diff --git a/CHANGELOG.md b/CHANGELOG.md
index 34813656b7..e7fefe2e91 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -15,6 +15,7 @@ NEW FEATURES:
 * Add support for a `removed` block that allows users to remove resources or modules from the state without destroying them. ([#1158](https://github.com/opentofu/opentofu/pull/1158))
 
 ENHANCEMENTS:
+* Added support to use `.tfvars` files from tests folder. ([#1386](https://github.com/opentofu/opentofu/pull/1386))
 * Added `templatestring` function that takes a string and renders it as a template using a supplied set of template variables. ([#1223](https://github.com/opentofu/opentofu/pull/1223))
 * Added `base64gunzip` function that takes a base64 encoded gzip string and returns the decompressed data as a string. ([#800](https://github.com/opentofu/opentofu/issues/800))
 * Added `cidrcontains` function that determines if an address belongs to a certain prefix. ([#366](https://github.com/opentofu/opentofu/issues/366))
diff --git a/internal/command/meta_vars.go b/internal/command/meta_vars.go
index 0749ac4bc8..84197c6ec0 100644
--- a/internal/command/meta_vars.go
+++ b/internal/command/meta_vars.go
@@ -8,6 +8,7 @@ package command
 import (
 	"fmt"
 	"os"
+	"path/filepath"
 	"strings"
 
 	"github.com/hashicorp/hcl/v2"
@@ -62,30 +63,12 @@ func (m *Meta) collectVariableValues() (map[string]backend.UnparsedVariableValue
 		}
 	}
 
-	// Next up we have some implicit files that are loaded automatically
-	// if they are present. There's the original terraform.tfvars
-	// (DefaultVarsFilename) along with the later-added search for all files
-	// ending in .auto.tfvars.
-	if _, err := os.Stat(DefaultVarsFilename); err == nil {
-		moreDiags := m.addVarsFromFile(DefaultVarsFilename, tofu.ValueFromAutoFile, ret)
-		diags = diags.Append(moreDiags)
-	}
-	const defaultVarsFilenameJSON = DefaultVarsFilename + ".json"
-	if _, err := os.Stat(defaultVarsFilenameJSON); err == nil {
-		moreDiags := m.addVarsFromFile(defaultVarsFilenameJSON, tofu.ValueFromAutoFile, ret)
-		diags = diags.Append(moreDiags)
-	}
-	if infos, err := os.ReadDir("."); err == nil {
-		// "infos" is already sorted by name, so we just need to filter it here.
-		for _, info := range infos {
-			name := info.Name()
-			if !isAutoVarFile(name) {
-				continue
-			}
-			moreDiags := m.addVarsFromFile(name, tofu.ValueFromAutoFile, ret)
-			diags = diags.Append(moreDiags)
-		}
-	}
+	// Next up we load implicit files from the specified directory (first root then tests dir
+	// as tests dir files have higher precendence). These files are automatically loaded if present.
+	// There's the original terraform.tfvars (DefaultVarsFilename) along with the later-added
+	// search for all files ending in .auto.tfvars.
+	diags = diags.Append(m.addVarsFromDir(".", ret))
+	diags = diags.Append(m.addVarsFromDir("tests", ret))
 
 	// Finally we process values given explicitly on the command line, either
 	// as individual literal settings or as additional files to read.
@@ -135,6 +118,33 @@ func (m *Meta) collectVariableValues() (map[string]backend.UnparsedVariableValue
 	return ret, diags
 }
 
+func (m *Meta) addVarsFromDir(currDir string, ret map[string]backend.UnparsedVariableValue) tfdiags.Diagnostics {
+	var diags tfdiags.Diagnostics
+
+	if _, err := os.Stat(filepath.Join(currDir, DefaultVarsFilename)); err == nil {
+		moreDiags := m.addVarsFromFile(filepath.Join(currDir, DefaultVarsFilename), tofu.ValueFromAutoFile, ret)
+		diags = diags.Append(moreDiags)
+	}
+	const defaultVarsFilenameJSON = DefaultVarsFilename + ".json"
+	if _, err := os.Stat(filepath.Join(currDir, defaultVarsFilenameJSON)); err == nil {
+		moreDiags := m.addVarsFromFile(filepath.Join(currDir, defaultVarsFilenameJSON), tofu.ValueFromAutoFile, ret)
+		diags = diags.Append(moreDiags)
+	}
+	if infos, err := os.ReadDir(currDir); err == nil {
+		// "infos" is already sorted by name, so we just need to filter it here.
+		for _, info := range infos {
+			name := info.Name()
+			if !isAutoVarFile(name) {
+				continue
+			}
+			moreDiags := m.addVarsFromFile(filepath.Join(currDir, name), tofu.ValueFromAutoFile, ret)
+			diags = diags.Append(moreDiags)
+		}
+	}
+
+	return diags
+}
+
 func (m *Meta) addVarsFromFile(filename string, sourceType tofu.ValueSourceType, to map[string]backend.UnparsedVariableValue) tfdiags.Diagnostics {
 	var diags tfdiags.Diagnostics
 
