diff --git a/fixtures/tsconfig/cases/references-cycle/a/src/index.ts b/fixtures/tsconfig/cases/references-cycle/a/src/index.ts
new file mode 100644
index 00000000..bd571ae0
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-cycle/a/src/index.ts
@@ -0,0 +1 @@
+export const from = "a";
diff --git a/fixtures/tsconfig/cases/references-cycle/a/tsconfig.json b/fixtures/tsconfig/cases/references-cycle/a/tsconfig.json
new file mode 100644
index 00000000..2cab053f
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-cycle/a/tsconfig.json
@@ -0,0 +1,10 @@
+{
+  "compilerOptions": {
+    "composite": true,
+    "baseUrl": "./",
+    "paths": {
+      "@a/*": ["src/*"]
+    }
+  },
+  "references": [{ "path": "../b" }]
+}
diff --git a/fixtures/tsconfig/cases/references-cycle/b/src/index.ts b/fixtures/tsconfig/cases/references-cycle/b/src/index.ts
new file mode 100644
index 00000000..fc37097d
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-cycle/b/src/index.ts
@@ -0,0 +1 @@
+export const from = "b";
diff --git a/fixtures/tsconfig/cases/references-cycle/b/tsconfig.json b/fixtures/tsconfig/cases/references-cycle/b/tsconfig.json
new file mode 100644
index 00000000..26cc84a1
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-cycle/b/tsconfig.json
@@ -0,0 +1,10 @@
+{
+  "compilerOptions": {
+    "composite": true,
+    "baseUrl": "./",
+    "paths": {
+      "@b/*": ["src/*"]
+    }
+  },
+  "references": [{ "path": "../a" }]
+}
diff --git a/fixtures/tsconfig/cases/references-extends/app/aliased/index.ts b/fixtures/tsconfig/cases/references-extends/app/aliased/index.ts
new file mode 100644
index 00000000..aec3f835
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-extends/app/aliased/index.ts
@@ -0,0 +1 @@
+export const from = "app";
diff --git a/fixtures/tsconfig/cases/references-extends/app/tsconfig.json b/fixtures/tsconfig/cases/references-extends/app/tsconfig.json
new file mode 100644
index 00000000..5f3ab415
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-extends/app/tsconfig.json
@@ -0,0 +1,9 @@
+{
+  "compilerOptions": {
+    "baseUrl": "./",
+    "paths": {
+      "@/*": ["./aliased/*"]
+    }
+  },
+  "references": [{ "path": "../project_b" }]
+}
diff --git a/fixtures/tsconfig/cases/references-extends/project_b/src/aliased/index.ts b/fixtures/tsconfig/cases/references-extends/project_b/src/aliased/index.ts
new file mode 100644
index 00000000..9bd27886
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-extends/project_b/src/aliased/index.ts
@@ -0,0 +1 @@
+export const from = "project_b via extends";
diff --git a/fixtures/tsconfig/cases/references-extends/project_b/tsconfig.json b/fixtures/tsconfig/cases/references-extends/project_b/tsconfig.json
new file mode 100644
index 00000000..15e488c9
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-extends/project_b/tsconfig.json
@@ -0,0 +1,7 @@
+{
+  "extends": "../tsconfig.base.json",
+  "compilerOptions": {
+    "composite": true,
+    "baseUrl": "./src"
+  }
+}
diff --git a/fixtures/tsconfig/cases/references-extends/tsconfig.base.json b/fixtures/tsconfig/cases/references-extends/tsconfig.base.json
new file mode 100644
index 00000000..7426947c
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-extends/tsconfig.base.json
@@ -0,0 +1,7 @@
+{
+  "compilerOptions": {
+    "paths": {
+      "@/*": ["./aliased/*"]
+    }
+  }
+}
diff --git a/fixtures/tsconfig/cases/references-transitive/app/aliased/index.ts b/fixtures/tsconfig/cases/references-transitive/app/aliased/index.ts
new file mode 100644
index 00000000..aec3f835
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-transitive/app/aliased/index.ts
@@ -0,0 +1 @@
+export const from = "app";
diff --git a/fixtures/tsconfig/cases/references-transitive/app/tsconfig.json b/fixtures/tsconfig/cases/references-transitive/app/tsconfig.json
new file mode 100644
index 00000000..5f3ab415
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-transitive/app/tsconfig.json
@@ -0,0 +1,9 @@
+{
+  "compilerOptions": {
+    "baseUrl": "./",
+    "paths": {
+      "@/*": ["./aliased/*"]
+    }
+  },
+  "references": [{ "path": "../project_b" }]
+}
diff --git a/fixtures/tsconfig/cases/references-transitive/project_b/src/aliased/index.ts b/fixtures/tsconfig/cases/references-transitive/project_b/src/aliased/index.ts
new file mode 100644
index 00000000..2f74543f
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-transitive/project_b/src/aliased/index.ts
@@ -0,0 +1 @@
+export const from = "project_b";
