diff --git a/src/code/UpdatePSResource.cs b/src/code/UpdatePSResource.cs
index 29792ab71..4d44d2b52 100644
--- a/src/code/UpdatePSResource.cs
+++ b/src/code/UpdatePSResource.cs
@@ -390,7 +390,8 @@ private string[] ProcessPackageNames(
                 }
 
                 // If the current package is out of range, install it with the correct version.
-                if (!NuGetVersion.TryParse(installedPackage.Version.ToString(), out NuGetVersion installedVersion))
+                string installedVersionString = Utils.GetThreeDigitNormalizedVersionString(installedPackage.Version.ToString(), installedPackage.Prerelease);
+                if (!NuGetVersion.TryParse(installedVersionString, out NuGetVersion installedVersion))
                 {
                     WriteWarning($"Cannot parse nuget version in installed package '{installedPackage.Name}'. Cannot update package.");
                     continue;
diff --git a/test/UpdatePSResourceTests/UpdatePSResourceV2.Tests.ps1 b/test/UpdatePSResourceTests/UpdatePSResourceV2.Tests.ps1
index cd50abcf1..e2d81aa65 100644
--- a/test/UpdatePSResourceTests/UpdatePSResourceV2.Tests.ps1
+++ b/test/UpdatePSResourceTests/UpdatePSResourceV2.Tests.ps1
@@ -13,13 +13,14 @@ Describe 'Test HTTP Update-PSResource for V2 Server Protocol' -tags 'CI' {
         $testModuleName = "test_module"
         $testModuleName2 = "test_module2"
         $testModuleName3 = "TestModule99"
+        $testModuleName4 = "TestModulePrerelease"
         $PackageManagement = "PackageManagement"
         Get-NewPSResourceRepositoryFile
         Get-PSResourceRepository
     }
 
     AfterEach {
-       Uninstall-PSResource "test_module", "TestModule99", "TestModuleWithLicense", "test_module2", "test_script" -Version "*" -ErrorAction SilentlyContinue -SkipDependencyCheck
+       Uninstall-PSResource "test_module", "TestModule99", "TestModuleWithLicense", "test_module2", "test_script", "TestModulePrerelease" -Version "*" -ErrorAction SilentlyContinue -SkipDependencyCheck
     }
 
     AfterAll {
@@ -210,6 +211,20 @@ Describe 'Test HTTP Update-PSResource for V2 Server Protocol' -tags 'CI' {
         $isPkgUpdated | Should -Be $true
     }
 
+    It "Update prerelease version to next version when prerelease label is only differing factor between versions" {
+        # $testModuleName4 (TestModulePrerelease) has versions: 0.0.4-beta, 0.0.4. Updating should respect prerelease label
+        Install-PSResource -Name $testModuleName4 -Version "0.0.4-beta" -Repository $PSGalleryName -TrustRepository
+        $res = Get-InstalledPSResource -Name $testModuleName4
+        $res.Name | Should -Be $testModuleName4
+        $res.Version | Should -Contain "0.0.4"
+        $res.Prerelease | Should -Be "beta"
+
+        Update-PSResource -Name $testModuleName4 -Repository $PSGalleryName -TrustRepository
+        $res2 = Get-InstalledPSResource -Name $testModuleName4
+        $res2.Version | Should -Contain "0.0.4"
+        $res2.Prerelease | Should -BeNullOrEmpty
+    }
+
     # Windows only
     It "update resource under CurrentUser scope" -skip:(!($IsWindows -and (Test-IsAdmin))) {
         # TODO: perhaps also install TestModule with the highest version (the one above 1.2.0.0) to the AllUsers path too