diff --git a/dotnet/src/Functions/Functions.Prompty.UnitTests/Functions.Prompty.UnitTests.csproj b/dotnet/src/Functions/Functions.Prompty.UnitTests/Functions.Prompty.UnitTests.csproj
index 77e97f711e7f..d58ba5a5c5dd 100644
--- a/dotnet/src/Functions/Functions.Prompty.UnitTests/Functions.Prompty.UnitTests.csproj
+++ b/dotnet/src/Functions/Functions.Prompty.UnitTests/Functions.Prompty.UnitTests.csproj
@@ -39,4 +39,9 @@
     </None>
     <EmbeddedResource Include="TestData\**\*.prompty" />
   </ItemGroup>
+  <ItemGroup>
+    <None Update="TestData\**\*.json">
+      <CopyToOutputDirectory>Always</CopyToOutputDirectory>
+    </None>
+  </ItemGroup>
 </Project>
\ No newline at end of file
diff --git a/dotnet/src/Functions/Functions.Prompty.UnitTests/PromptyTest.cs b/dotnet/src/Functions/Functions.Prompty.UnitTests/PromptyTest.cs
index a019f6bbfba9..aa255fe56b06 100644
--- a/dotnet/src/Functions/Functions.Prompty.UnitTests/PromptyTest.cs
+++ b/dotnet/src/Functions/Functions.Prompty.UnitTests/PromptyTest.cs
@@ -357,6 +357,47 @@ public void ItCreatesInputVariablesOnlyWhenNoneAreExplicitlySet()
         Assert.Equal(expectedVariables, kernelFunction.Metadata.Parameters.Select(p => p.Name));
     }
 
+    [Fact]
+    public void ItShouldCreateFunctionFromPromptYamlContainingRelativeFileReferences()
+    {
+        // Arrange
+        Kernel kernel = new();
+        var promptyPath = Path.Combine("TestData", "relativeFileReference.prompty");
+
+        // Act
+        var kernelFunction = kernel.CreateFunctionFromPromptyFile(promptyPath);
+
+        // Assert
+        Assert.NotNull(kernelFunction);
+        var executionSettings = kernelFunction.ExecutionSettings;
+        Assert.Single(executionSettings!);
+        Assert.True(executionSettings!.ContainsKey("default"));
+        var defaultExecutionSetting = executionSettings["default"];
+        Assert.Equal("gpt-35-turbo", defaultExecutionSetting.ModelId);
+    }
+
+    [Fact]
+    public void ItShouldCreateFunctionFromPromptYamlContainingRelativeFileReferencesWithFileProvider()
+    {
+        // Arrange
+        Kernel kernel = new();
+        var currentDirectory = Directory.GetCurrentDirectory();
+        var promptyPath = Path.Combine("TestData", "relativeFileReference.prompty");
+        using PhysicalFileProvider fileProvider = new(currentDirectory);
+
+        // Act
+        var kernelFunction = kernel.CreateFunctionFromPromptyFile(promptyPath,
+            fileProvider);
+
+        // Assert
+        Assert.NotNull(kernelFunction);
+        var executionSettings = kernelFunction.ExecutionSettings;
+        Assert.Single(executionSettings!);
+        Assert.True(executionSettings!.ContainsKey("default"));
+        var defaultExecutionSetting = executionSettings["default"];
+        Assert.Equal("gpt-35-turbo", defaultExecutionSetting.ModelId);
+    }
+
     private sealed class EchoTextGenerationService : ITextGenerationService
     {
         public IReadOnlyDictionary<string, object?> Attributes { get; } = new Dictionary<string, object?>();
diff --git a/dotnet/src/Functions/Functions.Prompty.UnitTests/TestData/model.json b/dotnet/src/Functions/Functions.Prompty.UnitTests/TestData/model.json
new file mode 100644
index 000000000000..03781ec6580d
--- /dev/null
+++ b/dotnet/src/Functions/Functions.Prompty.UnitTests/TestData/model.json
@@ -0,0 +1,11 @@
+{
+  "api": "chat",
+  "configuration": {
+    "type": "azure_openai",
+    "api_version": "2023-07-01-preview"
+  },
+  "parameters": {
+    "model_id": "gpt-35-turbo"
+  }
+}
+
diff --git a/dotnet/src/Functions/Functions.Prompty.UnitTests/TestData/relativeFileReference.prompty b/dotnet/src/Functions/Functions.Prompty.UnitTests/TestData/relativeFileReference.prompty
new file mode 100644
index 000000000000..696ca1272d4d
--- /dev/null
+++ b/dotnet/src/Functions/Functions.Prompty.UnitTests/TestData/relativeFileReference.prompty
@@ -0,0 +1,10 @@
+---
+name: TestRelativeFileReference
+description: A test prompt for relative file references
+authors:
+  - Test Author
+model: ${file:model.json}
+
+---
+
+# This is a test prompt for relative file references
diff --git a/dotnet/src/Functions/Functions.Prompty/Extensions/PromptyKernelExtensions.cs b/dotnet/src/Functions/Functions.Prompty/Extensions/PromptyKernelExtensions.cs
index 19e883cb9b60..3144b49c56bb 100644
--- a/dotnet/src/Functions/Functions.Prompty/Extensions/PromptyKernelExtensions.cs
+++ b/dotnet/src/Functions/Functions.Prompty/Extensions/PromptyKernelExtensions.cs
@@ -34,7 +34,7 @@ public static KernelFunction CreateFunctionFromPromptyFile(
         Verify.NotNullOrWhiteSpace(promptyFilePath);
 