diff --git a/fixtures/tsconfig/cases/references-transitive/project_b/tsconfig.json b/fixtures/tsconfig/cases/references-transitive/project_b/tsconfig.json
new file mode 100644
index 00000000..4a964b85
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-transitive/project_b/tsconfig.json
@@ -0,0 +1,10 @@
+{
+  "compilerOptions": {
+    "composite": true,
+    "baseUrl": "./src",
+    "paths": {
+      "@/*": ["./aliased/*"]
+    }
+  },
+  "references": [{ "path": "../project_c" }]
+}
diff --git a/fixtures/tsconfig/cases/references-transitive/project_c/aliased/index.ts b/fixtures/tsconfig/cases/references-transitive/project_c/aliased/index.ts
new file mode 100644
index 00000000..9aed6fb9
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-transitive/project_c/aliased/index.ts
@@ -0,0 +1 @@
+export const from = "project_c";
diff --git a/fixtures/tsconfig/cases/references-transitive/project_c/tsconfig.json b/fixtures/tsconfig/cases/references-transitive/project_c/tsconfig.json
new file mode 100644
index 00000000..85b91efa
--- /dev/null
+++ b/fixtures/tsconfig/cases/references-transitive/project_c/tsconfig.json
@@ -0,0 +1,9 @@
+{
+  "compilerOptions": {
+    "composite": true,
+    "baseUrl": "./",
+    "paths": {
+      "@/*": ["./aliased/*"]
+    }
+  }
+}
diff --git a/src/lib.rs b/src/lib.rs
index 707a1f27..f5296379 100644
--- a/src/lib.rs
+++ b/src/lib.rs
@@ -1475,35 +1475,9 @@ impl<Fs: FileSystem + Send + Sync> ResolverGeneric<Fs> {
           tracing::trace!(tsconfig = ?tsconfig, "load_tsconfig");
 
           // Extend tsconfig
-          if let Some(extends) = &tsconfig.extends {
-            let extended_tsconfig_paths = match extends {
-              ExtendsField::Single(s) => {
-                vec![
-                  self
-                    .get_extended_tsconfig_path(&directory, &tsconfig, s)
-                    .await?,
-                ]
-              }
-              ExtendsField::Multiple(specifiers) => {
-                try_join_all(
-                  specifiers
-                    .iter()
-                    .map(|s| self.get_extended_tsconfig_path(&directory, &tsconfig, s)),
-                )
-                .await?
-              }
-            };
-            for extended_tsconfig_path in extended_tsconfig_paths {
-              let extended_tsconfig = self
-                .load_tsconfig(
-                  /* root */ false,
-                  &extended_tsconfig_path,
-                  &TsconfigReferences::Disabled,
-                )
-                .await?;
-              tsconfig.extend_tsconfig(&extended_tsconfig);
-            }
-          }
+          self
+            .merge_tsconfig_extends(&mut tsconfig, &directory)
+            .await?;
 
           // Load project references
           match references {
@@ -1521,31 +1495,8 @@ impl<Fs: FileSystem + Send + Sync> ResolverGeneric<Fs> {
                 .collect();
             }
           }
-          if !tsconfig.references.is_empty() {
-            let directory = tsconfig.directory().to_path_buf();
-            for reference in &mut tsconfig.references {
-              let reference_tsconfig_path = directory.normalize_with(&reference.path);
-              let reference_tsconfig = self
-                .cache
-                .tsconfig(
-                  /* root */ true,
-                  &reference_tsconfig_path,
-                  |reference_tsconfig| async {
-                    if reference_tsconfig.path == tsconfig.path {
-                      return Err(ResolveError::TsconfigSelfReference(
-                        reference_tsconfig.path.clone(),
-                      ));
-                    }
-                    Ok(reference_tsconfig)
-                  },
-                )
-                .await?;
-              tsconfig
-                .file_dependencies
-                .extend(reference_tsconfig.file_dependencies.iter().cloned());
-              reference.tsconfig.replace(reference_tsconfig);
-            }
-          }
+          let mut visited = FxHashSet::default();
+          self.load_references(&mut tsconfig, &mut visited).await?;
 
           Ok(tsconfig)
         })
@@ -1554,6 +1505,113 @@ impl<Fs: FileSystem + Send + Sync> ResolverGeneric<Fs> {
     Box::pin(fut)
   }
 
+  // Walks `tsconfig.references` and loads each referenced tsconfig, recursing
+  // into nested references so that transitive `paths` (e.g. A → B → C) are
+  // honored — matching `tsc`'s "nearest tsconfig wins" behavior and
+  // `enhanced-resolve`'s recursive `references: "auto"` walk.
