diff --git a/Lib/sqlite3/test/hooks.py b/Lib/sqlite3/test/hooks.py
index 8c60bdcf5d70aa..97121eea1be5fb 100644
--- a/Lib/sqlite3/test/hooks.py
+++ b/Lib/sqlite3/test/hooks.py
@@ -20,6 +20,7 @@
 #    misrepresented as being the original software.
 # 3. This notice may not be removed or altered from any source distribution.
 
+import contextlib
 import unittest
 import sqlite3 as sqlite
 
@@ -200,6 +201,16 @@ def progress():
         self.assertEqual(action, 0, "progress handler was not cleared")
 
 class TraceCallbackTests(unittest.TestCase):
+    @contextlib.contextmanager
+    def check_stmt_trace(self, cx, expected):
+        try:
+            traced = []
+            cx.set_trace_callback(lambda stmt: traced.append(stmt))
+            yield
+        finally:
+            self.assertEqual(traced, expected)
+            cx.set_trace_callback(None)
+
     def test_trace_callback_used(self):
         """
         Test that the trace callback is invoked once it is set.
@@ -261,6 +272,21 @@ def trace(statement):
         cur.execute(queries[1])
         self.assertEqual(traced_statements, queries)
 
+    def test_trace_expanded_sql(self):
+        expected = [
+            "create table t(t)",
+            "BEGIN ",
+            "insert into t values(0)",
+            "insert into t values(1)",
+            "insert into t values(2)",
+            "COMMIT",
+        ]
+        cx = sqlite.connect(":memory:")
+        with self.check_stmt_trace(cx, expected):
+            with cx:
+                cx.execute("create table t(t)")
+                cx.executemany("insert into t values(?)", ((v,) for v in range(3)))
+
 
 def suite():
     tests = [
diff --git a/Misc/NEWS.d/next/Library/2021-09-08-16-21-03.bpo-45138.yghUrK.rst b/Misc/NEWS.d/next/Library/2021-09-08-16-21-03.bpo-45138.yghUrK.rst
new file mode 100644
index 00000000000000..906ed4c4db43c8
--- /dev/null
+++ b/Misc/NEWS.d/next/Library/2021-09-08-16-21-03.bpo-45138.yghUrK.rst
@@ -0,0 +1,3 @@
+Fix a regression in the :mod:`sqlite3` trace callback where bound parameters
+were not expanded in the passed statement string. The regression was introduced
+in Python 3.10 by :issue:`40318`. Patch by Erlend E. Aasland.
diff --git a/Modules/_sqlite/connection.c b/Modules/_sqlite/connection.c
index c9c10b41398e26..68c5aee79ab15f 100644
--- a/Modules/_sqlite/connection.c
+++ b/Modules/_sqlite/connection.c
@@ -1050,33 +1050,65 @@ static int _progress_handler(void* user_arg)
  * may change in future releases. Callback implementations should return zero
  * to ensure future compatibility.
  */
-static int _trace_callback(unsigned int type, void* user_arg, void* prepared_statement, void* statement_string)
+static int
+_trace_callback(unsigned int type, void *callable, void *stmt, void *sql)
 #else
-static void _trace_callback(void* user_arg, const char* statement_string)
+static void
+_trace_callback(void *callable, const char *sql)
 #endif
 {
-    PyObject *py_statement = NULL;
-    PyObject *ret = NULL;
-
-    PyGILState_STATE gilstate;
-
 #ifdef HAVE_TRACE_V2
     if (type != SQLITE_TRACE_STMT) {
         return 0;
     }
 #endif
 
-    gilstate = PyGILState_Ensure();
-    py_statement = PyUnicode_DecodeUTF8(statement_string,
-            strlen(statement_string), "replace");
+    PyGILState_STATE gilstate = PyGILState_Ensure();
+
+    PyObject *py_statement = NULL;
+#ifdef HAVE_TRACE_V2
+    const char *expanded_sql = sqlite3_expanded_sql((sqlite3_stmt *)stmt);
+    if (expanded_sql == NULL) {
+        sqlite3 *db = sqlite3_db_handle((sqlite3_stmt *)stmt);
+        if (sqlite3_errcode(db) == SQLITE_NOMEM) {
+            (void)PyErr_NoMemory();
+            goto exit;
+        }
+
+        PyErr_SetString(pysqlite_DataError,
+                "Expanded SQL string exceeds the maximum string length");
+        if (_pysqlite_enable_callback_tracebacks) {
+            PyErr_Print();
+        } else {
+            PyErr_Clear();
+        }
+
+        // Fall back to unexpanded sql
+        py_statement = PyUnicode_FromString((const char *)sql);
+    }
+    else {
+        py_statement = PyUnicode_FromString(expanded_sql);
+        sqlite3_free((void *)expanded_sql);
+    }
+#else
+    if (sql == NULL) {
+        PyErr_SetString(pysqlite_DataError,
+                "Expanded SQL string exceeds the maximum string length");
+        if (_pysqlite_enable_callback_tracebacks) {
+            PyErr_Print();
+        } else {
+            PyErr_Clear();
+        }
+        goto exit;
+    }
+    py_statement = PyUnicode_FromString(sql);
+#endif
     if (py_statement) {
-        ret = PyObject_CallOneArg((PyObject*)user_arg, py_statement);
+        PyObject *ret = PyObject_CallOneArg((PyObject *)callable, py_statement);
         Py_DECREF(py_statement);
+        Py_XDECREF(ret);
     }
-
-    if (ret) {
-        Py_DECREF(ret);
-    } else {
+    if (PyErr_Occurred()) {
         if (_pysqlite_enable_callback_tracebacks) {
             PyErr_Print();
         } else {
@@ -1084,6 +1116,7 @@ static void _trace_callback(void* user_arg, const char* statement_string)
         }
     }
 
+exit:
     PyGILState_Release(gilstate);
 #ifdef HAVE_TRACE_V2
     return 0;