diff --git a/Cargo.lock b/Cargo.lock
index 4ab141f463a..4d2392a4b03 100644
--- a/Cargo.lock
+++ b/Cargo.lock
@@ -1917,6 +1917,7 @@ dependencies = [
  "tracing",
  "tracing-subscriber",
  "unicode-xid",
+ "walkdir",
 ]
 
 [[package]]
diff --git a/forc-pkg/src/manifest.rs b/forc-pkg/src/manifest.rs
index 1ee8bb95b46..67100bc5694 100644
--- a/forc-pkg/src/manifest.rs
+++ b/forc-pkg/src/manifest.rs
@@ -1,7 +1,7 @@
 use crate::pkg::{manifest_file_missing, parsing_failed, wrong_program_type};
 use anyhow::{anyhow, bail, Context, Result};
 use forc_tracing::println_yellow_err;
-use forc_util::{find_manifest_dir, validate_name};
+use forc_util::{find_nested_manifest_dir, find_parent_manifest_dir, validate_name};
 use serde::{Deserialize, Serialize};
 use std::{
     collections::{BTreeMap, HashMap},
@@ -249,7 +249,7 @@ impl PackageManifestFile {
     /// This is short for `PackageManifest::from_file`, but takes care of constructing the path to the
     /// file.
     pub fn from_dir(manifest_dir: &Path) -> Result<Self> {
-        let dir = forc_util::find_manifest_dir(manifest_dir)
+        let dir = forc_util::find_parent_manifest_dir(manifest_dir)
             .ok_or_else(|| manifest_file_missing(manifest_dir))?;
         let path = dir.join(constants::MANIFEST_FILE_NAME);
         Self::from_file(path)
@@ -273,6 +273,18 @@ impl PackageManifestFile {
                 self.project.entry
             )
         }
+
+        // Check for nested packages.
+        //
+        // `path` is the path to manifest file. To start nested package search we need to start
+        // from manifest's directory. So, last part of the path (the filename, "/forc.toml") needs
+        // to be removed.
+        let mut pkg_dir = self.path.to_path_buf();
+        pkg_dir.pop();
+        if let Some(nested_package) = find_nested_manifest_dir(&pkg_dir) {
+            // remove file name from nested_package_manifest
+            bail!("Nested packages are not supported, please consider seperating the nested package at {} from the package at {}, or if it makes sense consider creating a workspace.", nested_package.display(), pkg_dir.display())
+        }
         Ok(())
     }
 
@@ -450,7 +462,8 @@ impl PackageManifest {
     /// This is short for `PackageManifest::from_file`, but takes care of constructing the path to the
     /// file.
     pub fn from_dir(dir: &Path) -> Result<Self> {
-        let manifest_dir = find_manifest_dir(dir).ok_or_else(|| manifest_file_missing(dir))?;
+        let manifest_dir =
+            find_parent_manifest_dir(dir).ok_or_else(|| manifest_file_missing(dir))?;
         let file_path = manifest_dir.join(constants::MANIFEST_FILE_NAME);
         Self::from_file(&file_path)
     }
@@ -734,24 +747,25 @@ impl WorkspaceManifestFile {
     /// This is short for `PackageManifest::from_file`, but takes care of constructing the path to the
     /// file.
     pub fn from_dir(manifest_dir: &Path) -> Result<Self> {
-        let dir = forc_util::find_manifest_dir_with_check(manifest_dir, |possible_manifest_dir| {
-            // Check if the found manifest file is a workspace manifest file or a standalone
-            // package manifest file.
-            let possible_path = possible_manifest_dir.join(constants::MANIFEST_FILE_NAME);
-            // We should not continue to search if the given manifest is a workspace manifest with
-            // some issues.
-            //
-            // If the error is missing field `workspace` (which happens when trying to read a
-            // package manifest as a workspace manifest), look into the parent directories for a
-            // legitimate workspace manifest. If the error returned is something else this is a
-            // workspace manifest with errors, classify this as a workspace manifest but with
-            // errors so that the erros will be displayed to the user.
-            Self::from_file(possible_path)
-                .err()
-                .map(|e| !e.to_string().contains("missing field `workspace`"))
-                .unwrap_or_else(|| true)
-        })
-        .ok_or_else(|| manifest_file_missing(manifest_dir))?;
+        let dir =
+            forc_util::find_parent_manifest_dir_with_check(manifest_dir, |possible_manifest_dir| {
+                // Check if the found manifest file is a workspace manifest file or a standalone
+                // package manifest file.
+                let possible_path = possible_manifest_dir.join(constants::MANIFEST_FILE_NAME);
+                // We should not continue to search if the given manifest is a workspace manifest with
+                // some issues.
+                //
+                // If the error is missing field `workspace` (which happens when trying to read a
+                // package manifest as a workspace manifest), look into the parent directories for a
+                // legitimate workspace manifest. If the error returned is something else this is a
+                // workspace manifest with errors, classify this as a workspace manifest but with
+                // errors so that the erros will be displayed to the user.
+                Self::from_file(possible_path)
+                    .err()
+                    .map(|e| !e.to_string().contains("missing field `workspace`"))
+                    .unwrap_or_else(|| true)
+            })
+            .ok_or_else(|| manifest_file_missing(manifest_dir))?;
         let path = dir.join(constants::MANIFEST_FILE_NAME);
         Self::from_file(path)
     }
diff --git a/forc-plugins/forc-fmt/src/main.rs b/forc-plugins/forc-fmt/src/main.rs
index 9cd8010fa27..747e9cd98cd 100644
--- a/forc-plugins/forc-fmt/src/main.rs
+++ b/forc-plugins/forc-fmt/src/main.rs
@@ -14,7 +14,7 @@ use taplo::formatter as taplo_fmt;
 use tracing::{error, info};
 
