diff --git a/cli/azd/cmd/extension.go b/cli/azd/cmd/extension.go
index 72ace3e83ed..dfa7ac0f4b0 100644
--- a/cli/azd/cmd/extension.go
+++ b/cli/azd/cmd/extension.go
@@ -913,9 +913,16 @@ func (a *extensionUpgradeAction) Run(ctx context.Context) (*actions.ActionResult
 			return nil, fmt.Errorf("failed to get installed extension: %w", err)
 		}
 
+		// Honor the source from which the extension was originally installed
+		// Only use the --source flag if explicitly provided by the user
+		sourceToUse := installed.Source
+		if a.flags.source != "" {
+			sourceToUse = a.flags.source
+		}
+
 		filterOptions := &extensions.FilterOptions{
 			Id:      extensionId,
-			Source:  a.flags.source,
+			Source:  sourceToUse,
 			Version: a.flags.version,
 		}
 
@@ -927,17 +934,46 @@ func (a *extensionUpgradeAction) Run(ctx context.Context) (*actions.ActionResult
 
 		if len(matches) == 0 {
 			a.console.StopSpinner(ctx, stepMessage, input.StepFailed)
-			return nil, fmt.Errorf("extension %s not found", extensionId)
+			return nil, fmt.Errorf("extension %s not found in source %s", extensionId, sourceToUse)
 		}
 
-		selectedExtension, err := selectDistinctExtension(ctx, a.console, extensionId, matches, a.flags.global)
-		if err != nil {
-			return nil, err
+		// When filtering by exact source and extension ID, there should only be one match
+		// However, if there are multiple matches (unexpected), we'll use the first one
+		if len(matches) > 1 {
+			a.console.MessageUxItem(ctx, &ux.WarningMessage{
+				Description: fmt.Sprintf(
+					"Found %d matches for %s in source %s, using the first match",
+					len(matches),
+					extensionId,
+					sourceToUse,
+				),
+			})
 		}
+		selectedExtension := matches[0]
 
 		a.console.ShowSpinner(ctx, stepMessage, input.Step)
 		latestVersion := selectedExtension.Versions[len(selectedExtension.Versions)-1]
 
+		// Check if there's a newer version available in other sources
+		// Only do this if the user didn't explicitly specify a source
+		if a.flags.source == "" {
+			if err := a.checkForNewerVersionInOtherSources(
+				ctx,
+				extensionId,
+				installed.Source,
+				latestVersion.Version,
+			); err != nil {
+				// Log the error but don't fail the upgrade
+				// Using console warning instead of log.Printf for consistency
+				a.console.MessageUxItem(ctx, &ux.WarningMessage{
+					Description: fmt.Sprintf(
+						"Failed to check for newer versions in other sources: %v",
+						err,
+					),
+				})
+			}
+		}
+
 		// Parse semantic versions for proper comparison
 		installedSemver, err := semver.NewVersion(installed.Version)
 		if err != nil {
@@ -982,6 +1018,92 @@ func (a *extensionUpgradeAction) Run(ctx context.Context) (*actions.ActionResult
 	}, nil
 }
 
