diff --git a/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.test.tsx b/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.test.tsx
index 8acd7763542..98cd9aa1993 100644
--- a/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.test.tsx
+++ b/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.test.tsx
@@ -1,4 +1,4 @@
-import { SceneGridLayout, SceneTimeRange } from '@grafana/scenes';
+import { SceneGridLayout, SceneGridRow, SceneTimeRange } from '@grafana/scenes';
 import { LibraryPanel } from '@grafana/schema/dist/esm/index.gen';
 
 import { activateFullSceneTree } from '../utils/test-utils';
@@ -46,6 +46,110 @@ describe('AddLibraryPanelWidget', () => {
       'Trying to add a library panel in a layout that is not SceneGridLayout'
     );
   });
+
+  it('should replace grid item when grid item state is passed', async () => {
+    const libPanel = new LibraryVizPanel({
+      title: 'Panel Title',
+      uid: 'uid',
+      name: 'name',
+      panelKey: 'panel-1',
+    });
+
+    let gridItem = new DashboardGridItem({
+      body: libPanel,
+      key: 'grid-item-1',
+    });
+    addLibPanelDrawer = new AddLibraryPanelDrawer({ panelToReplaceRef: libPanel.getRef() });
+    dashboard = new DashboardScene({
+      $timeRange: new SceneTimeRange({}),
+      title: 'hello',
+      uid: 'dash-1',
+      version: 4,
+      meta: {
+        canEdit: true,
+      },
+      body: new SceneGridLayout({
+        children: [gridItem],
+      }),
+      overlay: addLibPanelDrawer,
+    });
+
+    const panelInfo: LibraryPanel = {
+      uid: 'new_uid',
+      model: {
+        type: 'timeseries',
+      },
+      name: 'new_name',
+      version: 1,
+      type: 'timeseries',
+    };
+
+    addLibPanelDrawer.onAddLibraryPanel(panelInfo);
+
+    const layout = dashboard.state.body as SceneGridLayout;
+    gridItem = layout.state.children[0] as DashboardGridItem;
+
+    expect(layout.state.children.length).toBe(1);
+    expect(gridItem.state.body!).toBeInstanceOf(LibraryVizPanel);
+    expect(gridItem.state.key).toBe('grid-item-1');
+    expect((gridItem.state.body! as LibraryVizPanel).state.uid).toBe('new_uid');
+    expect((gridItem.state.body! as LibraryVizPanel).state.name).toBe('new_name');
+  });
+
+  it('should replace grid item in row when grid item state is passed', async () => {
+    const libPanel = new LibraryVizPanel({
+      title: 'Panel Title',
+      uid: 'uid',
+      name: 'name',
+      panelKey: 'panel-1',
+    });
+
+    let gridItem = new DashboardGridItem({
+      body: libPanel,
+      key: 'grid-item-1',
+    });
+    addLibPanelDrawer = new AddLibraryPanelDrawer({ panelToReplaceRef: libPanel.getRef() });
+    dashboard = new DashboardScene({
+      $timeRange: new SceneTimeRange({}),
+      title: 'hello',
+      uid: 'dash-1',
+      version: 4,
+      meta: {
+        canEdit: true,
+      },
+      body: new SceneGridLayout({
+        children: [
+          new SceneGridRow({
+            children: [gridItem],
+          }),
+        ],
+      }),
+      overlay: addLibPanelDrawer,
+    });
+
+    const panelInfo: LibraryPanel = {
+      uid: 'new_uid',
+      model: {
+        type: 'timeseries',
+      },
+      name: 'new_name',
+      version: 1,
+      type: 'timeseries',
+    };
+
+    addLibPanelDrawer.onAddLibraryPanel(panelInfo);
+
+    const layout = dashboard.state.body as SceneGridLayout;
+    const gridRow = layout.state.children[0] as SceneGridRow;
+    gridItem = gridRow.state.children[0] as DashboardGridItem;
+
+    expect(layout.state.children.length).toBe(1);
+    expect(gridRow.state.children.length).toBe(1);
+    expect(gridItem.state.body!).toBeInstanceOf(LibraryVizPanel);
+    expect(gridItem.state.key).toBe('grid-item-1');
+    expect((gridItem.state.body! as LibraryVizPanel).state.uid).toBe('new_uid');
+    expect((gridItem.state.body! as LibraryVizPanel).state.name).toBe('new_name');
+  });
 });
 
 async function buildTestScene() {
diff --git a/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.tsx b/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.tsx
index 831c0003506..60b0240694d 100644
--- a/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.tsx
+++ b/public/app/features/dashboard-scene/scene/AddLibraryPanelDrawer.tsx
@@ -1,6 +1,12 @@
 import React from 'react';
 
-import { SceneComponentProps, SceneGridLayout, SceneObjectBase, SceneObjectState } from '@grafana/scenes';
+import {
+  SceneComponentProps,
+  SceneGridLayout,
+  SceneObjectBase,
+  SceneObjectRef,
+  SceneObjectState,
+} from '@grafana/scenes';
 import { LibraryPanel } from '@grafana/schema';
 import { Drawer } from '@grafana/ui';
 import { t } from 'app/core/internationalization';
@@ -15,7 +21,9 @@ import { NEW_PANEL_HEIGHT, NEW_PANEL_WIDTH, getDashboardSceneFor, getVizPanelKey
 import { DashboardGridItem } from './DashboardGridItem';
 import { LibraryVizPanel } from './LibraryVizPanel';
 