         var promptyTemplate = File.ReadAllText(promptyFilePath);
-        return kernel.CreateFunctionFromPrompty(promptyTemplate, promptTemplateFactory);
+        return kernel.CreateFunctionFromPrompty(promptyTemplate, promptTemplateFactory, promptyFilePath);
     }
 
     /// <summary>
@@ -46,6 +46,7 @@ public static KernelFunction CreateFunctionFromPromptyFile(
     /// The <see cref="IPromptTemplateFactory"/> to use when interpreting the prompt template configuration into a <see cref="IPromptTemplate"/>.
     /// If null, a <see cref="AggregatorPromptTemplateFactory"/> will be used with support for Liquid and Handlebars prompt templates.
     /// </param>
+    /// <param name="promptyFilePath">Optional: File path to the prompty file.</param>
     /// <returns>The created <see cref="KernelFunction"/>.</returns>
     /// <exception cref="ArgumentNullException"><paramref name="kernel"/> is null.</exception>
     /// <exception cref="ArgumentNullException"><paramref name="promptyTemplate"/> is null.</exception>
@@ -53,12 +54,13 @@ public static KernelFunction CreateFunctionFromPromptyFile(
     public static KernelFunction CreateFunctionFromPrompty(
         this Kernel kernel,
         string promptyTemplate,
-        IPromptTemplateFactory? promptTemplateFactory = null)
+        IPromptTemplateFactory? promptTemplateFactory = null,
+        string? promptyFilePath = null)
     {
         Verify.NotNull(kernel);
         Verify.NotNullOrWhiteSpace(promptyTemplate);
 
-        var promptTemplateConfig = KernelFunctionPrompty.ToPromptTemplateConfig(promptyTemplate);
+        var promptTemplateConfig = KernelFunctionPrompty.ToPromptTemplateConfig(promptyTemplate, promptyFilePath);
 
         return KernelFunctionFactory.CreateFromPrompt(
             promptTemplateConfig,
@@ -118,6 +120,6 @@ public static KernelFunction CreateFunctionFromPromptyFile(
 
         using StreamReader reader = new(fileInfo.CreateReadStream());
         var promptyTemplate = reader.ReadToEnd();
-        return kernel.CreateFunctionFromPrompty(promptyTemplate, promptTemplateFactory);
+        return kernel.CreateFunctionFromPrompty(promptyTemplate, promptTemplateFactory, fileInfo.PhysicalPath);
     }
 }
diff --git a/dotnet/src/Functions/Functions.Prompty/KernelFunctionPrompty.cs b/dotnet/src/Functions/Functions.Prompty/KernelFunctionPrompty.cs
index 8b43f523f69f..8a7e821e5ad3 100644
--- a/dotnet/src/Functions/Functions.Prompty/KernelFunctionPrompty.cs
+++ b/dotnet/src/Functions/Functions.Prompty/KernelFunctionPrompty.cs
@@ -45,15 +45,16 @@ public static KernelFunction FromPrompty(
     /// Create a <see cref="PromptTemplateConfig"/> from a prompty template.
     /// </summary>
     /// <param name="promptyTemplate">Prompty representation of a prompt-based <see cref="KernelFunction"/>.</param>
+    /// <param name="promptyFilePath">Optional: File path to the prompty file.</param>
     /// <returns>The created <see cref="PromptTemplateConfig"/>.</returns>
     /// <exception cref="ArgumentNullException"><paramref name="promptyTemplate"/> is null.</exception>
     /// <exception cref="ArgumentException"><paramref name="promptyTemplate"/> is empty or composed entirely of whitespace.</exception>
-    public static PromptTemplateConfig ToPromptTemplateConfig(string promptyTemplate)
+    public static PromptTemplateConfig ToPromptTemplateConfig(string promptyTemplate, string? promptyFilePath = null)
     {
         Verify.NotNullOrWhiteSpace(promptyTemplate);
 
         Dictionary<string, object> globalConfig = [];
-        PromptyCore.Prompty prompty = PromptyCore.Prompty.Load(promptyTemplate, globalConfig);
+        PromptyCore.Prompty prompty = PromptyCore.Prompty.Load(promptyTemplate, globalConfig, promptyFilePath);
 
         var promptTemplateConfig = new PromptTemplateConfig
         {