diff --git a/internal/resolver/resolver.go b/internal/resolver/resolver.go
index 5f0c5b148..2e7945926 100644
--- a/internal/resolver/resolver.go
+++ b/internal/resolver/resolver.go
@@ -76,7 +76,7 @@ func (r *Resolver) Resolve(reqs []*chart.Dependency, repoNames map[string]string
 			}
 			continue
 		}
-		if strings.HasPrefix(d.Repository, "file://") {
+		if IsLocalDependency(d.Repository) {
 			chartpath, err := GetLocalPath(d.Repository, r.chartpath)
 			if err != nil {
 				return nil, err
@@ -259,3 +259,9 @@ func GetLocalPath(repo, chartpath string) (string, error) {
 
 	return depPath, nil
 }
+
+// IsLocalDependency checks if the repository path is a local file dependency.
+// Local dependencies use the "file://" protocol prefix.
+func IsLocalDependency(repositoryPath string) bool {
+	return strings.HasPrefix(repositoryPath, "file://")
+}
diff --git a/pkg/cmd/dependency_update_test.go b/pkg/cmd/dependency_update_test.go
index f9ff68097..e0ce0a046 100644
--- a/pkg/cmd/dependency_update_test.go
+++ b/pkg/cmd/dependency_update_test.go
@@ -310,3 +310,138 @@ func createTestingChart(t *testing.T, dest, name, baseURL string) {
 		t.Fatal(err)
 	}
 }
+
+func TestDependencyUpdateCmd_NestedLocalDependencies(t *testing.T) {
+	srv := repotest.NewTempServer(
+		t,
+		repotest.WithChartSourceGlob("testdata/testcharts/*.tgz"),
+	)
+	defer srv.Stop()
+
+	if err := srv.LinkIndices(); err != nil {
+		t.Fatal(err)
+	}
+
+	dir := func(p ...string) string {
+		return filepath.Join(append([]string{srv.Root()}, p...)...)
+	}
+
+	// Create leaf dependency (has remote dependency)
+	leafChart := &chart.Chart{
+		Metadata: &chart.Metadata{
+			APIVersion: chart.APIVersionV2,
+			Name:       "leaf-chart",
+			Version:    "0.1.0",
+			Dependencies: []*chart.Dependency{
+				{Name: "reqtest", Version: "0.1.0", Repository: srv.URL()},
+			},
+		},
+	}
+	if err := chartutil.SaveDir(leafChart, dir()); err != nil {
+		t.Fatal(err)
+	}
+
+	// Create middle dependency (has local dependency on leaf)
+	middleChart := &chart.Chart{
+		Metadata: &chart.Metadata{
+			APIVersion: chart.APIVersionV2,
+			Name:       "middle-chart",
+			Version:    "0.1.0",
+			Dependencies: []*chart.Dependency{
+				{Name: "leaf-chart", Version: "0.1.0", Repository: "file://../leaf-chart"},
+			},
+		},
+	}
+	if err := chartutil.SaveDir(middleChart, dir()); err != nil {
+		t.Fatal(err)
+	}
+
+	rootChart := &chart.Chart{
+		Metadata: &chart.Metadata{
+			APIVersion: chart.APIVersionV2,
+			Name:       "root-chart",
+			Version:    "0.1.0",
+			Dependencies: []*chart.Dependency{
+				{Name: "middle-chart", Version: "0.1.0", Repository: "file://../middle-chart"},
+			},
+		},
+	}
+	if err := chartutil.SaveDir(rootChart, dir()); err != nil {
+		t.Fatal(err)
+	}
+
+	contentCache := t.TempDir()
+
+	_, out, err := executeActionCommand(
+		fmt.Sprintf("dependency update '%s' --repository-config %s --repository-cache %s --content-cache %s --plain-http",
+			dir("root-chart"), dir("repositories.yaml"), dir(), contentCache),
+	)
+	if err != nil {
+		t.Logf("Output: %s", out)
+		t.Fatal(err)
+	}
+
+	expectMiddle := dir("root-chart", "charts/middle-chart-0.1.0.tgz")
+	if _, err := os.Stat(expectMiddle); err != nil {
+		t.Fatalf("Expected middle-chart dependency: %s", err)
+	}
+
+	expectLeaf := dir("middle-chart", "charts/leaf-chart-0.1.0.tgz")
+	if _, err := os.Stat(expectLeaf); err != nil {
+		t.Fatalf("Expected leaf-chart dependency: %s", err)
+	}
+
+	expectReqtest := dir("leaf-chart", "charts/reqtest-0.1.0.tgz")
+	if _, err := os.Stat(expectReqtest); err != nil {
+		t.Fatalf("Expected reqtest dependency: %s", err)
+	}
+}
+
+func TestDependencyUpdateCmd_CircularDependency(t *testing.T) {
+	srv := repotest.NewTempServer(t)
+	defer srv.Stop()
+
+	dir := func(p ...string) string {
+		return filepath.Join(append([]string{srv.Root()}, p...)...)
+	}
+
+	// Create chart A that depends on B
+	chartA := &chart.Chart{
+		Metadata: &chart.Metadata{
+			APIVersion: chart.APIVersionV2,
+			Name:       "chart-a",
+			Version:    "1.0.0",
+			Dependencies: []*chart.Dependency{
+				{Name: "chart-b", Version: "1.0.0", Repository: "file://../chart-b"},
+			},
+		},
+	}
+	if err := chartutil.SaveDir(chartA, dir()); err != nil {
+		t.Fatal(err)
+	}
+
+	// Create chart B that depends on A (circular)
+	chartB := &chart.Chart{
+		Metadata: &chart.Metadata{
+			APIVersion: chart.APIVersionV2,
+			Name:       "chart-b",
+			Version:    "1.0.0",
+			Dependencies: []*chart.Dependency{
+				{Name: "chart-a", Version: "1.0.0", Repository: "file://../chart-a"},
+			},
+		},
+	}
+	if err := chartutil.SaveDir(chartB, dir()); err != nil {
+		t.Fatal(err)
+	}
+
+	_, out, err := executeActionCommand(
+		fmt.Sprintf("dependency update '%s'", dir("chart-a")),
+	)
+	if err == nil {
+		t.Fatal("Expected circular dependency error")
+	}
+	if !strings.Contains(out, "circular dependency detected") {
+		t.Fatalf("Expected 'circular dependency detected' in output, got: %s", out)
+	}
+}
diff --git a/pkg/downloader/manager.go b/pkg/downloader/manager.go
index 543f685eb..695e67302 100644
--- a/pkg/downloader/manager.go
+++ b/pkg/downloader/manager.go
@@ -23,6 +23,7 @@ import (
 	"io"
 	stdfs "io/fs"
 	"log"
+	"log/slog"
 	"net/url"
 	"os"
 	"path/filepath"
@@ -192,6 +193,12 @@ func (m *Manager) Update() error {
 		}
 	}
 
+	// Do resolution for each local dependency first. Local dependencies may
+	// have their own dependencies which must be resolved.
+	if err := m.updateLocalDeps(req, nil); err != nil {
+		return err
+	}
+
 	// Now we need to find out which version of a chart best satisfies the
 	// dependencies in the Chart.yaml
 	lock, err := m.resolve(req, repoNames)
@@ -300,7 +307,7 @@ func (m *Manager) downloadAll(deps []*chart.Dependency) error {
 			}
 			continue
 		}
-		if strings.HasPrefix(dep.Repository, "file://") {
+		if resolver.IsLocalDependency(dep.Repository) {
 			if m.Debug {
 				fmt.Fprintf(m.Out, "Archiving %s from repo %s\n", dep.Name, dep.Repository)
 			}
@@ -476,7 +483,7 @@ func (m *Manager) hasAllRepos(deps []*chart.Dependency) error {
 Loop:
 	for _, dd := range deps {
 		// If repo is from local path or OCI, continue
-		if strings.HasPrefix(dd.Repository, "file://") || registry.IsOCI(dd.Repository) {
+		if resolver.IsLocalDependency(dd.Repository) || registry.IsOCI(dd.Repository) {
 			continue
 		}
 
@@ -579,7 +586,7 @@ func (m *Manager) resolveRepoNames(deps []*chart.Dependency) (map[string]string,
 			continue
 		}
 		// if dep chart is from local path, verify the path is valid
-		if strings.HasPrefix(dd.Repository, "file://") {
+		if resolver.IsLocalDependency(dd.Repository) {
 			if _, err := resolver.GetLocalPath(dd.Repository, m.ChartPath); err != nil {
 				return nil, err
 			}
@@ -871,7 +878,7 @@ func writeLock(chartpath string, lock *chart.Lock, legacyLockfile bool) error {
 
 // archive a dep chart from local directory and save it into destPath
 func tarFromLocalDir(chartpath, name, repo, version, destPath string) (string, error) {
-	if !strings.HasPrefix(repo, "file://") {
+	if !resolver.IsLocalDependency(repo) {
 		return "", fmt.Errorf("wrong format: chart %s repository %s", name, repo)
 	}
 
@@ -917,3 +924,51 @@ func key(name string) (string, error) {
 	}
 	return hex.EncodeToString(hash.Sum(nil)), nil
 }
+
+// updateLocalDeps recursively updates local dependencies and detects circular dependencies.
+func (m *Manager) updateLocalDeps(deps []*chart.Dependency, chain []string) error {
+	absPath, err := filepath.Abs(m.ChartPath)
+	if err != nil {
+		return err
+	}
+
+	// Check for circular dependency
+	for i, visited := range chain {
+		if visited == absPath {
+			cycle := append(chain[i:], absPath)
+			return fmt.Errorf("circular dependency detected:\n%s", strings.Join(cycle, "\n -> "))
+		}
+	}
+
+	chain = append(chain, absPath)
+
+	for _, dep := range deps {
+		if !resolver.IsLocalDependency(dep.Repository) {
+			continue
+		}
+		chartpath, err := resolver.GetLocalPath(dep.Repository, m.ChartPath)
+		if err != nil {
+			return err
+		}
+
+		c, err := loader.LoadDir(chartpath)
+		if err != nil {
+			return err
+		}
+
+		man := *m
+		man.SkipUpdate = true
+		man.ChartPath = chartpath
+		slog.Debug("Recursively updating dependencies for local chart", "chart", dep.Name, "path", chartpath)
+
+		if err := man.updateLocalDeps(c.Metadata.Dependencies, chain); err != nil {
+			return err
+		}
+
+		if err := man.Update(); err != nil {
+			return err
+		}
+	}
+
+	return nil
+}