diff --git a/common/changes/@microsoft/rush/fix-3205_2024-07-17-01-52.json b/common/changes/@microsoft/rush/fix-3205_2024-07-17-01-52.json
new file mode 100644
index 00000000000..b7b9c62884a
--- /dev/null
+++ b/common/changes/@microsoft/rush/fix-3205_2024-07-17-01-52.json
@@ -0,0 +1,10 @@
+{
+  "changes": [
+    {
+      "packageName": "@microsoft/rush",
+      "comment": "Fix an issue where PreferredVersions are ignored when a project contains an overlapping dependency entry (https://github.com/microsoft/rushstack/issues/3205)",
+      "type": "none"
+    }
+  ],
+  "packageName": "@microsoft/rush"
+}
\ No newline at end of file
diff --git a/libraries/rush-lib/src/logic/pnpm/PnpmfileConfiguration.ts b/libraries/rush-lib/src/logic/pnpm/PnpmfileConfiguration.ts
index a7090c1746f..6dece515a8a 100644
--- a/libraries/rush-lib/src/logic/pnpm/PnpmfileConfiguration.ts
+++ b/libraries/rush-lib/src/logic/pnpm/PnpmfileConfiguration.ts
@@ -2,6 +2,7 @@
 // See LICENSE in the project root for license information.
 
 import * as path from 'path';
+import * as semver from 'semver';
 import { FileSystem, Import, type IPackageJson, JsonFile, MapExtensions } from '@rushstack/node-core-library';
 
 import type { PnpmPackageManager } from '../../api/packageManager/PnpmPackageManager';
@@ -91,11 +92,16 @@ export class PnpmfileConfiguration {
     if ((rushConfiguration.packageManagerOptions as PnpmOptionsConfiguration).useWorkspaces) {
       const commonVersionsConfiguration: CommonVersionsConfiguration = subspace.getCommonVersions();
       const preferredVersions: Map<string, string> = new Map();
-      MapExtensions.mergeFromMap(preferredVersions, commonVersionsConfiguration.getAllPreferredVersions());
       MapExtensions.mergeFromMap(
         preferredVersions,
         rushConfiguration.getImplicitlyPreferredVersions(subspace)
       );
+      for (const [name, version] of commonVersionsConfiguration.getAllPreferredVersions()) {
+        // Use the most restrictive version range available
+        if (!preferredVersions.has(name) || semver.subset(version, preferredVersions.get(name)!)) {
+          preferredVersions.set(name, version);
+        }
+      }
       allPreferredVersions = MapExtensions.toObject(preferredVersions);
       allowedAlternativeVersions = MapExtensions.toObject(
         commonVersionsConfiguration.allowedAlternativeVersions
diff --git a/libraries/rush-lib/src/logic/pnpm/test/PnpmfileConfiguration.test.ts b/libraries/rush-lib/src/logic/pnpm/test/PnpmfileConfiguration.test.ts
new file mode 100644
index 00000000000..b1875dbde8f
--- /dev/null
+++ b/libraries/rush-lib/src/logic/pnpm/test/PnpmfileConfiguration.test.ts
@@ -0,0 +1,37 @@
+// Copyright (c) Microsoft Corporation. All rights reserved. Licensed under the MIT license.
+// See LICENSE in the project root for license information.
+
+import { RushConfiguration } from '../../../api/RushConfiguration';
+import { PnpmfileConfiguration } from '../PnpmfileConfiguration';
+import { JsonFile, type JsonObject } from '@rushstack/node-core-library';
+
+describe(PnpmfileConfiguration.name, () => {
+  const repoPath: string = `${__dirname}/repo`;
+  const rushFilename: string = `${repoPath}/rush3.json`;
+  const rushConfiguration: RushConfiguration = RushConfiguration.loadFromConfigurationFile(rushFilename);
+  const shimPath: string = `${rushConfiguration.defaultSubspace.getSubspaceTempFolderPath()}/pnpmfileSettings.json`;
+
+  beforeAll(async () => {
+    const subspace = rushConfiguration.defaultSubspace;
+    await PnpmfileConfiguration.writeCommonTempPnpmfileShimAsync(
+      rushConfiguration,
+      subspace.getSubspaceTempFolderPath(),
+      subspace
+    );
+  });
+
+  it('should use the smallest-available SemVer range (preferredVersions)', async () => {
+    const shimJson: JsonObject = await JsonFile.loadAsync(shimPath);
+    expect(shimJson.allPreferredVersions).toHaveProperty('core-js', '3.6.5');
+  });
+
+  it('should use the smallest-available SemVer range (per-project)', async () => {
+    const shimJson: JsonObject = await JsonFile.loadAsync(shimPath);
+    expect(shimJson.allPreferredVersions).toHaveProperty('delay', '5.0.0');
+  });
+
+  it('should override preferredVersions when per-project versions conflict', async () => {
+    const shimJson: JsonObject = await JsonFile.loadAsync(shimPath);
+    expect(shimJson.allPreferredVersions).toHaveProperty('find-up', '5.0.0');
+  });
+});
diff --git a/libraries/rush-lib/src/logic/pnpm/test/repo/apps/baz/package.json b/libraries/rush-lib/src/logic/pnpm/test/repo/apps/baz/package.json
new file mode 100644
index 00000000000..524e9d4cb89
--- /dev/null
+++ b/libraries/rush-lib/src/logic/pnpm/test/repo/apps/baz/package.json
@@ -0,0 +1,9 @@
+{
+  "name": "baz",
+  "version": "1.0.0",
+  "dependencies": {
+    "core-js": "^3.0.0",
+    "delay": "5.0.0",
+    "find-up": "*"
+  }
+}
diff --git a/libraries/rush-lib/src/logic/pnpm/test/repo/common/config/rush/common-versions.json b/libraries/rush-lib/src/logic/pnpm/test/repo/common/config/rush/common-versions.json
new file mode 100644
index 00000000000..30d53549184
--- /dev/null
+++ b/libraries/rush-lib/src/logic/pnpm/test/repo/common/config/rush/common-versions.json
@@ -0,0 +1,8 @@
+{
+  "$schema": "https://developer.microsoft.com/json-schemas/rush/v5/common-versions.schema.json",
+  "preferredVersions": {
+    "core-js": "3.6.5",
+    "delay": "4.0.0",
+    "find-up": "5.0.0"
+  }
+}
diff --git a/libraries/rush-lib/src/logic/pnpm/test/repo/rush3.json b/libraries/rush-lib/src/logic/pnpm/test/repo/rush3.json
new file mode 100644
index 00000000000..d5b3a4e1d82
--- /dev/null
+++ b/libraries/rush-lib/src/logic/pnpm/test/repo/rush3.json
@@ -0,0 +1,14 @@
+{
+  "$schema": "https://developer.microsoft.com/json-schemas/rush/v5/rush.schema.json",
+  "pnpmVersion": "7.0.0",
+  "rushVersion": "5.46.1",
+  "projects": [
+    {
+      "packageName": "baz",
+      "projectFolder": "apps/baz"
+    }
+  ],
+  "pnpmOptions": {
+    "useWorkspaces": true
+  }
+}