diff --git a/internal/command/test_test.go b/internal/command/test_test.go
index 4a329e48c7..291ad108d6 100644
--- a/internal/command/test_test.go
+++ b/internal/command/test_test.go
@@ -161,6 +161,14 @@ func TestTest(t *testing.T) {
 			expected: "1 passed, 0 failed.",
 			code:     0,
 		},
+		"pass_with_tests_dir_variables": {
+			expected: "1 passed, 0 failed.",
+			code:     0,
+		},
+		"override_with_tests_dir_variables": {
+			expected: "1 passed, 0 failed.",
+			code:     0,
+		},
 	}
 	for name, tc := range tcs {
 		t.Run(name, func(t *testing.T) {
diff --git a/internal/command/testdata/test/override_with_tests_dir_variables/main.tf b/internal/command/testdata/test/override_with_tests_dir_variables/main.tf
new file mode 100644
index 0000000000..ff87bac8e8
--- /dev/null
+++ b/internal/command/testdata/test/override_with_tests_dir_variables/main.tf
@@ -0,0 +1,7 @@
+variable "testVar" {
+  type = string
+}
+
+resource "test_resource" "testRes" {
+  value = var.testVar
+}
diff --git a/internal/command/testdata/test/override_with_tests_dir_variables/terraform.tfvars b/internal/command/testdata/test/override_with_tests_dir_variables/terraform.tfvars
new file mode 100644
index 0000000000..1f3399c64c
--- /dev/null
+++ b/internal/command/testdata/test/override_with_tests_dir_variables/terraform.tfvars
@@ -0,0 +1 @@
+testVar = "ValueFROM./tfvars"
diff --git a/internal/command/testdata/test/override_with_tests_dir_variables/tests/main.tftest.hcl b/internal/command/testdata/test/override_with_tests_dir_variables/tests/main.tftest.hcl
new file mode 100644
index 0000000000..832360947c
--- /dev/null
+++ b/internal/command/testdata/test/override_with_tests_dir_variables/tests/main.tftest.hcl
@@ -0,0 +1,6 @@
+run "validate_test_resource" {
+  assert {
+    condition     = test_resource.testRes.value == "ValueFROMtests/tfvars"
+    error_message = "invalid value"
+  }
+}
diff --git a/internal/command/testdata/test/override_with_tests_dir_variables/tests/terraform.tfvars b/internal/command/testdata/test/override_with_tests_dir_variables/tests/terraform.tfvars
new file mode 100644
index 0000000000..917e0d9813
--- /dev/null
+++ b/internal/command/testdata/test/override_with_tests_dir_variables/tests/terraform.tfvars
@@ -0,0 +1 @@
+testVar = "ValueFROMtests/tfvars"
diff --git a/internal/command/testdata/test/pass_with_tests_dir_variables/main.tf b/internal/command/testdata/test/pass_with_tests_dir_variables/main.tf
new file mode 100644
index 0000000000..ff87bac8e8
--- /dev/null
+++ b/internal/command/testdata/test/pass_with_tests_dir_variables/main.tf
@@ -0,0 +1,7 @@
+variable "testVar" {
+  type = string
+}
+
+resource "test_resource" "testRes" {
+  value = var.testVar
+}
diff --git a/internal/command/testdata/test/pass_with_tests_dir_variables/tests/main.tftest.hcl b/internal/command/testdata/test/pass_with_tests_dir_variables/tests/main.tftest.hcl
new file mode 100644
index 0000000000..832360947c
--- /dev/null
+++ b/internal/command/testdata/test/pass_with_tests_dir_variables/tests/main.tftest.hcl
@@ -0,0 +1,6 @@
+run "validate_test_resource" {
+  assert {
+    condition     = test_resource.testRes.value == "ValueFROMtests/tfvars"
+    error_message = "invalid value"
+  }
+}
diff --git a/internal/command/testdata/test/pass_with_tests_dir_variables/tests/terraform.tfvars b/internal/command/testdata/test/pass_with_tests_dir_variables/tests/terraform.tfvars
new file mode 100644
index 0000000000..917e0d9813
--- /dev/null
+++ b/internal/command/testdata/test/pass_with_tests_dir_variables/tests/terraform.tfvars
@@ -0,0 +1 @@
+testVar = "ValueFROMtests/tfvars"
diff --git a/website/docs/cli/commands/test/index.mdx b/website/docs/cli/commands/test/index.mdx
index 62da5a8848..18a7989aac 100644
--- a/website/docs/cli/commands/test/index.mdx
+++ b/website/docs/cli/commands/test/index.mdx
@@ -244,10 +244,11 @@ can provide variables to your test run using any of the following methods:
 | Order  | Source                                                                                                                         |
 |:------:|:-------------------------------------------------------------------------------------------------------------------------------|
 |   1    | Environment variables with the `TF_VAR_` prefix.                                                                               |
-|   2    | tfvar files specified: `terraform.tfvars` and `*.auto.tfvars`.                                                                 |
-|   3    | Commandline variables defined using the flag `-var`, and the variables defined in the files specified by the flag `-var-file`. |
-|   4    | The variables from the `variables` block in a test file.                                                                       |
-|   5    | The variables from the `variables` block in `run` block.                                                                       |
+|   2    | tfvar files specified in the current directory: `terraform.tfvars` and `*.auto.tfvars`.                                        |
+|   3    | tfvar files specified in the tests directory: `tests/terraform.tfvars` and `tests/*.auto.tfvars`.                              |
+|   4    | Commandline variables defined using the flag `-var`, and the variables defined in the files specified by the flag `-var-file`. |
+|   5    | The variables from the `variables` block in a test file.                                                                       |
+|   6    | The variables from the `variables` block in `run` block.                                                                       |
 
 OpenTofu evaluates the variables in the order listed above, so you can use it to override the previously set variable.
 For example: