diff --git a/packages/bridge/package.json b/packages/bridge/package.json
index 1c9280b0dc..5c6dd87256 100644
--- a/packages/bridge/package.json
+++ b/packages/bridge/package.json
@@ -44,7 +44,7 @@
     "magic-string": "^0.26.1",
     "mlly": "^0.5.1",
     "murmurhash-es": "^0.1.1",
-    "nitropack": "^0.1.2",
+    "nitropack": "^0.2.1",
     "node-fetch": "^3.2.3",
     "nuxi": "3.0.0",
     "ohash": "^0.1.0",
diff --git a/packages/bridge/src/nitro.ts b/packages/bridge/src/nitro.ts
index edc1cf3d5a..14ff640f13 100644
--- a/packages/bridge/src/nitro.ts
+++ b/packages/bridge/src/nitro.ts
@@ -3,7 +3,7 @@ import fetch from 'node-fetch'
 import fsExtra from 'fs-extra'
 import { addPluginTemplate, resolvePath, useNuxt } from '@nuxt/kit'
 import { joinURL, stringifyQuery, withoutTrailingSlash } from 'ufo'
-import { resolve, join } from 'pathe'
+import { resolve, join, dirname } from 'pathe'
 import { createNitro, createDevServer, build, writeTypes, prepare, copyPublicAssets, prerender } from 'nitropack'
 import { dynamicEventHandler, toEventHandler } from 'h3'
 import type { Nitro, NitroEventHandler, NitroDevEventHandler, NitroConfig } from 'nitropack'
@@ -86,12 +86,9 @@ export async function setupNitroBridge () {
       crawlLinks: nuxt.options.generate.crawler,
       routes: nuxt.options.generate.routes
     },
-    output: {
-      dir: nuxt.options.dev ? join(nuxt.options.buildDir, 'nitro') : resolve(nuxt.options.rootDir, '.output')
-    },
     externals: {
       inline: [
-        ...(nuxt.options.dev ? [] : [nuxt.options.buildDir]),
+        ...(nuxt.options.dev ? [] : ['vue', '@vue/', '@nuxt/', nuxt.options.buildDir]),
         '@nuxt/bridge/dist',
         '@nuxt/bridge-edge/dist'
       ]
@@ -113,10 +110,16 @@ export async function setupNitroBridge () {
       '#nitro/error': resolve(distDir, 'runtime/nitro/error'),
 
       // Paths
-      '#paths': resolve(distDir, 'runtime/nitro/paths')
+      '#paths': resolve(distDir, 'runtime/nitro/paths'),
+
+      // Nuxt aliases
+      ...nuxt.options.alias
     }
   })
 
+  // Let nitro handle #build for windows path normalization
+  delete nitroConfig.alias['#build']
+
   // Extend nitro config with hook
   await nuxt.callHook('nitro:config', nitroConfig)
 
@@ -131,15 +134,6 @@ export async function setupNitroBridge () {
 
   // Connect hooks
   nuxt.hook('close', () => nitro.hooks.callHook('close'))
-  nitro.hooks.hook('nitro:document', template => nuxt.callHook('nitro:document', template))
-
-  // Use custom document template if provided
-  if (nuxt.options.appTemplatePath) {
-    nuxt.hook('nitro:document', async (template) => {
-      template.src = nuxt.options.appTemplatePath
-      template.contents = await fsp.readFile(nuxt.options.appTemplatePath, 'utf-8')
-    })
-  }
 
   async function updateViteBase () {
     const clientDist = resolve(nuxt.options.buildDir, 'dist/client')
@@ -168,7 +162,6 @@ export async function setupNitroBridge () {
       }
     }
   }
-  nuxt.hook('nitro:generate', updateViteBase)
   nuxt.hook('generate:before', updateViteBase)
 
   // .ts is supported for serverMiddleware
@@ -267,6 +260,7 @@ export async function setupNitroBridge () {
   const waitUntilCompile = new Promise<void>(resolve => nitro.hooks.hook('nitro:compiled', () => resolve()))
   nuxt.hook('build:done', async () => {
     if (nuxt.options._prepare) { return }
+    await writeDocumentTemplate(nuxt)
     if (nuxt.options.dev) {
       await build(nitro)
       await waitUntilCompile
@@ -274,13 +268,10 @@ export async function setupNitroBridge () {
     } else {
       await prepare(nitro)
       await copyPublicAssets(nitro)
-      if (nuxt.options.target === 'static') {
+      if (nuxt.options._generate || nuxt.options.target === 'static') {
         await prerender(nitro)
       }
       await build(nitro)
-      if (nuxt.options._generate) {
-        await prerender(nitro)
-      }
     }
   })
 
