diff --git a/cli/azd/docs/extensions/extension-resolution-and-versioning.md b/cli/azd/docs/extensions/extension-resolution-and-versioning.md
index 3fbb0c1a673..0cd889cd877 100644
--- a/cli/azd/docs/extensions/extension-resolution-and-versioning.md
+++ b/cli/azd/docs/extensions/extension-resolution-and-versioning.md
@@ -370,7 +370,8 @@ When `latest` is specified (or the version is omitted), `azd` selects the **high
 | *"extension X not found"* | The extension ID is not present in any configured source. | Verify your sources with `azd extension source list`. Check the extension ID spelling. |
 | *"found in multiple sources, specify exact source"* | The extension exists in two or more configured sources. | Use `azd extension install X --source <name>` to specify which source to use. |
 | *"no matching version found"* | The version constraint excludes all available versions. | Check available versions with `azd extension show X`. Relax the constraint. |
-| *"dependency X not found"* | A recursive dependency declared by the extension is missing from all sources. | Ensure the dependency is published to an accessible source. |
+| *"dependency X not found"* | A recursive dependency is not installed and is missing from the parent extension's source. | Publish the dependency to the same source or install it explicitly before installing the parent. |
+| *"no version satisfies constraint"* | The dependency exists, but none of its versions match the parent extension's constraint. | Publish a compatible dependency version or update the parent extension's constraint. |
 | Stale version installed | The source cache has not expired yet, so `azd` is using an older manifest. | Set `AZD_EXTENSION_CACHE_TTL=0s` or delete files in `~/.azd/cache/extensions/`. |
 
 ### Diagnostic Steps
diff --git a/cli/azd/pkg/extensions/manager.go b/cli/azd/pkg/extensions/manager.go
index f5cae401072..9e5dc85745e 100644
--- a/cli/azd/pkg/extensions/manager.go
+++ b/cli/azd/pkg/extensions/manager.go
@@ -62,6 +62,24 @@ func (e *DependencyNotFoundError) Error() string {
 	return fmt.Sprintf("dependency %s required by %s was not found", e.DependencyId, e.ParentId)
 }
 
+// DependencyVersionNotFoundError indicates that a required dependency exists
+// but none of its versions satisfy the constraint declared by its parent.
+type DependencyVersionNotFoundError struct {
+	// DependencyId is the id of the dependency without a matching version.
+	DependencyId string
+	// ParentId is the id of the extension that declares the dependency.
+	ParentId string
+	// Constraint is the version constraint that could not be satisfied.
+	Constraint string
+}
+
+func (e *DependencyVersionNotFoundError) Error() string {
+	return fmt.Sprintf(
+		"dependency %s required by %s was found, but no version satisfies constraint %q",
+		e.DependencyId, e.ParentId, e.Constraint,
+	)
+}
+
 // DependencyAmbiguousSourceError indicates that a required dependency of an
 // extension was found in more than one configured source, so azd cannot decide
 // which one to use. The caller must disambiguate by specifying an exact source.
@@ -630,6 +648,22 @@ func (m *Manager) installInternal(
 			}
 
 			if len(dependencyMatches) == 0 {
+				if dependency.Version != "" && !strings.EqualFold(dependency.Version, "latest") {
+					unconstrainedOptions := *dependencyOptions
+					unconstrainedOptions.Version = ""
+					unconstrainedMatches, err := m.FindExtensions(ctx, &unconstrainedOptions)
+					if err != nil {
+						return nil, fmt.Errorf("failed to find dependency %s: %w", dependency.Id, err)
+					}
+					if len(unconstrainedMatches) > 0 {
+						return nil, &DependencyVersionNotFoundError{
+							DependencyId: dependency.Id,
+							ParentId:     extension.Id,
+							Constraint:   dependency.Version,
+						}
+					}
+				}
+
 				return nil, &DependencyNotFoundError{DependencyId: dependency.Id, ParentId: extension.Id}
 			}
 
diff --git a/cli/azd/pkg/extensions/manager_test.go b/cli/azd/pkg/extensions/manager_test.go
index a3b39450e21..22c2b6e76d1 100644
--- a/cli/azd/pkg/extensions/manager_test.go
+++ b/cli/azd/pkg/extensions/manager_test.go
@@ -519,6 +519,72 @@ func Test_Install_PackDependency_SemverConstraint(t *testing.T) {
 	require.Equal(t, "0.1.31-preview", installed.Version)
 }
 
+func Test_Install_PackDependency_ErrorClassification(t *testing.T) {
+	t.Parallel()
+
+	tests := []struct {
+		name                    string
+		dependency              *ExtensionMetadata
+		expectVersionConstraint bool
+	}{
+		{
+			name: "dependency not found",
+		},
+		{
+			name: "dependency version not found",
+			dependency: &ExtensionMetadata{
+				Id:     "test.child",
+				Source: "local",
+				Versions: []ExtensionVersion{
+					{Version: "1.0.0", Artifacts: sampleArtifacts},
+				},
+			},
+			expectVersionConstraint: true,
+		},
+	}
+
+	for _, test := range tests {
+		t.Run(test.name, func(t *testing.T) {
+			parent := &ExtensionMetadata{
+				Id:     "test.pack",
+				Source: "local",
+				Versions: []ExtensionVersion{
+					{
+						Version: "1.0.0",
+						Dependencies: []ExtensionDependency{
+							{Id: "test.child", Version: ">=2.0.0"},
+						},
+					},
+				},
+			}
+			sourceExtensions := []*ExtensionMetadata{parent}
+			if test.dependency != nil {
+				sourceExtensions = append(sourceExtensions, test.dependency)
+			}
+
+			manager := newTestManager(t)
+			manager.sources = []Source{&mockSource{name: "local", extensions: sourceExtensions}}
+
+			_, err := manager.Install(t.Context(), parent, "")
+			require.Error(t, err)
+			if test.expectVersionConstraint {
+				versionErr, ok := errors.AsType[*DependencyVersionNotFoundError](err)
+				require.True(t, ok)
+				require.Equal(t, "test.child", versionErr.DependencyId)
+				require.Equal(t, "test.pack", versionErr.ParentId)
+				require.Equal(t, ">=2.0.0", versionErr.Constraint)
+				require.Contains(t, versionErr.Error(), "was found, but no version satisfies constraint")
+				return
+			}
+
+			notFoundErr, ok := errors.AsType[*DependencyNotFoundError](err)
+			require.True(t, ok)
+			require.Equal(t, "test.child", notFoundErr.DependencyId)
+			require.Equal(t, "test.pack", notFoundErr.ParentId)
+		})
+	}
+}
+
 func Test_Install_PackDependency_InstalledDependencyMustSatisfyConstraint(t *testing.T) {
 	mockContext := mocks.NewMockContext(t.Context())