diff --git a/libraries/rush-lib/src/logic/base/BaseInstallManager.ts b/libraries/rush-lib/src/logic/base/BaseInstallManager.ts
index a7016129ae6..ca5578e5133 100644
--- a/libraries/rush-lib/src/logic/base/BaseInstallManager.ts
+++ b/libraries/rush-lib/src/logic/base/BaseInstallManager.ts
@@ -883,8 +883,11 @@ ${gitLfsHookHandling}
           // On pnpm@8, disable the "dedupe-peer-dependents" feature when doing a filtered CI install so that filters take effect.
           args.push('--config.dedupe-peer-dependents=false');
         }
-      } else if (experiments.usePnpmPreferFrozenLockfileForRushUpdate) {
-        // In workspaces, we want to avoid unnecessary lockfile churn
+      } else if (experiments.usePnpmPreferFrozenLockfileForRushUpdate && !onlyShrinkwrap) {
+        // In workspaces, we want to avoid unnecessary lockfile churn.
+        // Do NOT use --prefer-frozen-lockfile during the --lockfile-only phase: pnpm v10
+        // omits the packages:/snapshots: sections when this combination is used, producing
+        // a broken lockfile that fails the subsequent --frozen-lockfile install phase.
         args.push('--prefer-frozen-lockfile');
       } else {
         // Ensure that Rush's tarball dependencies get synchronized properly with the pnpm-lock.yaml file.
diff --git a/libraries/rush-lib/src/logic/test/BaseInstallManager.test.ts b/libraries/rush-lib/src/logic/test/BaseInstallManager.test.ts
index 21a2f460d3c..546f7575336 100644
--- a/libraries/rush-lib/src/logic/test/BaseInstallManager.test.ts
+++ b/libraries/rush-lib/src/logic/test/BaseInstallManager.test.ts
@@ -129,4 +129,46 @@ describe('BaseInstallManager Test', () => {
       );
     }
   });
+
+  it('usePnpmPreferFrozenLockfileForRushUpdate should not add --prefer-frozen-lockfile when onlyShrinkwrap is true', () => {
+    const rushJsonFile: string = path.resolve(__dirname, 'ignoreCompatibilityDb/rush3.json');
+    const rushConfiguration: RushConfiguration = RushConfiguration.loadFromConfigurationFile(rushJsonFile);
+    const purgeManager: typeof PurgeManager.prototype = new PurgeManager(rushConfiguration, rushGlobalFolder);
+
+    // Enable the usePnpmPreferFrozenLockfileForRushUpdate experiment
+    Object.defineProperty(rushConfiguration.experimentsConfiguration, 'configuration', {
+      value: { usePnpmPreferFrozenLockfileForRushUpdate: true },
+      writable: false,
+      configurable: true
+    });
+
+    const fakeBaseInstallManager: FakeBaseInstallManager = new FakeBaseInstallManager(
+      rushConfiguration,
+      rushGlobalFolder,
+      purgeManager,
+      { subspace: rushConfiguration.defaultSubspace } as IInstallManagerOptions
+    );
+
+    // When onlyShrinkwrap is true (Phase 1 of two-phase install), --prefer-frozen-lockfile must NOT be added.
+    // pnpm v10 omits packages:/snapshots: sections when --prefer-frozen-lockfile and --lockfile-only are
+    // combined, producing a broken lockfile that fails the subsequent --frozen-lockfile install phase.
+    const argsWithOnlyShrinkwrap: string[] = [];
+    fakeBaseInstallManager.pushConfigurationArgs(
+      argsWithOnlyShrinkwrap,
+      { onlyShrinkwrap: true, pnpmFilterArgumentValues: [] } as unknown as IInstallManagerOptions,
+      rushConfiguration.defaultSubspace
+    );
+    expect(argsWithOnlyShrinkwrap).not.toContain('--prefer-frozen-lockfile');
+    expect(argsWithOnlyShrinkwrap).toContain('--lockfile-only');
+
+    // When onlyShrinkwrap is false (single-phase or Phase 2), --prefer-frozen-lockfile should be added.
+    const argsWithoutOnlyShrinkwrap: string[] = [];
+    fakeBaseInstallManager.pushConfigurationArgs(
+      argsWithoutOnlyShrinkwrap,
+      { onlyShrinkwrap: false, pnpmFilterArgumentValues: [] } as unknown as IInstallManagerOptions,
+      rushConfiguration.defaultSubspace
+    );
+    expect(argsWithoutOnlyShrinkwrap).toContain('--prefer-frozen-lockfile');
+    expect(argsWithoutOnlyShrinkwrap).not.toContain('--lockfile-only');
+  });
 });