diff --git a/.github/workflows/test-pr-arm64.yaml b/.github/workflows/test-pr-arm64.yaml
index e5855ced2..4e48da3e3 100644
--- a/.github/workflows/test-pr-arm64.yaml
+++ b/.github/workflows/test-pr-arm64.yaml
@@ -75,5 +75,14 @@ jobs:
       - name: "Install latest devcontainer CLI"
         run: npm install -g @devcontainers/cli
 
+      - name: "Exclude iptables-isolation scenarios from docker-in-docker"
+        if: matrix.features == 'docker-in-docker'
+        run: |
+          sudo apt-get update && sudo apt-get install -y jq
+          sed 's://.*$::' test/docker-in-docker/scenarios.json \
+            | jq 'del(.docker_without_iptables, .docker_without_iptables_ubuntu)' \
+            > test/docker-in-docker/scenarios.json.tmp
+          mv test/docker-in-docker/scenarios.json.tmp test/docker-in-docker/scenarios.json
+
       - name: "Testing '${{ matrix.features }}' scenarios"
         run: devcontainer features test -f ${{ matrix.features }} --skip-autogenerated  .
diff --git a/.github/workflows/test-pr.yaml b/.github/workflows/test-pr.yaml
index e00c50876..9a7edf13d 100644
--- a/.github/workflows/test-pr.yaml
+++ b/.github/workflows/test-pr.yaml
@@ -92,5 +92,42 @@ jobs:
       - name: "Install latest devcontainer CLI"
         run: npm install -g @devcontainers/cli
 
+      - name: "Exclude iptables-isolation scenarios from docker-in-docker"
+        if: matrix.features == 'docker-in-docker'
+        run: |
+          sudo apt-get update && sudo apt-get install -y jq
+          sed 's://.*$::' test/docker-in-docker/scenarios.json \
+            | jq 'del(.docker_without_iptables, .docker_without_iptables_ubuntu)' \
+            > test/docker-in-docker/scenarios.json.tmp
+          mv test/docker-in-docker/scenarios.json.tmp test/docker-in-docker/scenarios.json
+
       - name: "Testing '${{ matrix.features }}' scenarios"
         run: devcontainer features test -f ${{ matrix.features }} --skip-autogenerated  .
+
+  iptables-isolation:
+    needs: [detect-changes]
+    if: contains(fromJSON(needs.detect-changes.outputs.features), 'docker-in-docker')
+    runs-on: ubuntu-latest
+    continue-on-error: true
+    strategy:
+      fail-fast: false
+      matrix:
+        scenario:
+          - docker_without_iptables
+          - docker_without_iptables_ubuntu
+    steps:
+      - uses: actions/checkout@v6
+
+      - name: "Install latest devcontainer CLI"
+        run: npm install -g @devcontainers/cli
+
+      - name: "Isolate scenario '${{ matrix.scenario }}'"
+        run: |
+          sudo apt-get update && sudo apt-get install -y jq
+          sed 's://.*$::' test/docker-in-docker/scenarios.json \
+            | jq '{ "${{ matrix.scenario }}": .["${{ matrix.scenario }}"] }' \
+            > test/docker-in-docker/scenarios.json.tmp
+          mv test/docker-in-docker/scenarios.json.tmp test/docker-in-docker/scenarios.json
+
+      - name: "Testing docker-in-docker scenario '${{ matrix.scenario }}'"
+        run: devcontainer features test --features docker-in-docker --filter ${{ matrix.scenario }} --skip-autogenerated  .
