diff --git a/litellm/llms/watsonx/common_utils.py b/litellm/llms/watsonx/common_utils.py
index d6f296c608..299fc843b3 100644
--- a/litellm/llms/watsonx/common_utils.py
+++ b/litellm/llms/watsonx/common_utils.py
@@ -114,10 +114,10 @@ def _get_api_params(
             or get_secret_str("SPACE_ID")
         )
 
-    if project_id is None:
+    if project_id is None and space_id is None:
         raise WatsonXAIError(
             status_code=401,
-            message="Error: Watsonx project_id not set. Set WX_PROJECT_ID in environment variables or pass in as a parameter.",
+            message="Error: At least one of project_id or space_id must be set. Set WX_PROJECT_ID or WX_SPACE_ID in environment variables or pass in as a parameter.",
         )
 
     return WatsonXAPIParams(
@@ -279,13 +279,13 @@ class IBMWatsonXMixin:
 
     def _prepare_payload(self, model: str, api_params: WatsonXAPIParams) -> dict:
         payload: dict = {}
+        payload["space_id"] = api_params["space_id"]
         if model.startswith("deployment/"):
             if api_params["space_id"] is None:
                 raise WatsonXAIError(
                     status_code=401,
                     message="Error: space_id is required for models called using the 'deployment/' endpoint. Pass in the space_id as a parameter or set it in the WX_SPACE_ID environment variable.",
                 )
-            payload["space_id"] = api_params["space_id"]
             return payload
         payload["model_id"] = model
         payload["project_id"] = api_params["project_id"]
diff --git a/tests/litellm/llms/watsonx/test_common_util.py b/tests/litellm/llms/watsonx/test_common_util.py
new file mode 100644
index 0000000000..d248542deb
--- /dev/null
+++ b/tests/litellm/llms/watsonx/test_common_util.py
@@ -0,0 +1,70 @@
+from unittest.mock import patch
+import pytest
+
+from litellm.llms.watsonx.common_utils import WatsonXAIError
+
+
+@pytest.mark.parametrize(
+    "value_from",
+    [
+        {'params': {'space_id': 'space-id'}, 'secrets': {}},
+        {'params': {}, 'secrets': {'WATSONX_DEPLOYMENT_SPACE_ID': 'space-id'}},
+        {'params': {}, 'secrets': {'WATSONX_SPACE_ID': 'space-id'}},
+        {'params': {}, 'secrets': {'SPACE_ID': 'space-id'}},
+    ],
+    ids=[
+        "field",
+        "WATSONX_DEPLOYMENT_SPACE_ID",
+        "WATSONX_SPACE_ID",
+        "SPACE_ID"
+    ]
+)
+def test_watsonx_chat_handler_with_space_id(value_from):
+    with patch('litellm.llms.watsonx.common_utils.get_secret_str') as get_secret_str:
+        get_secret_str.return_value = ''
+        get_secret_str.side_effect = lambda key: value_from['secrets'][key] if key in value_from['secrets'] else None
+
+        from litellm.llms.watsonx import common_utils
+
+        _get_api_params = getattr(common_utils, '_get_api_params')
+        params = _get_api_params(value_from['params'])
+        assert params['space_id'] == 'space-id'
+
+
+@pytest.mark.parametrize(
+    "value_from",
+    [
+        {'params': {'project_id': 'project-id'}, 'secrets': {}},
+        {'params': {}, 'secrets': {'WATSONX_PROJECT_ID': 'project-id'}},
+        {'params': {}, 'secrets': {'WX_PROJECT_ID': 'project-id'}},
+        {'params': {}, 'secrets': {'PROJECT_ID': 'project-id'}},
+    ],
+    ids=[
+        "field",
+        "WATSONX_PROJECT_ID",
+        "WX_PROJECT_ID",
+        "PROJECT_ID"
+    ]
+)
+def test_watsonx_chat_handler_with_project_id(value_from):
+    with patch('litellm.llms.watsonx.common_utils.get_secret_str') as get_secret_str:
+        get_secret_str.return_value = ''
+        get_secret_str.side_effect = lambda key: value_from['secrets'][key] if key in value_from['secrets'] else None
+
+        from litellm.llms.watsonx import common_utils
+
+        _get_api_params = getattr(common_utils, '_get_api_params')
+        params = _get_api_params(value_from['params'])
+        assert params['project_id'] == 'project-id'
+
+
+def test_watsonx_chat_handler_with_no_space_id_or_project_id():
+    with patch('litellm.llms.watsonx.common_utils.get_secret_str') as get_secret_str:
+        get_secret_str.return_value = None
+
+        from litellm.llms.watsonx import common_utils
+
+        _get_api_params = getattr(common_utils, '_get_api_params')
+        with pytest.raises(WatsonXAIError) as error:
+            params = _get_api_params({})
+        assert 'At least one of project_id or space_id must be set.' in error.value.message