diff --git a/src/common/localize.ts b/src/common/localize.ts
index e099463d..dd7c637f 100644
--- a/src/common/localize.ts
+++ b/src/common/localize.ts
@@ -168,6 +168,9 @@ export namespace CondaStrings {
     export const condaMissingPythonNoFix = l10n.t(
         'No Python found in the selected conda environment. Please select another environment or install Python manually.',
     );
+    export const condaCondaPrefixActive = l10n.t(
+        'CONDA_PREFIX is set for this VS Code session. Selection saved for new terminals only.',
+    );
 }
 
 export namespace PyenvStrings {
diff --git a/src/extension.ts b/src/extension.ts
index 75c60395..b03c5132 100644
--- a/src/extension.ts
+++ b/src/extension.ts
@@ -494,8 +494,9 @@ export async function activate(context: ExtensionContext): Promise<PythonEnviron
             }
             const envVar = shellEnv.value;
             if (envVar) {
-                if (envVar['VIRTUAL_ENV']) {
-                    const envPath = normalizeShellPath(envVar['VIRTUAL_ENV'], e.terminal.state.shell);
+                const envVarPath = envVar['VIRTUAL_ENV'] || envVar['CONDA_PREFIX'];
+                if (envVarPath) {
+                    const envPath = normalizeShellPath(envVarPath, e.terminal.state.shell);
                     const env = await api.resolveEnvironment(Uri.file(envPath));
                     if (env) {
                         monitoredTerminals.set(e.terminal, env);
diff --git a/src/managers/conda/condaEnvManager.ts b/src/managers/conda/condaEnvManager.ts
index 96be534a..55bfa46c 100644
--- a/src/managers/conda/condaEnvManager.ts
+++ b/src/managers/conda/condaEnvManager.ts
@@ -23,7 +23,7 @@ import { CondaStrings } from '../../common/localize';
 import { traceError } from '../../common/logging';
 import { createDeferred, Deferred } from '../../common/utils/deferred';
 import { normalizePath } from '../../common/utils/pathUtils';
-import { showErrorMessage, withProgress } from '../../common/window.apis';
+import { showErrorMessage, showInformationMessage, withProgress } from '../../common/window.apis';
 import { NativePythonFinder } from '../common/nativePythonFinder';
 import { CondaSourcingStatus } from './condaSourcingUtils';
 import {
@@ -289,6 +289,16 @@ export class CondaEnvManager implements EnvironmentManager, Disposable {
             const folder = this.api.getPythonProject(scope);
             const fsPath = folder?.uri?.fsPath ?? scope.fsPath;
             if (fsPath) {
+                // Notify user if CONDA_PREFIX is set and they're trying to select a different environment
+                if (process.env.CONDA_PREFIX && checkedEnv) {
+                    const condaPrefixPath = process.env.CONDA_PREFIX;
+                    const selectedPath = checkedEnv.environmentPath.fsPath;
+                    // Only show notification if they selected a different environment
+                    if (condaPrefixPath !== selectedPath) {
+                        showInformationMessage(CondaStrings.condaCondaPrefixActive);
+                    }
+                }
+
                 const normalizedFsPath = normalizePath(fsPath);
                 if (checkedEnv) {
                     this.fsPathToEnv.set(normalizedFsPath, checkedEnv);
diff --git a/src/managers/conda/condaUtils.ts b/src/managers/conda/condaUtils.ts
index 43a9e3af..ee45911b 100644
--- a/src/managers/conda/condaUtils.ts
+++ b/src/managers/conda/condaUtils.ts
@@ -82,6 +82,10 @@ export function getCondaPathSetting(): string | undefined {
 }
 
 export async function getCondaForWorkspace(fsPath: string): Promise<string | undefined> {
+    if (process.env.CONDA_PREFIX) {
+        return process.env.CONDA_PREFIX;
+    }
+
     const state = await getWorkspacePersistentState();
     const data: { [key: string]: string } | undefined = await state.get(CONDA_WORKSPACE_KEY);
     if (data) {