diff --git a/src/commands/createNewProject/ProjectCreateStep/DotnetProjectCreateStep.ts b/src/commands/createNewProject/ProjectCreateStep/DotnetProjectCreateStep.ts
index 01131232e..af1e8638a 100644
--- a/src/commands/createNewProject/ProjectCreateStep/DotnetProjectCreateStep.ts
+++ b/src/commands/createNewProject/ProjectCreateStep/DotnetProjectCreateStep.ts
@@ -3,8 +3,10 @@
  *  Licensed under the MIT License. See License.txt in the project root for license information.
  *--------------------------------------------------------------------------------------------*/
 
-import { AzExtFsExtra, DialogResponses, nonNullValueAndProp, type IActionContext } from '@microsoft/vscode-azext-utils';
+import { AzExtFsExtra, DialogResponses, nonNullValueAndProp, randomUtils, type IActionContext } from '@microsoft/vscode-azext-utils';
 import { composeArgs, withArg, withNamedArg } from '@microsoft/vscode-processutils';
+import * as fs from 'fs';
+import * as os from 'os';
 import * as path from 'path';
 import { getMajorVersion, type FuncVersion } from '../../../FuncVersion';
 import { ConnectionKey, ProjectLanguage, gitignoreFileName, hostFileName, localSettingsFileName } from '../../../constants';
@@ -35,18 +37,7 @@ export class DotnetProjectCreateStep extends ProjectCreateStepBase {
         const projName: string = projectName + language === ProjectLanguage.FSharp ? '.fsproj' : '.csproj';
 
         const workerRuntime = nonNullProp(context, 'workerRuntime');
-        // For containerized function apps we need to call func init before intialization as we want the .csproj file to be overwritten with the correct version
-        // currentely the version created by func init is behind the template version
-        if (context.containerizedProject) {
-            const runtime = context.workerRuntime?.capabilities.includes('isolated') ? 'dotnet-isolated' : 'dotnet';
-            const args = composeArgs(
-                withArg('init'),
-                withNamedArg('--worker-runtime', runtime),
-                withNamedArg('--target-framework', runtime === 'dotnet' ? undefined : nonNullValueAndProp(context.workerRuntime, 'targetFramework')), // targetFramework is only supported for dotnet-isolated projects
-                withArg('--docker'),
-            )();
-            await cpUtils.executeCommand(ext.outputChannel, context.projectPath, "func", args);
-        } else {
+        if (!context.containerizedProject) {
             await this.confirmOverwriteExisting(context, projName);
         }
 
@@ -66,8 +57,40 @@ export class DotnetProjectCreateStep extends ProjectCreateStepBase {
             templateArgs.Framework = context.workerRuntime.targetFramework;
         }
 
+        // Create the project from the .NET template first so files are written into a clean directory
         await executeDotnetTemplateCreate(context, version, projTemplateKey, context.projectPath, identity, templateArgs);
 
+        // For containerized projects, generate the Dockerfile by running func init --docker in an
+        // isolated temp directory, then copy only the Dockerfile into the project. This avoids
+        // func init's internal dotnet new conflicting with files already created by the template.
+        if (context.containerizedProject) {
+            const runtime = context.workerRuntime?.capabilities.includes('isolated') ? 'dotnet-isolated' : 'dotnet';
+            const tempDir = path.join(os.tmpdir(), `azfunc-docker-${randomUtils.getRandomHexString()}`);
+            try {
+                await fs.promises.mkdir(tempDir, { recursive: true });
+                const args = composeArgs(
+                    withArg('init'),
+                    withNamedArg('--worker-runtime', runtime),
+                    withNamedArg('--target-framework', runtime === 'dotnet' ? undefined : nonNullValueAndProp(context.workerRuntime, 'targetFramework')),
+                    withArg('--docker'),
+                )();
+                await cpUtils.executeCommand(ext.outputChannel, tempDir, "func", args);
+
+                // Copy only the Dockerfile (and .dockerignore if present) into the project
+                for (const file of ['Dockerfile', '.dockerignore']) {
+                    const src = path.join(tempDir, file);
+                    const dest = path.join(context.projectPath, file);
+                    try {
+                        await fs.promises.copyFile(src, dest);
+                    } catch {
+                        // .dockerignore may not exist, that's fine
+                    }
+                }
+            } finally {
+                await fs.promises.rm(tempDir, { recursive: true, force: true }).catch(() => { /* best-effort cleanup */ });
+            }
+        }
+
         await setLocalAppSetting(context, context.projectPath, ConnectionKey.Storage, '', MismatchBehavior.Overwrite);
     }