-export interface AddLibraryPanelDrawerState extends SceneObjectState {}
+export interface AddLibraryPanelDrawerState extends SceneObjectState {
+  panelToReplaceRef?: SceneObjectRef<LibraryVizPanel>;
+}
 
 export class AddLibraryPanelDrawer extends SceneObjectBase<AddLibraryPanelDrawerState> {
   public onClose = () => {
@@ -39,16 +47,28 @@ export class AddLibraryPanelDrawer extends SceneObjectBase<AddLibraryPanelDrawer
       panelKey: getVizPanelKeyForPanelId(panelId),
     });
 
-    const newGridItem = new DashboardGridItem({
-      height: NEW_PANEL_HEIGHT,
-      width: NEW_PANEL_WIDTH,
-      x: 0,
-      y: 0,
-      body: body,
-      key: `grid-item-${panelId}`,
-    });
+    const panelToReplace = this.state.panelToReplaceRef?.resolve();
 
-    layout.setState({ children: [newGridItem, ...layout.state.children] });
+    if (panelToReplace) {
+      const gridItemToReplace = panelToReplace.parent;
+
+      if (!(gridItemToReplace instanceof DashboardGridItem)) {
+        throw new Error('Trying to replace a panel that does not have a DashboardGridItem');
+      }
+
+      gridItemToReplace.setState({ body });
+    } else {
+      const newGridItem = new DashboardGridItem({
+        height: NEW_PANEL_HEIGHT,
+        width: NEW_PANEL_WIDTH,
+        x: 0,
+        y: 0,
+        body: body,
+        key: `grid-item-${panelId}`,
+      });
+
+      layout.setState({ children: [newGridItem, ...layout.state.children] });
+    }
 
     this.onClose();
   };
diff --git a/public/app/features/dashboard-scene/scene/DashboardScene.tsx b/public/app/features/dashboard-scene/scene/DashboardScene.tsx
index 4f4e319ed3b..fed30b8987e 100644
--- a/public/app/features/dashboard-scene/scene/DashboardScene.tsx
+++ b/public/app/features/dashboard-scene/scene/DashboardScene.tsx
@@ -10,6 +10,7 @@ import {
   SceneGridRow,
   SceneObject,
   SceneObjectBase,
+  SceneObjectRef,
   SceneObjectState,
   sceneUtils,
   SceneVariable,
@@ -812,9 +813,9 @@ export class DashboardScene extends SceneObjectBase<DashboardSceneState> {
     locationService.partial({ editview: 'settings' });
   };
 
-  public onShowAddLibraryPanelDrawer() {
+  public onShowAddLibraryPanelDrawer(panelToReplaceRef?: SceneObjectRef<LibraryVizPanel>) {
     this.setState({
-      overlay: new AddLibraryPanelDrawer({}),
+      overlay: new AddLibraryPanelDrawer({ panelToReplaceRef }),
     });
   }
 
diff --git a/public/app/features/dashboard-scene/scene/PanelMenuBehavior.tsx b/public/app/features/dashboard-scene/scene/PanelMenuBehavior.tsx
index 0aecf323e73..d33ed831670 100644
--- a/public/app/features/dashboard-scene/scene/PanelMenuBehavior.tsx
+++ b/public/app/features/dashboard-scene/scene/PanelMenuBehavior.tsx
@@ -123,6 +123,14 @@ export function panelMenuBehavior(menu: VizPanelMenu, isRepeat = false) {
             );
           },
         });
+
+        moreSubMenu.push({
+          text: t('panel.header-menu.replace-library-panel', `Replace library panel`),
+          onClick: () => {
+            DashboardInteractions.panelMenuItemClicked('replaceLibraryPanel');
+            dashboard.onShowAddLibraryPanelDrawer(parent.getRef());
+          },
+        });
       } else {
         moreSubMenu.push({
           text: t('panel.header-menu.create-library-panel', `Create library panel`),
diff --git a/public/app/features/dashboard-scene/utils/interactions.ts b/public/app/features/dashboard-scene/utils/interactions.ts
index 4f45bc7b457..85c4b332f82 100644
--- a/public/app/features/dashboard-scene/utils/interactions.ts
+++ b/public/app/features/dashboard-scene/utils/interactions.ts
@@ -20,6 +20,7 @@ export const DashboardInteractions = {
       | 'share'
       | 'createLibraryPanel'
       | 'unlinkLibraryPanel'
+      | 'replaceLibraryPanel'
       | 'duplicate'
       | 'copy'
       | 'remove'
diff --git a/public/locales/en-US/grafana.json b/public/locales/en-US/grafana.json
index 6f0fec9ee34..802bb676d3e 100644
--- a/public/locales/en-US/grafana.json
+++ b/public/locales/en-US/grafana.json
@@ -1270,6 +1270,7 @@
       "new-alert-rule": "New alert rule",
       "query": "Query",
       "remove": "Remove",
+      "replace-library-panel": "Replace library panel",
       "share": "Share",
       "show-legend": "Show legend",
       "unlink-library-panel": "Unlink library panel",
diff --git a/public/locales/pseudo-LOCALE/grafana.json b/public/locales/pseudo-LOCALE/grafana.json
index b796157a532..855683388bd 100644
--- a/public/locales/pseudo-LOCALE/grafana.json
+++ b/public/locales/pseudo-LOCALE/grafana.json
@@ -1270,6 +1270,7 @@
       "new-alert-rule": "Ńęŵ äľęřŧ řūľę",
       "query": "Qūęřy",
       "remove": "Ŗęmővę",
+      "replace-library-panel": "Ŗępľäčę ľįþřäřy päʼnęľ",
       "share": "Ŝĥäřę",
       "show-legend": "Ŝĥőŵ ľęģęʼnđ",
       "unlink-library-panel": "Ůʼnľįʼnĸ ľįþřäřy päʼnęľ",