+// checkForNewerVersionInOtherSources checks if there's a newer version of the extension
+// available in sources other than the current one, and displays a warning if found.
+func (a *extensionUpgradeAction) checkForNewerVersionInOtherSources(
+	ctx context.Context,
+	extensionId string,
+	currentSource string,
+	currentLatestVersion string,
+) error {
+	// Find all versions of this extension across all sources (excluding current source)
+	allMatches, err := a.extensionManager.FindExtensions(ctx, &extensions.FilterOptions{
+		Id: extensionId,
+	})
+	if err != nil {
+		return err
+	}
+
+	// Parse the current latest version
+	currentSemver, err := semver.NewVersion(currentLatestVersion)
+	if err != nil {
+		return fmt.Errorf("failed to parse current latest version '%s': %w", currentLatestVersion, err)
+	}
+
+	// Check each source for newer versions
+	var newerVersionSource string
+	var newestSemver *semver.Version
+
+	for _, match := range allMatches {
+		// Skip the current source
+		if strings.EqualFold(match.Source, currentSource) {
+			continue
+		}
+
+		// Get the latest version from this source
+		if len(match.Versions) == 0 {
+			continue
+		}
+
+		latestInSource := match.Versions[len(match.Versions)-1]
+		latestSemver, err := semver.NewVersion(latestInSource.Version)
+		if err != nil {
+			// Skip versions that can't be parsed
+			continue
+		}
+
+		// Check if this version is newer than current AND newer than what we've found so far
+		if latestSemver.GreaterThan(currentSemver) {
+			if newestSemver == nil || latestSemver.GreaterThan(newestSemver) {
+				newestSemver = latestSemver
+				newerVersionSource = match.Source
+			}
+		}
+	}
+
+	// Display warning if a newer version was found
+	if newestSemver != nil {
+		warningDesc := fmt.Sprintf(
+			"A newer version (%s) of %s is available in source '%s', but the extension was installed "+
+				"from source '%s'. The extension will be upgraded to version %s from the original source.",
+			output.WithHighLightFormat(newestSemver.String()),
+			output.WithHighLightFormat(extensionId),
+			output.WithHighLightFormat(newerVersionSource),
+			output.WithHighLightFormat(currentSource),
+			output.WithHighLightFormat(currentLatestVersion),
+		)
+		a.console.MessageUxItem(ctx, &ux.WarningMessage{Description: warningDesc})
+
+		a.console.Message(ctx, "")
+		instructionMsg := fmt.Sprintf(
+			"To switch to the newer version from '%s', first uninstall the extension and then "+
+				"install it from the desired source:",
+			newerVersionSource,
+		)
+		a.console.Message(ctx, instructionMsg)
+
+		uninstallCmd := fmt.Sprintf("azd extension uninstall %s", extensionId)
+		a.console.Message(ctx, fmt.Sprintf("  %s", output.WithHighLightFormat(uninstallCmd)))
+
+		installCmd := fmt.Sprintf("azd extension install %s --source %s", extensionId, newerVersionSource)
+		a.console.Message(ctx, fmt.Sprintf("  %s", output.WithHighLightFormat(installCmd)))
+
+		a.console.Message(ctx, "")
+	}
+
+	return nil
+}
+
 type extensionSourceListAction struct {
 	formatter     output.Formatter
 	writer        io.Writer
diff --git a/cli/azd/cmd/extensions_test.go b/cli/azd/cmd/extensions_test.go
index 4e0787c0626..2f82ba3a77b 100644
--- a/cli/azd/cmd/extensions_test.go
+++ b/cli/azd/cmd/extensions_test.go
@@ -176,3 +176,4 @@ func TestBindExtension_DeeplyNestedNamespace(t *testing.T) {
 	require.Equal(t, "Extension for fine tuning AI models.", finetuneCmd.Options.Command.Short)
 	require.Equal(t, "Extension for evaluating AI models.", evalCmd.Options.Command.Short)
 }
+
diff --git a/cli/azd/go.mod b/cli/azd/go.mod
index e9f0e57b2ea..c401f81475b 100644
--- a/cli/azd/go.mod
+++ b/cli/azd/go.mod
@@ -51,6 +51,7 @@ require (
 	github.com/google/uuid v1.6.0
 	github.com/gorilla/websocket v1.5.3
 	github.com/invopop/jsonschema v0.13.0
+	github.com/jmespath-community/go-jmespath v1.1.1
 	github.com/joho/godotenv v1.5.1
 	github.com/mark3labs/mcp-go v0.41.1
 	github.com/mattn/go-colorable v0.1.14
@@ -115,7 +116,6 @@ require (
 	github.com/grpc-ecosystem/grpc-gateway/v2 v2.27.2 // indirect
 	github.com/huandu/xstrings v1.5.0 // indirect
 	github.com/inconshreveable/mousetrap v1.1.0 // indirect
-	github.com/jmespath-community/go-jmespath v1.1.1 // indirect
 	github.com/json-iterator/go v1.1.12 // indirect
 	github.com/kballard/go-shellquote v0.0.0-20180428030007-95032a82bc51 // indirect
 	github.com/kylelemons/godebug v1.1.0 // indirect