 use forc_tracing::{init_tracing_subscriber, println_green, println_red};
-use forc_util::{find_manifest_dir, is_sway_file};
+use forc_util::{find_parent_manifest_dir, is_sway_file};
 use sway_core::{BuildConfig, BuildTarget};
 use sway_utils::{constants, get_sway_files};
 use swayfmt::Formatter;
@@ -62,8 +62,8 @@ fn run() -> Result<()> {
 
         // If we're formatting a single file, find the nearest manifest if within a project.
         // Otherwise, we simply provide 'None' to format_file().
-        let manifest_file =
-            find_manifest_dir(file_path).map(|path| path.join(constants::MANIFEST_FILE_NAME));
+        let manifest_file = find_parent_manifest_dir(file_path)
+            .map(|path| path.join(constants::MANIFEST_FILE_NAME));
 
         if is_sway_file(file_path) {
             format_file(&app, file_path.to_path_buf(), manifest_file, &mut formatter)?;
@@ -252,7 +252,7 @@ fn format_manifest(app: &App, manifest_file: PathBuf) -> Result<bool> {
 
 /// Format the package at the given directory.
 fn format_pkg_at_dir(app: &App, dir: &Path, formatter: &mut Formatter) -> Result<()> {
-    match find_manifest_dir(dir) {
+    match find_parent_manifest_dir(dir) {
         Some(path) => {
             let manifest_path = path.clone();
             let manifest_file = manifest_path.join(constants::MANIFEST_FILE_NAME);
diff --git a/forc-util/Cargo.toml b/forc-util/Cargo.toml
index 7b4de2d675c..7aead3a6781 100644
--- a/forc-util/Cargo.toml
+++ b/forc-util/Cargo.toml
@@ -26,3 +26,4 @@ sway-utils = { version = "0.37.0", path = "../sway-utils" }
 tracing = "0.1"
 tracing-subscriber = { version = "0.3", features = ["ansi", "env-filter", "json"] }
 unicode-xid = "0.2.2"
+walkdir = "2.3.3"
diff --git a/forc-util/src/lib.rs b/forc-util/src/lib.rs
index 0b867632b3f..b2b3057c7d6 100644
--- a/forc-util/src/lib.rs
+++ b/forc-util/src/lib.rs
@@ -64,7 +64,37 @@ pub fn format_log_receipts(receipts: &[fuel_tx::Receipt], pretty_print: bool) ->
     }
 }
 
+/// Continually go down in the file tree until a Forc manifest file is found.
+pub fn find_nested_manifest_dir(starter_path: &Path) -> Option<PathBuf> {
+    find_nested_dir_with_file(starter_path, constants::MANIFEST_FILE_NAME)
+}
+
+/// Continually go down in the file tree until a specified file is found.
+///
+/// Starts the search from child dirs of `starter_path`.
+pub fn find_nested_dir_with_file(starter_path: &Path, file_name: &str) -> Option<PathBuf> {
+    use walkdir::WalkDir;
+    let starter_dir = if starter_path.is_dir() {
+        starter_path
+    } else {
+        starter_path.parent()?
+    };
+    WalkDir::new(starter_path)
+        .into_iter()
+        .filter_map(|e| e.ok())
+        .filter(|entry| entry.path() != starter_dir.join(file_name))
+        .filter(|entry| entry.file_name().to_string_lossy() == file_name)
+        .map(|entry| {
+            let mut entry = entry.path().to_path_buf();
+            entry.pop();
+            entry
+        })
+        .next()
+}
+
 /// Continually go up in the file tree until a specified file is found.
+///
+/// Starts the search from `starter_path`.
 #[allow(clippy::branches_sharing_code)]
 pub fn find_parent_dir_with_file(starter_path: &Path, file_name: &str) -> Option<PathBuf> {
     let mut path = std::fs::canonicalize(starter_path).ok()?;
@@ -82,22 +112,22 @@ pub fn find_parent_dir_with_file(starter_path: &Path, file_name: &str) -> Option
     None
 }
 /// Continually go up in the file tree until a Forc manifest file is found.
-pub fn find_manifest_dir(starter_path: &Path) -> Option<PathBuf> {
+pub fn find_parent_manifest_dir(starter_path: &Path) -> Option<PathBuf> {
     find_parent_dir_with_file(starter_path, constants::MANIFEST_FILE_NAME)
 }
 