diff --git a/src/docker-in-docker/devcontainer-feature.json b/src/docker-in-docker/devcontainer-feature.json
index 0af78923e..0c5259ac2 100644
--- a/src/docker-in-docker/devcontainer-feature.json
+++ b/src/docker-in-docker/devcontainer-feature.json
@@ -1,6 +1,6 @@
 {
   "id": "docker-in-docker",
-  "version": "3.0.1",
+  "version": "4.0.0",
   "name": "Docker (Docker-in-Docker)",
   "documentationURL": "https://github.com/devcontainers/features/tree/main/src/docker-in-docker",
   "description": "Create child containers *inside* a container, independent from the host's docker instance. Installs Docker extension in the container along with needed CLIs.",
diff --git a/src/docker-in-docker/install.sh b/src/docker-in-docker/install.sh
index e9740efc5..543e90055 100755
--- a/src/docker-in-docker/install.sh
+++ b/src/docker-in-docker/install.sh
@@ -314,25 +314,28 @@ if [ "${ADJUSTED_ID}" = "debian" ] && command -v update-ca-certificates > /dev/n
 fi
 
 # Swap to legacy iptables for compatibility (Debian only)
-if [ "${ADJUSTED_ID}" = "debian" ]; then
+#if [ "${ADJUSTED_ID}" = "debian" ]; then
     # On distros where legacy iptables is no longer kernel-supported (e.g. Ubuntu 26.04 / resolute),
     # prefer iptables-nft. Otherwise prefer legacy for backward compatibility.
-    use_nft=false
-    case "${VERSION_CODENAME}" in
-        resolute) use_nft=true ;;
-    esac
-
-    if [ "${use_nft}" = "true" ] && type iptables-nft > /dev/null 2>&1; then
-        update-alternatives --set iptables /usr/sbin/iptables-nft || true
-        update-alternatives --set ip6tables /usr/sbin/ip6tables-nft || true
-    elif type iptables-legacy > /dev/null 2>&1; then
-        update-alternatives --set iptables /usr/sbin/iptables-legacy || true
-        update-alternatives --set ip6tables /usr/sbin/ip6tables-legacy || true
-    elif type iptables-nft > /dev/null 2>&1; then
-        update-alternatives --set iptables /usr/sbin/iptables-nft || true
-        update-alternatives --set ip6tables /usr/sbin/ip6tables-nft || true
-    fi
-fi
+#    use_nft=false
+#    case "${VERSION_CODENAME}" in
+#        resolute) use_nft=true ;;
+#    esac
+
+#    if [ "${use_nft}" = "true" ] && type iptables-nft > /dev/null 2>&1; then
+#        echo "(*) Setting iptables alternatives to nft for better compatibility with newer kernels"
+#        update-alternatives --set iptables /usr/sbin/iptables-nft || true
+#        update-alternatives --set ip6tables /usr/sbin/ip6tables-nft || true
+#    elif type iptables-legacy > /dev/null 2>&1 && iptables-legacy -L > /dev/null 2>&1; then
+#        echo "(*) Setting iptables alternatives to legacy for better compatibility with Docker and older kernels"
+#        update-alternatives --set iptables /usr/sbin/iptables-legacy || true
+#        update-alternatives --set ip6tables /usr/sbin/ip6tables-legacy || true
+#    elif type iptables-nft > /dev/null 2>&1; then
+#        echo "(*) Setting iptables alternatives to nft for better compatibility with newer kernels for non resolute"
+#        update-alternatives --set iptables /usr/sbin/iptables-nft || true
+#        update-alternatives --set ip6tables /usr/sbin/ip6tables-nft || true
+#    fi
+#fi
 
 # Set up the necessary repositories
 if [ "${USE_MOBY}" = "true" ]; then
@@ -970,6 +973,27 @@ DOCKER_DEFAULT_ADDRESS_POOL=${DOCKER_DEFAULT_ADDRESS_POOL}
 DOCKER_DEFAULT_IP6_TABLES=${DOCKER_DEFAULT_IP6_TABLES}
 EOF
 
+# On Debian-based images, re-assert the iptables alternative at container start.
+if [ "${ADJUSTED_ID}" = "debian" ]; then
+    tee -a /usr/local/share/docker-init.sh > /dev/null \
+<< 'EOF'
+# Prefer legacy only when the ip_tables kernel module is actually present.
+# (Do NOT call `iptables-legacy -L/-nL` to test this — it auto-modprobes ip_tables
+# and would defeat hosts/scenarios where the module is intentionally absent.)
