diff --git a/src/llama_stack/core/utils/context.py b/src/llama_stack/core/utils/context.py
index 24b249890..e7c61a8ed 100644
--- a/src/llama_stack/core/utils/context.py
+++ b/src/llama_stack/core/utils/context.py
@@ -7,6 +7,10 @@
 from collections.abc import AsyncGenerator
 from contextvars import ContextVar
 
+from llama_stack.core.telemetry.tracing import CURRENT_TRACE_CONTEXT
+
+_MISSING = object()
+
 
 def preserve_contexts_async_generator[T](
     gen: AsyncGenerator[T, None], context_vars: list[ContextVar]
@@ -21,20 +25,60 @@ def preserve_contexts_async_generator[T](
 
     async def wrapper() -> AsyncGenerator[T, None]:
         while True:
+            previous_values: dict[ContextVar, object] = {}
+            tokens: dict[ContextVar, object] = {}
+
+            # Restore ALL context values before any await and capture previous state
+            # This is needed to propagate context across async generator boundaries
+            for context_var in context_vars:
+                try:
+                    previous_values[context_var] = context_var.get()
+                except LookupError:
+                    previous_values[context_var] = _MISSING
+                tokens[context_var] = context_var.set(initial_context_values[context_var.name])
+
+            def _restore_context_var(context_var: ContextVar, *, _tokens=tokens, _prev=previous_values) -> None:
+                token = _tokens.get(context_var)
+                previous_value = _prev.get(context_var, _MISSING)
+                if token is not None:
+                    try:
+                        context_var.reset(token)
+                        return
+                    except (RuntimeError, ValueError):
+                        pass
+
+                if previous_value is _MISSING:
+                    context_var.set(None)
+                else:
+                    context_var.set(previous_value)
+
             try:
-                # Restore context values before any await
-                for context_var in context_vars:
-                    context_var.set(initial_context_values[context_var.name])
-
                 item = await gen.__anext__()
-
-                # Update our tracked values with any changes made during this iteration
-                for context_var in context_vars:
-                    initial_context_values[context_var.name] = context_var.get()
-
-                yield item
-
             except StopAsyncIteration:
+                # Restore all context vars before exiting to prevent leaks
+                # Use _restore_context_var for all vars to properly restore to previous values
+                for context_var in context_vars:
+                    _restore_context_var(context_var)
                 break
+            except Exception:
+                # Restore all context vars on exception
+                for context_var in context_vars:
+                    _restore_context_var(context_var)
+                raise
+
+            try:
+                yield item
+                # Update our tracked values with any changes made during this iteration
+                # Only for non-trace context vars - trace context must persist across yields
+                # to allow nested span tracking for telemetry
+                for context_var in context_vars:
+                    if context_var is not CURRENT_TRACE_CONTEXT:
+                        initial_context_values[context_var.name] = context_var.get()
+            finally:
+                # Restore non-trace context vars after each yield to prevent leaks between requests
+                # CURRENT_TRACE_CONTEXT is NOT restored here to preserve telemetry span stack
+                for context_var in context_vars:
+                    if context_var is not CURRENT_TRACE_CONTEXT:
+                        _restore_context_var(context_var)
 
     return wrapper()
diff --git a/tests/unit/core/test_provider_data_context.py b/tests/unit/core/test_provider_data_context.py
new file mode 100644
index 000000000..a45805863
--- /dev/null
+++ b/tests/unit/core/test_provider_data_context.py
@@ -0,0 +1,59 @@
+# Copyright (c) Meta Platforms, Inc. and affiliates.
+# All rights reserved.
+#
+# This source code is licensed under the terms described in the LICENSE file in
+# the root directory of this source tree.
+
+import asyncio
+import json
+from contextlib import contextmanager
+from contextvars import ContextVar
+
+from llama_stack.core.utils.context import preserve_contexts_async_generator
+
+# Define provider data context variable and context manager locally
+PROVIDER_DATA_VAR = ContextVar("provider_data", default=None)
+
+
+@contextmanager
+def request_provider_data_context(headers):
+    val = headers.get("X-LlamaStack-Provider-Data")
+    provider_data = json.loads(val) if val else {}
+    token = PROVIDER_DATA_VAR.set(provider_data)
+    try:
+        yield
+    finally:
+        PROVIDER_DATA_VAR.reset(token)
+
+
+def create_sse_event(data):
+    return f"data: {json.dumps(data)}\n\n"
+
+
+async def sse_generator(event_gen_coroutine):
+    event_gen = await event_gen_coroutine
+    async for item in event_gen:
+        yield create_sse_event(item)
+        await asyncio.sleep(0)
+
+
+async def async_event_gen():
+    async def event_gen():
+        yield PROVIDER_DATA_VAR.get()
+
+    return event_gen()
+
+
+async def test_provider_data_context_cleared_between_sse_requests():
+    headers = {"X-LlamaStack-Provider-Data": json.dumps({"api_key": "abc"})}
+    with request_provider_data_context(headers):
+        gen1 = preserve_contexts_async_generator(sse_generator(async_event_gen()), [PROVIDER_DATA_VAR])
+
+    events1 = [event async for event in gen1]
+    assert events1 == [create_sse_event({"api_key": "abc"})]
+    assert PROVIDER_DATA_VAR.get() is None
+
+    gen2 = preserve_contexts_async_generator(sse_generator(async_event_gen()), [PROVIDER_DATA_VAR])
+    events2 = [event async for event in gen2]
+    assert events2 == [create_sse_event(None)]
+    assert PROVIDER_DATA_VAR.get() is None