diff --git a/packages/@react-aria/overlays/package.json b/packages/@react-aria/overlays/package.json
index f8e3f63d7fe..8a6d64993e9 100644
--- a/packages/@react-aria/overlays/package.json
+++ b/packages/@react-aria/overlays/package.json
@@ -38,6 +38,9 @@
     "@react-types/shared": "^3.31.0",
     "@swc/helpers": "^0.5.0"
   },
+  "devDependencies": {
+    "@react-stately/flags": "^3.1.2"
+  },
   "peerDependencies": {
     "react": "^16.8.0 || ^17.0.0-rc.1 || ^18.0.0 || ^19.0.0-rc.1",
     "react-dom": "^16.8.0 || ^17.0.0-rc.1 || ^18.0.0 || ^19.0.0-rc.1"
diff --git a/packages/@react-aria/overlays/src/useOverlay.ts b/packages/@react-aria/overlays/src/useOverlay.ts
index 8fdcfa39410..dfa03668eb0 100644
--- a/packages/@react-aria/overlays/src/useOverlay.ts
+++ b/packages/@react-aria/overlays/src/useOverlay.ts
@@ -11,6 +11,7 @@
  */
 
 import {DOMAttributes, RefObject} from '@react-types/shared';
+import {getEventTarget} from '@react-aria/utils';
 import {isElementInChildOfActiveScope} from '@react-aria/focus';
 import {useEffect} from 'react';
 import {useFocusWithin, useInteractOutside} from '@react-aria/interactions';
@@ -91,7 +92,7 @@ export function useOverlay(props: AriaOverlayProps, ref: RefObject<Element | nul
   };
 
   let onInteractOutsideStart = (e: PointerEvent) => {
-    if (!shouldCloseOnInteractOutside || shouldCloseOnInteractOutside(e.target as Element)) {
+    if (!shouldCloseOnInteractOutside || shouldCloseOnInteractOutside(getEventTarget(e))) {
       if (visibleOverlays[visibleOverlays.length - 1] === ref) {
         e.stopPropagation();
         e.preventDefault();
@@ -100,7 +101,7 @@ export function useOverlay(props: AriaOverlayProps, ref: RefObject<Element | nul
   };
 
   let onInteractOutside = (e: PointerEvent) => {
-    if (!shouldCloseOnInteractOutside || shouldCloseOnInteractOutside(e.target as Element)) {
+    if (!shouldCloseOnInteractOutside || shouldCloseOnInteractOutside(getEventTarget(e))) {
       if (visibleOverlays[visibleOverlays.length - 1] === ref) {
         e.stopPropagation();
         e.preventDefault();
diff --git a/packages/@react-aria/overlays/test/useOverlay.test.js b/packages/@react-aria/overlays/test/useOverlay.test.js
index 2f686f0f287..98735bc19ad 100644
--- a/packages/@react-aria/overlays/test/useOverlay.test.js
+++ b/packages/@react-aria/overlays/test/useOverlay.test.js
@@ -10,17 +10,30 @@
  * governing permissions and limitations under the License.
  */
 
-import {fireEvent, installMouseEvent, installPointerEvent, render} from '@react-spectrum/test-utils-internal';
+import {
+  createShadowRoot,
+  fireEvent,
+  installMouseEvent,
+  installPointerEvent,
+  render
+} from '@react-spectrum/test-utils-internal';
+import {enableShadowDOM} from '@react-stately/flags';
 import {mergeProps} from '@react-aria/utils';
 import React, {useRef} from 'react';
+import ReactDOM from 'react-dom';
 import {useOverlay} from '../';
 
 function Example(props) {
   let ref = useRef();
   let {overlayProps, underlayProps} = useOverlay(props, ref);
   return (
-    <div {...mergeProps(underlayProps, props.underlayProps || {})}>
-      <div ref={ref} {...overlayProps} data-testid={props['data-testid'] || 'test'}>
+    <div
+      {...mergeProps(underlayProps, props.underlayProps || {})}
+      data-testid={'underlay'}>
+      <div
+        ref={ref}
+        {...overlayProps}
+        data-testid={props['data-testid'] || 'test'}>
         {props.children}
       </div>
     </div>
@@ -56,7 +69,7 @@ describe('useOverlay', function () {
       expect(document.activeElement).toBe(input);
     });
 