@@ -383,3 +374,17 @@ async function resolveHandlers (nuxt: Nuxt) {
     devHandlers
   }
 }
+
+async function writeDocumentTemplate (nuxt: Nuxt) {
+  // Compile html template
+  const src = nuxt.options.appTemplatePath || resolve(nuxt.options.buildDir, 'views/app.template.html')
+  const dst = src.replace(/.html$/, '.mjs').replace('app.template.mjs', 'document.template.mjs')
+  const contents = nuxt.vfs[src] || await fsp.readFile(src, 'utf-8').catch(() => '')
+  if (contents) {
+    const compiled = 'export default ' +
+      // eslint-disable-next-line no-template-curly-in-string
+      `(params) => \`${contents.replace(/{{ (\w+) }}/g, '${params.$1}')}\``
+    await fsp.mkdir(dirname(dst), { recursive: true })
+    await fsp.writeFile(dst, compiled, 'utf8')
+  }
+}
diff --git a/packages/nuxt3/package.json b/packages/nuxt3/package.json
index 446cc1c543..dc57178496 100644
--- a/packages/nuxt3/package.json
+++ b/packages/nuxt3/package.json
@@ -50,7 +50,7 @@
     "knitwork": "^0.1.1",
     "magic-string": "^0.26.1",
     "mlly": "^0.5.1",
-    "nitropack": "^0.1.2",
+    "nitropack": "^0.2.1",
     "nuxi": "3.0.0",
     "ohash": "^0.1.0",
     "ohmyfetch": "^0.4.15",
diff --git a/packages/nuxt3/src/core/nitro.ts b/packages/nuxt3/src/core/nitro.ts
index cd28fa0f9f..861d442e6b 100644
--- a/packages/nuxt3/src/core/nitro.ts
+++ b/packages/nuxt3/src/core/nitro.ts
@@ -1,4 +1,5 @@
-import { existsSync } from 'fs'
+import { existsSync, promises as fsp } from 'fs'
+import { dirname } from 'path'
 import { resolve, join } from 'pathe'
 import { createNitro, createDevServer, build, prepare, copyPublicAssets, writeTypes, scanHandlers, prerender } from 'nitropack'
 import type { NitroEventHandler, NitroDevEventHandler, NitroConfig } from 'nitropack'
@@ -56,12 +57,9 @@ export async function initNitro (nuxt: Nuxt) {
       crawlLinks: nuxt.options.generate.crawler,
       routes: nuxt.options.generate.routes
     },
-    output: {
-      dir: nuxt.options.dev ? join(nuxt.options.buildDir, 'nitro') : resolve(nuxt.options.rootDir, '.output')
-    },
     externals: {
       inline: [
-        ...(nuxt.options.dev ? [] : [nuxt.options.buildDir]),
+        ...(nuxt.options.dev ? [] : ['vue', '@vue/', '@nuxt/', nuxt.options.buildDir]),
         'nuxt/dist',
         'nuxt3/dist'
       ]
@@ -87,7 +85,10 @@ export async function initNitro (nuxt: Nuxt) {
       '#nitro/error': resolve(distDir, 'core/runtime/nitro/error'),
 
       // Paths
-      '#paths': resolve(distDir, 'core/runtime/nitro/paths')
+      '#paths': resolve(distDir, 'core/runtime/nitro/paths'),
+
+      // Nuxt aliases
+      ...nuxt.options.alias
     },
     replace: {
       'process.env.NUXT_NO_SSR': nuxt.options.ssr === false ? true : undefined
@@ -108,7 +109,6 @@ export async function initNitro (nuxt: Nuxt) {
 
   // Connect hooks
   nuxt.hook('close', () => nitro.hooks.callHook('close'))
-  nitro.hooks.hook('nitro:document', template => nuxt.callHook('nitro:document', template))
 
   // Register nuxt3 protection patterns
   nitro.hooks.hook('nitro:rollup:before', (nitro) => {
@@ -146,15 +146,16 @@ export async function initNitro (nuxt: Nuxt) {
 
   // nuxt build/dev
   nuxt.hook('build:done', async () => {
+    await writeDocumentTemplate(nuxt)
     if (nuxt.options.dev) {
       await build(nitro)
     } else {
       await prepare(nitro)
       await copyPublicAssets(nitro)
-      await build(nitro)
-      if (nuxt.options._generate) {
+      if (nuxt.options._generate || nuxt.options.target === 'static') {
         await prerender(nitro)
       }
+      await build(nitro)
     }
   })
 
