diff --git a/build/gulpfile.reh.js b/build/gulpfile.reh.js
index d6126ce90d9..b695a105ee4 100644
--- a/build/gulpfile.reh.js
+++ b/build/gulpfile.reh.js
@@ -76,7 +76,7 @@ const serverResources = [
 
 	// Terminal shell integration
 	'out-build/vs/workbench/contrib/terminal/browser/media/shellIntegration-bash.sh',
-	'out-build/vs/workbench/contrib/terminal/browser/media/shellIntegration-zsh.sh',
+	'out-build/vs/workbench/contrib/terminal/browser/media/.zshrc',
 	'out-build/vs/workbench/contrib/terminal/browser/media/shellIntegration.ps1',
 
 	'!**/test/**'
diff --git a/src/vs/workbench/contrib/terminal/browser/media/shellIntegration-zsh.sh b/src/vs/workbench/contrib/terminal/browser/media/.zshrc
similarity index 90%
rename from src/vs/workbench/contrib/terminal/browser/media/shellIntegration-zsh.sh
rename to src/vs/workbench/contrib/terminal/browser/media/.zshrc
index af52a164a20..e7d38a2ff7d 100755
--- a/src/vs/workbench/contrib/terminal/browser/media/shellIntegration-zsh.sh
+++ b/src/vs/workbench/contrib/terminal/browser/media/.zshrc
@@ -1,3 +1,5 @@
+autoload -Uz add-zsh-hook
+
 IN_COMMAND_EXECUTION="1"
 prompt_start() {
 	printf "\033]633;A\007"
@@ -47,8 +49,8 @@ preexec() {
 	IN_COMMAND_EXECUTION="1"
 	command_output_start
 }
-precmd_functions+=($precmd_functions precmd)
-preexec_functions+=($preexec_functions preexec)
+add-zsh-hook precmd precmd
+add-zsh-hook preexec preexec
 
 # Show the welcome message
 if [ -z "${VSCODE_SHELL_HIDE_WELCOME-}" ]; then
diff --git a/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts b/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts
index 603ed03ea2a..f35509b463d 100644
--- a/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts
+++ b/src/vs/workbench/contrib/terminal/browser/terminalProcessManager.ts
@@ -273,6 +273,10 @@ export class TerminalProcessManager extends Disposable implements ITerminalProce
 							shellLaunchConfig.env = shellLaunchConfig.env || {} as IProcessEnvironment;
 							shellLaunchConfig.env['VSCODE_SHELL_LOGIN'] = '1';
 						}
+						if (env?.['ZDOTDIR']) {
+							shellLaunchConfig.env = shellLaunchConfig.env || {} as IProcessEnvironment;
+							shellLaunchConfig.env['ZDOTDIR'] = env['ZDOTDIR'].replace('${execInstallFolder}', remoteEnv.appRoot.fsPath);
+						}
 