+  //
+  // `visited` carries the canonical paths of tsconfigs already being loaded
+  // along the current chain. When a reference points back into the chain,
+  // the cycle edge is cut: the reference is still attached with its own
+  // `paths` honored, but its nested references are not walked.
+  fn load_references<'a>(
+    &'a self,
+    tsconfig: &'a mut TsConfig,
+    visited: &'a mut FxHashSet<PathBuf>,
+  ) -> BoxFuture<'a, Result<(), ResolveError>> {
+    Box::pin(async move {
+      if tsconfig.references.is_empty() {
+        return Ok(());
+      }
+      let directory = tsconfig.directory().to_path_buf();
+      let current_path = tsconfig.path.clone();
+      visited.insert(current_path.clone());
+      for reference in &mut tsconfig.references {
+        let reference_tsconfig_path = directory.normalize_with(&reference.path);
+        // Reborrow so the closure below can capture `&mut FxHashSet` across
+        // multiple iterations of this loop. Without the reborrow, the first
+        // iteration would consume the original `&mut visited` binding.
+        let visited: &mut FxHashSet<PathBuf> = &mut *visited;
+        let reference_tsconfig = self
+          .cache
+          .tsconfig(
+            /* root */ true,
+            &reference_tsconfig_path,
+            |mut reference_tsconfig| {
+              let current_path = current_path.clone();
+              async move {
+                if reference_tsconfig.path == current_path {
+                  return Err(ResolveError::TsconfigSelfReference(
+                    reference_tsconfig.path.clone(),
+                  ));
+                }
+                // Cut the cycle: if this reference is already part of the
+                // ongoing load chain, return it without walking its own
+                // references. Its `paths` are still attached to the parent.
+                if visited.contains(&reference_tsconfig.path) {
+                  return Ok(reference_tsconfig);
+                }
+                // Apply `extends` so the reference inherits its base config's
+                // `baseUrl`/`paths` before its own references are walked.
+                let directory = self.cache.value(reference_tsconfig.directory());
+                self
+                  .merge_tsconfig_extends(&mut reference_tsconfig, &directory)
+                  .await?;
+                self
+                  .load_references(&mut reference_tsconfig, visited)
+                  .await?;
+                Ok(reference_tsconfig)
+              }
+            },
+          )
+          .await?;
+        tsconfig
+          .file_dependencies
+          .extend(reference_tsconfig.file_dependencies.iter().cloned());
+        reference.tsconfig.replace(reference_tsconfig);
+      }
+      Ok(())
+    })
+  }
+
+  async fn merge_tsconfig_extends(
+    &self,
+    tsconfig: &mut TsConfig,
+    directory: &CachedPath,
+  ) -> Result<(), ResolveError> {
+    let Some(extends) = &tsconfig.extends else {
+      return Ok(());
+    };
+    let extended_tsconfig_paths = match extends {
+      ExtendsField::Single(s) => {
+        vec![
+          self
+            .get_extended_tsconfig_path(directory, tsconfig, s)
+            .await?,
+        ]
+      }
+      ExtendsField::Multiple(specifiers) => {
+        try_join_all(
+          specifiers
+            .iter()
+            .map(|s| self.get_extended_tsconfig_path(directory, tsconfig, s)),
+        )
+        .await?
+      }
+    };
+    for extended_tsconfig_path in extended_tsconfig_paths {
+      let extended_tsconfig = self
+        .load_tsconfig(
+          /* root */ false,
+          &extended_tsconfig_path,
+          &TsconfigReferences::Disabled,
+        )
+        .await?;
+      tsconfig.extend_tsconfig(&extended_tsconfig);
+    }
+    Ok(())
+  }
+
   async fn get_extended_tsconfig_path(
     &self,
     directory: &CachedPath,
diff --git a/src/tests/tsconfig_project_references.rs b/src/tests/tsconfig_project_references.rs
index 44455729..9571b892 100644
--- a/src/tests/tsconfig_project_references.rs
+++ b/src/tests/tsconfig_project_references.rs
@@ -184,3 +184,110 @@ async fn self_reference() {
     );
   }
 }
+
+// Transitive project references: A → B → C.
+// When the entry tsconfig (A) declares `references: [B]` and B declares
+// `references: [C]`, a file inside C must resolve via C's own `paths`
+// (matching tsc's "nearest tsconfig wins" behavior and webpack's
+// recursive `references: "auto"` walk).
+#[tokio::test]
+async fn transitive_references() {
+  let f = super::fixture_root().join("tsconfig/cases/references-transitive");
+
+  let resolver = Resolver::new(ResolveOptions {
+    tsconfig: Some(TsconfigOptions {
+      config_file: f.join("app"),
+      references: TsconfigReferences::Auto,
+    }),
+    ..ResolveOptions::default()
+  });
+
+  let cases = [
+    // Direct: file in app uses app's paths.