@@ -199,3 +200,17 @@ async function resolveHandlers (nuxt: Nuxt) {
     devHandlers
   }
 }
+
+async function writeDocumentTemplate (nuxt: Nuxt) {
+  // Compile html template
+  const src = resolve(nuxt.options.buildDir, 'views/app.template.html')
+  const dst = src.replace(/.html$/, '.mjs').replace('app.template.mjs', 'document.template.mjs')
+  const contents = nuxt.vfs[src] || await fsp.readFile(src, 'utf-8').catch(() => '')
+  if (contents) {
+    const compiled = 'export default ' +
+    // eslint-disable-next-line no-template-curly-in-string
+    `(params) => \`${contents.replace(/{{ (\w+) }}/g, '${params.$1}')}\``
+    await fsp.mkdir(dirname(dst), { recursive: true })
+    await fsp.writeFile(dst, compiled, 'utf8')
+  }
+}
diff --git a/packages/schema/src/types/hooks.ts b/packages/schema/src/types/hooks.ts
index b2364b65ba..00d141ac45 100644
--- a/packages/schema/src/types/hooks.ts
+++ b/packages/schema/src/types/hooks.ts
@@ -101,8 +101,6 @@ export interface NuxtHooks {
   // nitropack
   'nitro:config': (nitroConfig: NitroConfig) => HookResult
   'nitro:init': (nitro: Nitro) => HookResult
-  'nitro:document': (template: { src: string, contents: string }) => HookResult
-  'nitro:generate': (context: any) => HookResult
 
   // @nuxt/cli
   'generate:cache:ignore': (ignore: string[]) => HookResult
diff --git a/packages/vite/src/server.ts b/packages/vite/src/server.ts
index 8ee090b62a..18ae909345 100644
--- a/packages/vite/src/server.ts
+++ b/packages/vite/src/server.ts
@@ -82,7 +82,8 @@ export async function buildServer (ctx: ViteBuildContext) {
 
   await ctx.nuxt.callHook('vite:extendConfig', serverConfig, { isClient: false, isServer: true })
 
-  ctx.nuxt.hook('nitro:generate', async () => {
+  // TODO: Do we still need this?
+  ctx.nuxt.hook('build:done', async () => {
     const clientDist = resolve(ctx.nuxt.options.buildDir, 'dist/client')
 
     // Remove public files that have been duplicated into buildAssetsDir
diff --git a/yarn.lock b/yarn.lock
index 5a6b279c8b..6c04e0ff4c 100644
--- a/yarn.lock
+++ b/yarn.lock
@@ -2619,7 +2619,7 @@ __metadata:
     magic-string: ^0.26.1
     mlly: ^0.5.1
     murmurhash-es: ^0.1.1
-    nitropack: ^0.1.2
+    nitropack: ^0.2.1
     node-fetch: ^3.2.3
     nuxi: 3.0.0
     nuxt: ^2
@@ -14658,9 +14658,9 @@ __metadata:
   languageName: node
   linkType: hard
 
-"nitropack@npm:^0.1.2":
-  version: 0.1.2
-  resolution: "nitropack@npm:0.1.2"
+"nitropack@npm:^0.2.1":
+  version: 0.2.1
+  resolution: "nitropack@npm:0.2.1"
   dependencies:
     "@cloudflare/kv-asset-handler": ^0.2.0
     "@netlify/functions": ^1.0.0
@@ -14726,7 +14726,7 @@ __metadata:
   bin:
     nitro: dist/cli.mjs
     nitropack: dist/cli.mjs
-  checksum: 81836ce9a4b04c78e21f799e92eaec99c4c609dca2a541859d6d444f3123f3866ae684e4ac34849260108eb961b5aa76bf9db96a36f1a7c6930f40d07c4f7704
+  checksum: 995a4a3dc7bb311417a95549aed42b2a1e47b686713b5500971985aede751e6f597203d7246b412208e84280339debf17d6f883f1e19fe17b74a98e9f3153baf
   languageName: node
   linkType: hard
 
@@ -15409,7 +15409,7 @@ __metadata:
     knitwork: ^0.1.1
     magic-string: ^0.26.1
     mlly: ^0.5.1
-    nitropack: ^0.1.2
+    nitropack: ^0.2.1
     nuxi: 3.0.0
     ohash: ^0.1.0
     ohmyfetch: ^0.4.15