diff --git a/cli/azd/extensions/azure.ai.agents/internal/cmd/init.go b/cli/azd/extensions/azure.ai.agents/internal/cmd/init.go
index 2aec48d32ae..33e9732f489 100644
--- a/cli/azd/extensions/azure.ai.agents/internal/cmd/init.go
+++ b/cli/azd/extensions/azure.ai.agents/internal/cmd/init.go
@@ -210,6 +210,46 @@ func newInitCommand(rootFlags *rootFlagsDefinition) *cobra.Command {
 				Timeout: 30 * time.Second,
 			}
 
+			// Auto-detect an existing agent manifest in the target directory
+			// when no --manifest flag was provided.
+			if flags.manifestPointer == "" {
+				checkDir := flags.src
+				if checkDir == "" {
+					checkDir = "."
+				}
+				detected, detectErr := detectLocalManifest(checkDir)
+				if detectErr != nil {
+					return fmt.Errorf("checking for existing manifest: %w", detectErr)
+				}
+				if detected != "" {
+					useExisting := flags.NoPrompt
+					if !flags.NoPrompt {
+						confirmResp, promptErr := azdClient.Prompt().Confirm(ctx, &azdext.ConfirmRequest{
+							Options: &azdext.ConfirmOptions{
+								Message: fmt.Sprintf(
+									"An existing agent manifest was found at %q. Use it?",
+									detected,
+								),
+								DefaultValue: new(true),
+							},
+						})
+						if promptErr != nil {
+							if exterrors.IsCancellation(promptErr) {
+								return exterrors.Cancelled("initialization was cancelled")
+							}
+							return fmt.Errorf("prompting for manifest detection: %w", promptErr)
+						}
+						useExisting = *confirmResp.Value
+					}
+					if useExisting {
+						flags.manifestPointer = detected
+						if flags.src == "" {
+							flags.src = checkDir
+						}
+					}
+				}
+			}
+
 			if flags.manifestPointer != "" {
 				if err := runInitFromManifest(ctx, flags, azdClient, httpClient); err != nil {
 					if exterrors.IsCancellation(err) {
diff --git a/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_code.go b/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_code.go
index 232f9af6842..736ebd60676 100644
--- a/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_code.go
+++ b/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_code.go
@@ -71,6 +71,37 @@ func (a *InitFromCodeAction) Run(ctx context.Context) error {
 		a.flags.src = relPath
 	}
 
+	// Default src to current directory when not specified
+	srcDir := a.flags.src
+	if srcDir == "" {
+		srcDir = "."
+	}
+
+	// Check if agent.yaml already exists before the interactive setup so the user
+	// doesn't complete the full agent configuration only to have it discarded.
+	agentYamlPath := filepath.Join(srcDir, "agent.yaml")
+	if _, statErr := os.Stat(agentYamlPath); statErr == nil {
+		if a.flags.NoPrompt {
+			return exterrors.Cancelled("agent.yaml already exists; overwrite declined in no-prompt mode")
+		}
+
+		confirmResp, err := a.azdClient.Prompt().Confirm(ctx, &azdext.ConfirmRequest{
+			Options: &azdext.ConfirmOptions{
+				Message:      fmt.Sprintf("An agent.yaml already exists in %q. Overwrite?", srcDir),
+				DefaultValue: new(false),
+			},
+		})
+		if err != nil {
+			if exterrors.IsCancellation(err) {
+				return exterrors.Cancelled("overwrite confirmation was cancelled")
+			}
+			return fmt.Errorf("prompting for overwrite confirmation: %w", err)
+		}
+		if !*confirmResp.Value {
+			return exterrors.Cancelled("agent.yaml already exists; overwrite declined")
+		}
+	}
+
 	// No manifest pointer provided - process local agent code
 	// Create a definition based on user prompts
 	localDefinition, err := a.createDefinitionFromLocalAgent(ctx)
@@ -79,11 +110,6 @@ func (a *InitFromCodeAction) Run(ctx context.Context) error {
 	}
 
 	if localDefinition != nil {
-		// Default src to current directory when not specified
-		srcDir := a.flags.src
-		if srcDir == "" {
-			srcDir = "."
-		}
 
 		// Write the definition to a file in the src directory
 		_, err := a.writeDefinitionToSrcDir(localDefinition, srcDir)
diff --git a/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers.go b/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers.go
index d625152183d..cd16a9d7ec7 100644
--- a/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers.go
+++ b/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers.go
@@ -6,6 +6,7 @@ package cmd
 import (
 	"context"
 	"encoding/json"
+	"errors"
 	"fmt"
 	"io"
 	"io/fs"
@@ -16,6 +17,7 @@ import (
 	"strings"
 