 						newProcess = await backend.createProcess(
 							shellLaunchConfig,
@@ -451,6 +455,13 @@ export class TerminalProcessManager extends Disposable implements ITerminalProce
 		const shellIntegration = terminalEnvironment.injectShellIntegrationArgs(this._logService, this._configurationService, env, this._configHelper.config.shellIntegration?.enabled || false, shellLaunchConfig, OS);
 		if (shellIntegration.enableShellIntegration) {
 			shellLaunchConfig.args = shellIntegration.args;
+			if (env?.['ZDOTDIR']) {
+				shellLaunchConfig.env = shellLaunchConfig.env || {} as IProcessEnvironment;
+				const activeWorkspaceRootUri = this._historyService.getLastActiveWorkspaceRoot(Schemas.file);
+				const lastActiveWorkspaceRoot = activeWorkspaceRootUri ? withNullAsUndefined(this._workspaceContextService.getWorkspaceFolder(activeWorkspaceRootUri)) : undefined;
+				const resolved = await this._configurationResolverService.resolveAsync(lastActiveWorkspaceRoot, env['ZDOTDIR']);
+				env['ZDOTDIR'] = resolved;
+			}
 			// Always resolve the injected arguments on local processes
 			await this._terminalProfileResolverService.resolveShellLaunchConfig(shellLaunchConfig, {
 				remoteAuthority: undefined,
diff --git a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
index a6bb1100595..96210ec7965 100644
--- a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
+++ b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
@@ -416,8 +416,8 @@ shellIntegrationArgs.set(ShellIntegrationExecutable.WindowsPwsh, ['-noexit', ' -
 shellIntegrationArgs.set(ShellIntegrationExecutable.WindowsPwshLogin, ['-l', '-noexit', ' -command', '. \"${execInstallFolder}\\out\\vs\\workbench\\contrib\\terminal\\browser\\media\\shellIntegration.ps1\"{0}']);
 shellIntegrationArgs.set(ShellIntegrationExecutable.Pwsh, ['-noexit', '-command', '. "${execInstallFolder}/out/vs/workbench/contrib/terminal/browser/media/shellIntegration.ps1"{0}']);
 shellIntegrationArgs.set(ShellIntegrationExecutable.PwshLogin, ['-l', '-noexit', '-command', '. "${execInstallFolder}/out/vs/workbench/contrib/terminal/browser/media/shellIntegration.ps1"']);
-shellIntegrationArgs.set(ShellIntegrationExecutable.Zsh, ['-c', '"${execInstallFolder}/out/vs/workbench/contrib/terminal/browser/media/shellIntegration-zsh.sh"; zsh -i']);
-shellIntegrationArgs.set(ShellIntegrationExecutable.ZshLogin, ['-c', '"${execInstallFolder}/out/vs/workbench/contrib/terminal/browser/media/shellIntegration-zsh.sh"; zsh -il']);
+shellIntegrationArgs.set(ShellIntegrationExecutable.Zsh, ['-i']);
+shellIntegrationArgs.set(ShellIntegrationExecutable.ZshLogin, ['-il']);
 shellIntegrationArgs.set(ShellIntegrationExecutable.Bash, ['--init-file', '${execInstallFolder}/out/vs/workbench/contrib/terminal/browser/media/shellIntegration-bash.sh']);
 const loginArgs = ['-login', '-l'];
 const pwshImpliedArgs = ['-nol', '-nologo'];
@@ -491,7 +491,12 @@ export function injectShellIntegrationArgs(
 					newArgs = shellIntegrationArgs.get(ShellIntegrationExecutable.Zsh);
 				} else if (areZshBashLoginArgs(originalArgs)) {
 					newArgs = shellIntegrationArgs.get(ShellIntegrationExecutable.ZshLogin);
+				} else if (originalArgs === shellIntegrationArgs.get(ShellIntegrationExecutable.Zsh) || originalArgs === shellIntegrationArgs.get(ShellIntegrationExecutable.ZshLogin)) {
+					newArgs = originalArgs;
 				}
+				// Set the ZDOTDIR to be the dir of the shell integration script so that it runs
+				// as a .zshrc file and the autoload hook will work and set precmd and preexec correctly
+				env['ZDOTDIR'] = '${execInstallFolder}/out/vs/workbench/contrib/terminal/browser/media';
 				const showWelcome = configurationService.getValue(TerminalSettingId.ShellIntegrationShowWelcome);
 				if (!showWelcome) {
 					env['VSCODE_SHELL_HIDE_WELCOME'] = '1';
diff --git a/src/vs/workbench/contrib/terminal/test/browser/terminalProcessManager.test.ts b/src/vs/workbench/contrib/terminal/test/browser/terminalProcessManager.test.ts
index ad8ba91ed53..5e27446e046 100644
--- a/src/vs/workbench/contrib/terminal/test/browser/terminalProcessManager.test.ts
+++ b/src/vs/workbench/contrib/terminal/test/browser/terminalProcessManager.test.ts
@@ -90,7 +90,10 @@ suite('Workbench - TerminalProcessManager', () => {
 		await configurationService.setUserConfiguration('terminal', {
 			integrated: {
 				fontFamily: 'bar',
-				enablePersistentSessions: true
+				enablePersistentSessions: true,
+				shellIntegration: {
+					enabled: false
+				}
 			}
 		});
 		instantiationService.stub(IConfigurationService, configurationService);