-    it('should hide the overlay when clicking outside if isDismissble is true', function () {
+    it('should hide the overlay when clicking outside if isDismissable is true', function () {
       let onClose = jest.fn();
       render(<Example isOpen onClose={onClose} isDismissable />);
       pressStart(document.body);
@@ -140,3 +153,78 @@ describe('useOverlay', function () {
     });
   });
 });
+
+describe('useOverlay with shadow dom', () => {
+  beforeAll(() => {
+    enableShadowDOM();
+  });
+
+  describe.each`
+    type                | prepare                | actions
+    ${'Mouse Events'}   | ${installMouseEvent}   | ${[(el) => fireEvent.mouseDown(el, {button: 0}), (el) => fireEvent.mouseUp(el, {button: 0})]}
+    ${'Pointer Events'} | ${installPointerEvent} | ${[(el) => fireEvent.pointerDown(el, {button: 0, pointerId: 1}), (el) => {fireEvent.pointerUp(el, {button: 0, pointerId: 1}); fireEvent.click(el, {button: 0, pointerId: 1});}]}
+    ${'Touch Events'}   | ${() => {}}            | ${[(el) => fireEvent.touchStart(el, {changedTouches: [{identifier: 1}]}), (el) => fireEvent.touchEnd(el, {changedTouches: [{identifier: 1}]})]}
+  `('$type', ({actions: [pressStart, pressEnd], prepare}) => {
+    prepare();
+
+    it('should not close the overlay when clicking outside if shouldCloseOnInteractOutside returns true', function () {
+      const {shadowRoot, cleanup} = createShadowRoot();
+
+      let onClose = jest.fn();
+      let underlay;
+
+      const WrapperComponent = () =>
+        ReactDOM.createPortal(
+          <Example
+            isOpen
+            onClose={onClose}
+            isDismissable
+            shouldCloseOnInteractOutside={(target) => {
+              return target === underlay;
+            }} />,
+          shadowRoot
+        );
+
+      const {unmount} = render(<WrapperComponent />);
+
+      underlay = shadowRoot.querySelector("[data-testid='underlay']");
+
+      pressStart(underlay);
+      pressEnd(underlay);
+      expect(onClose).toHaveBeenCalled();
+
+      // Cleanup
+      unmount();
+      cleanup();
+    });
+
+    it('should not close the overlay when clicking outside if shouldCloseOnInteractOutside returns false', function () {
+      const {shadowRoot, cleanup} = createShadowRoot();
+
+      let onClose = jest.fn();
+      let underlay;
+
+      const WrapperComponent = () =>
+        ReactDOM.createPortal(
+          <Example
+            isOpen
+            onClose={onClose}
+            isDismissable
+            shouldCloseOnInteractOutside={(target) => target !== underlay} />,
+          shadowRoot
+        );
+
+      const {unmount} = render(<WrapperComponent />);
+
+      underlay = shadowRoot.querySelector("[data-testid='underlay']");
+
+      pressStart(underlay);
+      pressEnd(underlay);
+      expect(onClose).not.toHaveBeenCalled();
+
+      // Cleanup
+      unmount();
+      cleanup();
+    });
+  });
+});
diff --git a/yarn.lock b/yarn.lock
index 009a250feb7..f6727454e65 100644
--- a/yarn.lock
+++ b/yarn.lock
@@ -5912,6 +5912,7 @@ __metadata:
     "@react-aria/ssr": "npm:^3.9.10"
     "@react-aria/utils": "npm:^3.30.0"
     "@react-aria/visually-hidden": "npm:^3.8.26"
+    "@react-stately/flags": "npm:^3.1.2"
     "@react-stately/overlays": "npm:^3.6.18"
     "@react-types/button": "npm:^3.13.0"
     "@react-types/overlays": "npm:^3.9.0"