 	"azureaiagent/internal/exterrors"
+	"azureaiagent/internal/pkg/agents/agent_yaml"
 
 	"github.com/azure/azure-dev/cli/azd/pkg/azdext"
 	"github.com/fatih/color"
@@ -260,3 +262,44 @@ func findAgentManifest(dir string) (string, error) {
 
 	return found, nil
 }
+
+// detectLocalManifest checks only the immediate directory for an agent manifest file.
+// Returns the path to the found manifest (preferring agent.manifest.yaml over agent.yaml,
+// then .yml variants), or an empty string if none contain valid manifest content.
+// Returns a non-nil error for unexpected I/O failures (e.g. permission errors).
+func detectLocalManifest(dir string) (string, error) {
+	candidates := []string{
+		"agent.manifest.yaml",
+		"agent.yaml",
+		"agent.manifest.yml",
+		"agent.yml",
+	}
+
+	for _, name := range candidates {
+		candidate := filepath.Join(dir, name)
+		_, err := os.Stat(candidate)
+		if errors.Is(err, os.ErrNotExist) {
+			continue
+		}
+		if err != nil {
+			return "", fmt.Errorf("checking for manifest %s: %w", candidate, err)
+		}
+		if isValidManifestFile(candidate) {
+			return candidate, nil
+		}
+	}
+	return "", nil
+}
+
+// isValidManifestFile reads the file and checks whether it can be loaded as
+// a valid AgentManifest via LoadAndValidateAgentManifest.
+func isValidManifestFile(path string) bool {
+	//nolint:gosec // path comes from a known filename in a user-controlled directory
+	content, err := os.ReadFile(path)
+	if err != nil {
+		return false
+	}
+
+	_, err = agent_yaml.LoadAndValidateAgentManifest(content)
+	return err == nil
+}
diff --git a/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers_test.go b/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers_test.go
index 3fa7ecaca6a..b5b34a853aa 100644
--- a/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers_test.go
+++ b/cli/azd/extensions/azure.ai.agents/internal/cmd/init_from_templates_helpers_test.go
@@ -298,3 +298,141 @@ func TestDirIsEmpty(t *testing.T) {
 		require.False(t, empty)
 	})
 }
+
+func TestDetectLocalManifest(t *testing.T) {
+	t.Parallel()
+
+	// Valid agent manifest content (has template with kind + name)
+	validManifest := `name: test-agent
+template:
+  kind: hosted
+  name: test-agent
+  protocols:
+    - protocol: responses
+      version: v1
+`
+
+	t.Run("no manifest files", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "main.py"), []byte("print()"), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Empty(t, result)
+	})
+
+	t.Run("valid agent.yaml", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yaml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.yaml"), result)
+	})
+
+	t.Run("valid agent.manifest.yaml", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.manifest.yaml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.manifest.yaml"), result)
+	})
+
+	t.Run("both files prefers agent.manifest.yaml", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yaml"), []byte(validManifest), 0600))
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.manifest.yaml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.manifest.yaml"), result)
+	})
+
+	t.Run("does not search subdirectories", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		subDir := filepath.Join(dir, "src")
+		require.NoError(t, os.MkdirAll(subDir, 0700))
+		require.NoError(t, os.WriteFile(filepath.Join(subDir, "agent.yaml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Empty(t, result)
+	})
+
+	t.Run("empty directory", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Empty(t, result)
+	})
+
+	t.Run("invalid YAML content is skipped", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yaml"), []byte("not: valid: yaml: ["), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Empty(t, result)
+	})
+
+	t.Run("YAML without template is skipped", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yaml"), []byte("foo: bar\n"), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Empty(t, result)
+	})
+
+	t.Run("falls back to agent.yaml when manifest.yaml is invalid", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.manifest.yaml"), []byte("foo: bar\n"), 0600))
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yaml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.yaml"), result)
+	})
+
+	t.Run("detects agent.yml variant", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.yml"), result)
+	})
+
+	t.Run("detects agent.manifest.yml variant", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.manifest.yml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.manifest.yml"), result)
+	})
+
+	t.Run("prefers yaml over yml", func(t *testing.T) {
+		t.Parallel()
+		dir := t.TempDir()
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yaml"), []byte(validManifest), 0600))
+		require.NoError(t, os.WriteFile(filepath.Join(dir, "agent.yml"), []byte(validManifest), 0600))
+
+		result, err := detectLocalManifest(dir)
+		require.NoError(t, err)
+		require.Equal(t, filepath.Join(dir, "agent.yaml"), result)
+	})
+}