+if type iptables-legacy > /dev/null 2>&1 \
+   && { grep -qE '^(ip_tables)\b' /proc/modules \
+        || [ -d /sys/module/ip_tables ]; } \
+   && update-alternatives --list iptables 2>/dev/null | grep -q '/usr/sbin/iptables-legacy'; then
+    update-alternatives --set iptables  /usr/sbin/iptables-legacy || true
+    update-alternatives --set ip6tables /usr/sbin/ip6tables-legacy || true
+elif type iptables-nft > /dev/null 2>&1 \
+     && update-alternatives --list iptables 2>/dev/null | grep -q '/usr/sbin/iptables-nft'; then
+    update-alternatives --set iptables  /usr/sbin/iptables-nft  || true
+    update-alternatives --set ip6tables /usr/sbin/ip6tables-nft || true
+fi
+EOF
+fi
+
 tee -a /usr/local/share/docker-init.sh > /dev/null \
 << 'EOF'
 dockerd_start="AZURE_DNS_AUTO_DETECTION=${AZURE_DNS_AUTO_DETECTION} DOCKER_DEFAULT_ADDRESS_POOL=${DOCKER_DEFAULT_ADDRESS_POOL} DOCKER_DEFAULT_IP6_TABLES=${DOCKER_DEFAULT_IP6_TABLES} $(cat << 'INNEREOF'
diff --git a/test/docker-in-docker/docker_with_iptables.sh b/test/docker-in-docker/docker_with_iptables.sh
new file mode 100644
index 000000000..e29e10146
--- /dev/null
+++ b/test/docker-in-docker/docker_with_iptables.sh
@@ -0,0 +1,20 @@
+#!/bin/bash
+
+set -e
+
+# Optional: Import test library
+source dev-container-features-test-lib
+
+# Feature specific tests
+check "iptables works" sudo iptables -L
+check "iptables uses legacy" bash -c "iptables --version | grep legacy"
+
+check "version" docker  --version
+check "docker-ps" bash -c "docker ps"
+check "log-exists" bash -c "ls /tmp/dockerd.log"
+check "log-for-completion" bash -c "cat /tmp/dockerd.log | grep 'Daemon has completed initialization'"
+check "log-contents" bash -c "cat /tmp/dockerd.log | grep 'API listen on /var/run/docker.sock'"
+
+# Report result
+reportResults
+
diff --git a/test/docker-in-docker/docker_with_iptables_ubuntu.sh b/test/docker-in-docker/docker_with_iptables_ubuntu.sh
new file mode 100644
index 000000000..e29e10146
--- /dev/null
+++ b/test/docker-in-docker/docker_with_iptables_ubuntu.sh
@@ -0,0 +1,20 @@
+#!/bin/bash
+
+set -e
+
+# Optional: Import test library
+source dev-container-features-test-lib
+
+# Feature specific tests
+check "iptables works" sudo iptables -L
+check "iptables uses legacy" bash -c "iptables --version | grep legacy"
+
+check "version" docker  --version
+check "docker-ps" bash -c "docker ps"
+check "log-exists" bash -c "ls /tmp/dockerd.log"
+check "log-for-completion" bash -c "cat /tmp/dockerd.log | grep 'Daemon has completed initialization'"
+check "log-contents" bash -c "cat /tmp/dockerd.log | grep 'API listen on /var/run/docker.sock'"
+
+# Report result
+reportResults
+
diff --git a/test/docker-in-docker/docker_without_iptables.sh b/test/docker-in-docker/docker_without_iptables.sh
new file mode 100644
index 000000000..6ecaddc8d
--- /dev/null
+++ b/test/docker-in-docker/docker_without_iptables.sh
@@ -0,0 +1,34 @@
+#!/bin/bash
+
+set -e
+
+# Optional: Import test library
+source dev-container-features-test-lib
+
+# Feature specific tests
+check "docker-ps" bash -c "docker ps"
+# Fail loudly if dockerd never finished initializing, printing the real error
+check "dockerd-started-successfully" bash -c '
+    if ! grep -q "Daemon has completed initialization" /tmp/dockerd.log; then
