diff --git a/src/Aspire.Cli/Projects/DotNetAppHostProject.cs b/src/Aspire.Cli/Projects/DotNetAppHostProject.cs
index 171e6f44420..ab709e8d7e2 100644
--- a/src/Aspire.Cli/Projects/DotNetAppHostProject.cs
+++ b/src/Aspire.Cli/Projects/DotNetAppHostProject.cs
@@ -263,7 +263,7 @@ public async Task<int> RunAsync(AppHostProjectContext context, CancellationToken
 
         try
         {
-            if (!watch && !context.NoBuild)
+            if (!context.NoBuild)
             {
                 // Build in CLI if either not running under extension host, or the extension reports 'build-dotnet-using-cli' capability.
                 var extensionHasBuildCapability = extensionBackchannel is not null && await extensionBackchannel.HasCapabilityAsync(KnownCapabilities.BuildDotnetUsingCli, cancellationToken);
@@ -338,7 +338,11 @@ public async Task<int> RunAsync(AppHostProjectContext context, CancellationToken
         // Start the apphost - the runner will signal the backchannel when ready
         try
         {
-            // noBuild: true if either watch mode is off (we already built above) or --no-build was passed
+            // The app host may already have been built above (in the CLI, or by the extension).
+            // For non-watch runs we pass noBuild=true so dotnet run doesn't rebuild. For watch runs
+            // we leave builds enabled unless the user explicitly requested --no-build, so dotnet watch
+            // can perform its own build/incremental build and hot reload even if an up-front build
+            // already happened earlier in this method.
             // noRestore: only relevant when noBuild is false (since --no-build implies --no-restore)
             var noBuild = !watch || context.NoBuild;
             return await _runner.RunAsync(
diff --git a/tests/Aspire.Cli.Tests/Commands/RunCommandTests.cs b/tests/Aspire.Cli.Tests/Commands/RunCommandTests.cs
index d2fd7edcb39..5f5e7409ce0 100644
--- a/tests/Aspire.Cli.Tests/Commands/RunCommandTests.cs
+++ b/tests/Aspire.Cli.Tests/Commands/RunCommandTests.cs
@@ -846,6 +846,59 @@ public async Task RunCommand_WhenDefaultWatchEnabledFeatureFlagIsTrue_UsesWatchM
         Assert.True(watchModeUsed, "Expected watch mode to be enabled when defaultWatchEnabled feature flag is true");
     }
 
+    [Fact]
+    public async Task RunCommand_WhenDefaultWatchEnabledFeatureFlagIsTrueAndBuildFails_ReturnsBuildFailure()
+    {
+        var runCalled = false;
+
+        var runnerFactory = (IServiceProvider sp) =>
+        {
+            var runner = new TestDotNetCliRunner();
+            runner.BuildAsyncCallback = (projectFile, noRestore, options, ct) =>
+            {
+                options.StandardErrorCallback?.Invoke("error CS0103: The name 'MissingSymbol' does not exist in the current context");
+                return 1;
+            };
+
+            runner.GetAppHostInformationAsyncCallback = (projectFile, options, ct) => (0, true, VersionHelper.GetDefaultTemplateVersion());
+
+            runner.RunAsyncCallback = (projectFile, watch, noBuild, noRestore, args, env, backchannelCompletionSource, options, ct) =>
+            {
+                runCalled = true;
+                return Task.FromResult(0);
+            };
+
+            return runner;
+        };
+
+        var backchannelFactory = (IServiceProvider sp) =>
+        {
+            var backchannel = new TestAppHostBackchannel();
+            backchannel.GetAppHostLogEntriesAsyncCallback = ReturnLogEntriesUntilCancelledAsync;
+            return backchannel;
+        };
+
+        var projectLocatorFactory = (IServiceProvider sp) => new TestProjectLocator();
+
+        using var workspace = TemporaryWorkspace.Create(outputHelper);
+        var services = CliTestHelper.CreateServiceCollection(workspace, outputHelper, options =>
+        {
+            options.ProjectLocatorFactory = projectLocatorFactory;
+            options.AppHostBackchannelFactory = backchannelFactory;
+            options.DotNetCliRunnerFactory = runnerFactory;
+            options.EnabledFeatures = [KnownFeatures.DefaultWatchEnabled];
+        });
+
+        using var provider = services.BuildServiceProvider();
+        var command = provider.GetRequiredService<RootCommand>();
+        var result = command.Parse("run");
+
+        var exitCode = await result.InvokeAsync().DefaultTimeout();
+
+        Assert.Equal(ExitCodeConstants.FailedToBuildArtifacts, exitCode);
+        Assert.False(runCalled, "The AppHost should not be started when the initial build fails in watch mode.");
+    }
+
     [Fact]
     public async Task RunCommand_WhenDefaultWatchEnabledFeatureFlagIsFalse_DoesNotUseWatchMode()
     {