+    (f.join("app"), "@/index.ts", f.join("app/aliased/index.ts")),
+    // One level: file in project_b uses project_b's paths (baseUrl ./src).
+    (
+      f.join("project_b/src"),
+      "@/index.ts",
+      f.join("project_b/src/aliased/index.ts"),
+    ),
+    // Two levels: file in project_c (referenced by project_b which is
+    // referenced by app) uses project_c's paths.
+    (
+      f.join("project_c"),
+      "@/index.ts",
+      f.join("project_c/aliased/index.ts"),
+    ),
+  ];
+
+  for (path, request, expected) in cases {
+    let resolved_path = resolver
+      .resolve(&path, request)
+      .await
+      .map(|p| p.full_path());
+    assert_eq!(resolved_path, Ok(expected), "{request} from {path:?}");
+  }
+}
+
+// When a project reference uses `extends` to inherit its `baseUrl`/`paths`
+// from a shared base config, those fields must be merged before the
+// reference is consulted for resolution. Without merging `extends` on
+// referenced configs, a request from inside `project_b` would see no
+// alias candidates and fail to resolve.
+#[tokio::test]
+async fn references_with_extends() {
+  let f = super::fixture_root().join("tsconfig/cases/references-extends");
+
+  let resolver = Resolver::new(ResolveOptions {
+    tsconfig: Some(TsconfigOptions {
+      config_file: f.join("app"),
+      references: TsconfigReferences::Auto,
+    }),
+    ..ResolveOptions::default()
+  });
+
+  // From project_b's directory, the inherited `paths` from
+  // ../tsconfig.base.json must apply (baseUrl ./src).
+  let resolved_path = resolver
+    .resolve(&f.join("project_b/src"), "@/index.ts")
+    .await
+    .map(|p| p.full_path());
+  assert_eq!(resolved_path, Ok(f.join("project_b/src/aliased/index.ts")));
+
+  // The entry tsconfig still uses its own `paths`.
+  let resolved_path = resolver
+    .resolve(&f.join("app"), "@/index.ts")
+    .await
+    .map(|p| p.full_path());
+  assert_eq!(resolved_path, Ok(f.join("app/aliased/index.ts")));
+}
+
+// A pair of project references that form a cycle (a → b → a) must not
+// cause infinite recursion / stack overflow when `references: "auto"`
+// recursively walks the graph. Each project's own `paths` should still
+// be honored from within its own directory.
+#[tokio::test]
+async fn cyclic_references() {
+  let f = super::fixture_root().join("tsconfig/cases/references-cycle");
+
+  let resolver = Resolver::new(ResolveOptions {
+    extensions: vec![".ts".into()],
+    tsconfig: Some(TsconfigOptions {
+      config_file: f.join("a"),
+      references: TsconfigReferences::Auto,
+    }),
+    ..ResolveOptions::default()
+  });
+
+  let resolved_path = resolver
+    .resolve(&f.join("a"), "@a/index")
+    .await
+    .map(|p| p.full_path());
+  assert_eq!(resolved_path, Ok(f.join("a/src/index.ts")));
+
+  let resolved_path = resolver
+    .resolve(&f.join("b"), "@b/index")
+    .await
+    .map(|p| p.full_path());
+  assert_eq!(resolved_path, Ok(f.join("b/src/index.ts")));
+}
diff --git a/src/tsconfig.rs b/src/tsconfig.rs
index 7286790f..a803a5af 100644
--- a/src/tsconfig.rs
+++ b/src/tsconfig.rs
@@ -170,17 +170,31 @@ impl TsConfig {
   }
 
   pub fn resolve(&self, path: &Path, specifier: &str) -> Vec<PathBuf> {
+    if let Some(matched) = self.find_reference_paths(path, specifier) {
+      return matched;
+    }
+    self.resolve_path_alias(specifier)
+  }
+
+  // Walks `references` recursively, returning the nearest reference whose
+  // `base_path` contains `path`. Used to honor transitive project references
+  // (A → B → C): a file inside C should resolve via C's own `paths` even
+  // when the entry tsconfig is A and only B is listed directly in A's
+  // references. Matches `tsc`'s "nearest tsconfig wins" semantics.
+  fn find_reference_paths(&self, path: &Path, specifier: &str) -> Option<Vec<PathBuf>> {
     for tsconfig in self
       .references
       .iter()
       .filter_map(|reference| reference.tsconfig.as_ref())
     {
+      if let Some(nested) = tsconfig.find_reference_paths(path, specifier) {
+        return Some(nested);
+      }
       if path.starts_with(tsconfig.base_path()) {
-        return tsconfig.resolve_path_alias(specifier);
+        return Some(tsconfig.resolve_path_alias(specifier));
       }
     }
-
-    self.resolve_path_alias(specifier)
+    None
   }
 
   // Copied from parcel