+        echo "❌ Docker daemon failed to start. Last errors from /tmp/dockerd.log:"
+        echo "----- dockerd.log (tail) -----"
+        tail -n 100 /tmp/dockerd.log
+        echo "----- error/fatal lines -----"
+        grep -iE "error|fatal|failed|panic" /tmp/dockerd.log || true
+        exit 1
+    fi
+'
+check "log-for-completion" bash -c "cat /tmp/dockerd.log | grep 'Daemon has completed initialization'"
+
+check "iptables works" sudo iptables -L
+check "iptables uses nf_tables" bash -c "iptables --version | grep nf_tables"
+
+check "version" docker  --version
+check "docker-ps" bash -c "docker ps"
+check "log-exists" bash -c "ls /tmp/dockerd.log"
+check "log-for-completion" bash -c "cat /tmp/dockerd.log | grep 'Daemon has completed initialization'"
+check "log-contents" bash -c "cat /tmp/dockerd.log | grep 'API listen on /var/run/docker.sock'"
+
+# Report result
+reportResults
+
diff --git a/test/docker-in-docker/docker_without_iptables_ubuntu.sh b/test/docker-in-docker/docker_without_iptables_ubuntu.sh
new file mode 100644
index 000000000..6d2dab04c
--- /dev/null
+++ b/test/docker-in-docker/docker_without_iptables_ubuntu.sh
@@ -0,0 +1,20 @@
+#!/bin/bash
+
+set -e
+
+# Optional: Import test library
+source dev-container-features-test-lib
+
+# Feature specific tests
+check "iptables works" sudo iptables -L
+check "iptables uses nf_tables" bash -c "iptables --version | grep nf_tables"
+
+check "version" docker  --version
+check "docker-ps" bash -c "docker ps"
+check "log-exists" bash -c "ls /tmp/dockerd.log"
+check "log-for-completion" bash -c "cat /tmp/dockerd.log | grep 'Daemon has completed initialization'"
+check "log-contents" bash -c "cat /tmp/dockerd.log | grep 'API listen on /var/run/docker.sock'"
+
+# Report result
+reportResults
+
diff --git a/test/docker-in-docker/scenarios.json b/test/docker-in-docker/scenarios.json
index 2f9df3958..497708f26 100644
--- a/test/docker-in-docker/scenarios.json
+++ b/test/docker-in-docker/scenarios.json
@@ -1,4 +1,40 @@
 {
+    "docker_without_iptables": {
+        "image": "mcr.microsoft.com/devcontainers/base:debian",
+        "features": {
+            "docker-in-docker": {
+                "moby": "false"
+            }
+        },
+        "initializeCommand": "sudo modprobe --remove --remove-holders --wait 1000 ip_tables"
+    },
+    "docker_with_iptables": {
+        "image": "mcr.microsoft.com/devcontainers/base:debian",
+        "features": {
+            "docker-in-docker": {
+                "moby": "false"
+            }
+        },
+        "initializeCommand": "sudo modprobe ip_tables"
+    },
+    "docker_without_iptables_ubuntu": {
+        "image": "mcr.microsoft.com/devcontainers/base:ubuntu",
+        "features": {
+            "docker-in-docker": {
+                "moby": "false"
+            }
+        },
+        "initializeCommand": "sudo modprobe --remove --remove-holders --wait 1000 ip_tables"
+    },
+    "docker_with_iptables_ubuntu": {
+        "image": "mcr.microsoft.com/devcontainers/base:ubuntu",
+        "features": {
+            "docker-in-docker": {
+                "moby": "false"
+            }
+        },
+        "initializeCommand": "sudo modprobe ip_tables"
+    },        
     "overlayfs_containerd_root": {
         "image": "mcr.microsoft.com/devcontainers/base:noble",
         "features": {