diff --git a/src/Config/ConfigFileWatcher.cs b/src/Config/ConfigFileWatcher.cs
index 288a95e3d7..e1afb39838 100644
--- a/src/Config/ConfigFileWatcher.cs
+++ b/src/Config/ConfigFileWatcher.cs
@@ -20,8 +20,10 @@ namespace Azure.DataApiBuilder.Config;
 /// <seealso cref="https://learn.microsoft.com/en-us/dotnet/api/system.io.filesystemwatcher.onchanged#remarks"/>
 /// <seealso cref="https://learn.microsoft.com/en-us/dotnet/api/system.io.filesystemwatcher.notifyfilter"/>
 /// <seealso cref="https://learn.microsoft.com/en-us/aspnet/core/fundamentals/change-tokens#:~:text=exponential%20back%2Doff.-,Utilities/Utilities.cs%3A,-C%23"/>
-public class ConfigFileWatcher
+public class ConfigFileWatcher : IDisposable
 {
+    private bool _disposed;
+
     /// <summary>
     /// Watches a specific file for modifications and alerts
     /// this class when a change is detected.
@@ -120,4 +122,25 @@ private void OnConfigFileChange(object sender, FileSystemEventArgs e)
             Console.WriteLine("Unable to hot reload configuration file due to " + ex.Message);
         }
     }
+
+    /// <summary>
+    /// Disposes the file watcher and unsubscribes from events to release
+    /// file handles and prevent further file change notifications.
+    /// </summary>
+    public void Dispose()
+    {
+        if (_disposed)
+        {
+            return;
+        }
+
+        _disposed = true;
+
+        if (_fileWatcher is not null)
+        {
+            _fileWatcher.EnableRaisingEvents = false;
+            _fileWatcher.Changed -= OnConfigFileChange;
+            _fileWatcher.Dispose();
+        }
+    }
 }
diff --git a/src/Config/FileSystemRuntimeConfigLoader.cs b/src/Config/FileSystemRuntimeConfigLoader.cs
index ecefd6a9c2..7b888a82bf 100644
--- a/src/Config/FileSystemRuntimeConfigLoader.cs
+++ b/src/Config/FileSystemRuntimeConfigLoader.cs
@@ -30,8 +30,9 @@ namespace Azure.DataApiBuilder.Config;
 /// which allows for mocking of the file system in tests, providing a way to run the test
 /// in isolation of other tests or the actual file system.
 /// </remarks>
-public class FileSystemRuntimeConfigLoader : RuntimeConfigLoader
+public class FileSystemRuntimeConfigLoader : RuntimeConfigLoader, IDisposable
 {
+    private bool _disposed;
     /// <summary>
     /// This stores either the default config name e.g. dab-config.json
     /// or user provided config file which could be a relative file path,
@@ -102,6 +103,27 @@ public FileSystemRuntimeConfigLoader(
         _logBuffer = logBuffer;
     }
 
+    /// <summary>
+    /// Disposes the config file watcher to release file handles and stop
+    /// monitoring the config file for changes.
+    /// </summary>
+    public void Dispose()
+    {
+        if (_disposed)
+        {
+            return;
+        }
+
+        _disposed = true;
+
+        if (_configFileWatcher is not null)
+        {
+            _configFileWatcher.NewFileContentsDetected -= OnNewFileContentsDetected;
+            _configFileWatcher.Dispose();
+            _configFileWatcher = null;
+        }
+    }
+
     /// <summary>
     /// Get the directory name of the config file and
     /// return as a string.
diff --git a/src/Service.Tests/Configuration/ConfigurationTests.cs b/src/Service.Tests/Configuration/ConfigurationTests.cs
index 323649baf8..26a0313e59 100644
--- a/src/Service.Tests/Configuration/ConfigurationTests.cs
+++ b/src/Service.Tests/Configuration/ConfigurationTests.cs
@@ -710,9 +710,26 @@ type Moon {
         [TestCleanup]
         public void CleanupAfterEachTest()
         {
+            // Retry file deletion with exponential back-off to handle cases where a
+            // file watcher or hot-reload process may still hold a handle on the file.
             if (File.Exists(CUSTOM_CONFIG_FILENAME))
             {
-                File.Delete(CUSTOM_CONFIG_FILENAME);
+                int retryCount = 0;
+                const int maxRetries = 3;
+                while (true)
+                {
+                    try
+                    {
+                        File.Delete(CUSTOM_CONFIG_FILENAME);
+                        break;
+                    }
+                    catch (IOException ex) when (retryCount < maxRetries)
+                    {
+                        retryCount++;
+                        Console.WriteLine($"CleanupAfterEachTest: Retry {retryCount}/{maxRetries} deleting {CUSTOM_CONFIG_FILENAME}. {ex.Message}");
+                        Thread.Sleep(TimeSpan.FromSeconds(Math.Pow(2, retryCount)));
+                    }
+                }
             }
 
             TestHelper.UnsetAllDABEnvironmentVariables();