, out string[]? value) =>
+            {
+                value = null;
+                return false;
+            });
+
+        var fileSystem = new Mock<IFileSystem>();
+
+        var environment = new Mock<IEnvironment>();
+        environment.Setup(x => x.GetEnvironmentVariable("TESTINGPLATFORM_EXPERIMENTAL_VSTEST_RUNSETTINGS"))
+            .Returns(RunSettingsWithEnvironmentVariables);
+
+        var provider = new RunSettingsEnvironmentVariableProvider(new TestExtension(), commandLineOptions.Object, fileSystem.Object, environment.Object);
+
+        var environmentVariables = new Mock<IEnvironmentVariables>();
+        var capturedVariables = new List<EnvironmentVariable>();
+        environmentVariables.Setup(x => x.SetVariable(It.IsAny<EnvironmentVariable>()))
+            .Callback<EnvironmentVariable>(capturedVariables.Add);
+
+        // Act
+        await provider.IsEnabledAsync();
+        await provider.UpdateAsync(environmentVariables.Object);
+
+        // Assert
+        Assert.HasCount(2, capturedVariables);
+        Assert.Contains(v => v.Variable == "TEST_ENV" && v.Value == "TestValue", capturedVariables);
+        Assert.Contains(v => v.Variable == "ANOTHER_VAR" && v.Value == "AnotherValue", capturedVariables);
+    }
+}