 /// Continually go up in the file tree until a Forc manifest file is found and given predicate
 /// returns true.
-pub fn find_manifest_dir_with_check<F>(starter_path: &Path, f: F) -> Option<PathBuf>
+pub fn find_parent_manifest_dir_with_check<F>(starter_path: &Path, f: F) -> Option<PathBuf>
 where
     F: Fn(&Path) -> bool,
 {
-    find_manifest_dir(starter_path).and_then(|manifest_dir| {
+    find_parent_manifest_dir(starter_path).and_then(|manifest_dir| {
         // If given check satisifies return current dir otherwise start searching from the parent.
         if f(&manifest_dir) {
             Some(manifest_dir)
         } else if let Some(parent_dir) = manifest_dir.parent() {
-            find_manifest_dir_with_check(parent_dir, f)
+            find_parent_manifest_dir_with_check(parent_dir, f)
         } else {
             None
         }
diff --git a/forc/src/ops/forc_clean.rs b/forc/src/ops/forc_clean.rs
index f07ef7b80db..83f3b919e09 100644
--- a/forc/src/ops/forc_clean.rs
+++ b/forc/src/ops/forc_clean.rs
@@ -1,7 +1,7 @@
 use crate::cli::CleanCommand;
 use anyhow::{anyhow, bail, Result};
 use forc_pkg::manifest::ManifestFile;
-use forc_util::{default_output_directory, find_manifest_dir};
+use forc_util::{default_output_directory, find_parent_manifest_dir};
 use std::path::PathBuf;
 use sway_utils::MANIFEST_FILE_NAME;
 
@@ -15,7 +15,7 @@ pub fn clean(command: CleanCommand) -> Result<()> {
         std::env::current_dir().map_err(|e| anyhow!("{:?}", e))?
     };
 
-    let manifest_dir = match find_manifest_dir(&this_dir) {
+    let manifest_dir = match find_parent_manifest_dir(&this_dir) {
         Some(dir) => dir,
         None => {
             bail!(
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/.gitignore b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/.gitignore
new file mode 100644
index 00000000000..77d3844f58c
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/.gitignore
@@ -0,0 +1,2 @@
+out
+target
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/Forc.toml b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/Forc.toml
new file mode 100644
index 00000000000..d3ea8b1a28e
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/Forc.toml
@@ -0,0 +1,6 @@
+[project]
+authors = ["Fuel Labs <contact@fuel.sh>"]
+entry = "main.sw"
+license = "Apache-2.0"
+name = "test_contract"
+implicit-std = false
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/main.sw b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/main.sw
new file mode 100644
index 00000000000..841cc78e0ec
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/main.sw
@@ -0,0 +1 @@
+contract;
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/.gitignore b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/.gitignore
new file mode 100644
index 00000000000..77d3844f58c
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/.gitignore
@@ -0,0 +1,2 @@
+out
+target
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/Forc.toml b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/Forc.toml
new file mode 100644
index 00000000000..66ea37cbf23
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/Forc.toml
@@ -0,0 +1,6 @@
+[project]
+authors = ["Fuel Labs <contact@fuel.sh>"]
+entry = "main.sw"
+license = "Apache-2.0"
+name = "sub_package"
+implicit-std = false
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/src/main.sw b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/src/main.sw
new file mode 100644
index 00000000000..841cc78e0ec
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/src/sub_package/src/main.sw
@@ -0,0 +1 @@
+contract;
diff --git a/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/test.toml b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/test.toml
new file mode 100644
index 00000000000..2f91f447506
--- /dev/null
+++ b/test/src/e2e_vm_tests/test_programs/should_fail/forc/nested_package/test.toml
@@ -0,0 +1,5 @@
+category = "fail"
+
+# check: $()Nested packages are not supported, please consider seperating the nested package at
+# check: $() from the package at
+# check: $(), or if it makes sense consider creating a workspace.