diff --git a/package.json b/package.json
index f9e8d6da7b..89b96c211c 100644
--- a/package.json
+++ b/package.json
@@ -20,7 +20,7 @@
     "play": "pnpm nuxi dev playground",
     "play:build": "pnpm nuxi build playground",
     "play:preview": "pnpm nuxi preview playground",
-    "test:fixtures": "pnpm nuxi prepare test/fixtures/basic && JITI_ESM_RESOLVE=1 vitest run --dir test",
+    "test:fixtures": "pnpm nuxi prepare test/fixtures/basic && nuxi prepare test/fixtures/runtime-compiler && JITI_ESM_RESOLVE=1 vitest run --dir test",
     "test:fixtures:dev": "TEST_ENV=dev pnpm test:fixtures",
     "test:fixtures:webpack": "TEST_BUILDER=webpack pnpm test:fixtures",
     "test:types": "pnpm nuxi prepare test/fixtures/basic && cd test/fixtures/basic && npx vue-tsc --noEmit",
diff --git a/packages/nuxt/src/core/nitro.ts b/packages/nuxt/src/core/nitro.ts
index c0114b2ea7..684ff3758e 100644
--- a/packages/nuxt/src/core/nitro.ts
+++ b/packages/nuxt/src/core/nitro.ts
@@ -126,6 +126,18 @@ export async function initNitro (nuxt: Nuxt & { _nitro?: Nitro }) {
         'nuxt/dist',
         'nuxt3/dist',
         distDir
+      ],
+      traceInclude: [
+        // force include files used in generated code from the runtime-compiler
+        ...(nuxt.options.experimental.runtimeVueCompiler && !nuxt.options.experimental.externalVue)
+          ? [
+              ...nuxt.options.modulesDir.reduce<string[]>((targets, path) => {
+                const serverRendererPath = resolve(path, 'vue/server-renderer/index.js')
+                if (existsSync(serverRendererPath)) { targets.push(serverRendererPath) }
+                return targets
+              }, [])
+            ]
+          : []
       ]
     },
     alias: {
@@ -137,11 +149,15 @@ export async function initNitro (nuxt: Nuxt & { _nitro?: Nitro }) {
             vue: await resolvePath(`vue/dist/vue.cjs${nuxt.options.dev ? '' : '.prod'}.js`)
           },
       // Vue 3 mocks
-      'estree-walker': 'unenv/runtime/mock/proxy',
-      '@babel/parser': 'unenv/runtime/mock/proxy',
-      '@vue/compiler-core': 'unenv/runtime/mock/proxy',
-      '@vue/compiler-dom': 'unenv/runtime/mock/proxy',
-      '@vue/compiler-ssr': 'unenv/runtime/mock/proxy',
+      ...nuxt.options.experimental.runtimeVueCompiler || nuxt.options.experimental.externalVue
+        ? {}
+        : {
+            'estree-walker': 'unenv/runtime/mock/proxy',
+            '@babel/parser': 'unenv/runtime/mock/proxy',
+            '@vue/compiler-core': 'unenv/runtime/mock/proxy',
+            '@vue/compiler-dom': 'unenv/runtime/mock/proxy',
+            '@vue/compiler-ssr': 'unenv/runtime/mock/proxy'
+          },
       '@vue/devtools-api': 'vue-devtools-stub',
 
       // Paths
@@ -231,6 +247,37 @@ export async function initNitro (nuxt: Nuxt & { _nitro?: Nitro }) {
     nuxt.callHook('prerender:routes', { routes })
   })
 
+  // Enable runtime compiler client side
+  if (nuxt.options.experimental.runtimeVueCompiler) {
+    nuxt.hook('vite:extendConfig', (config, { isClient }) => {
+      if (isClient) {
+        if (Array.isArray(config.resolve!.alias)) {
+          config.resolve!.alias.push({
+            find: 'vue',
+            replacement: 'vue/dist/vue.esm-bundler'
+          })
+        } else {
+          config.resolve!.alias = {
+            ...config.resolve!.alias,
+            vue: 'vue/dist/vue.esm-bundler'
+          }
+        }
+      }
+    })
+    nuxt.hook('webpack:config', (configuration) => {
+      const clientConfig = configuration.find(config => config.name === 'client')
+      if (!clientConfig!.resolve) { clientConfig!.resolve!.alias = {} }
+      if (Array.isArray(clientConfig!.resolve!.alias)) {
+        clientConfig!.resolve!.alias.push({
+          name: 'vue',
+          alias: 'vue/dist/vue.esm-bundler'
+        })
+      } else {
+        clientConfig!.resolve!.alias!.vue = 'vue/dist/vue.esm-bundler'
+      }
+    })
+  }
+
   // Setup handlers
   const devMiddlewareHandler = dynamicEventHandler()
   nitro.options.devHandlers.unshift({ handler: devMiddlewareHandler })
diff --git a/packages/schema/src/config/app.ts b/packages/schema/src/config/app.ts
index d3c3aede68..c9a42f37db 100644
--- a/packages/schema/src/config/app.ts
+++ b/packages/schema/src/config/app.ts
@@ -12,7 +12,7 @@ export default defineUntypedSchema({
      * @see [documentation](https://vuejs.org/api/application.html#app-config-compileroptions)
      * @type {typeof import('@vue/compiler-core').CompilerOptions}
      */
-    compilerOptions: {}
+    compilerOptions: {},
   },
 
   /**
diff --git a/packages/schema/src/config/experimental.ts b/packages/schema/src/config/experimental.ts
index 2469dd2680..0817b672a1 100644
--- a/packages/schema/src/config/experimental.ts
+++ b/packages/schema/src/config/experimental.ts
@@ -21,6 +21,12 @@ export default defineUntypedSchema({
      */
     externalVue: true,
 
+    // TODO: move to `vue.runtimeCompiler` in v3.5
+    /**
+     * Include Vue compiler in runtime bundle.
+     */
+    runtimeVueCompiler: false,
+
     /**
      * Tree shakes contents of client-only components from server bundle.
      * @see https://github.com/nuxt/framework/pull/5750
diff --git a/test/fixtures/runtime-compiler/.gitignore b/test/fixtures/runtime-compiler/.gitignore
new file mode 100644
index 0000000000..438cb0860d
--- /dev/null
+++ b/test/fixtures/runtime-compiler/.gitignore
@@ -0,0 +1,8 @@
+node_modules
+*.log*
+.nuxt
+.nitro
+.cache
+.output
+.env
+dist
diff --git a/test/fixtures/runtime-compiler/components/Helloworld.vue b/test/fixtures/runtime-compiler/components/Helloworld.vue
new file mode 100644
index 0000000000..f25b73707c
--- /dev/null
+++ b/test/fixtures/runtime-compiler/components/Helloworld.vue
@@ -0,0 +1,5 @@
+<script>
+export default defineNuxtComponent({
+  template: '<div>hello, Helloworld.vue here ! </div>'
+})
+</script>
diff --git a/test/fixtures/runtime-compiler/components/Name.ts b/test/fixtures/runtime-compiler/components/Name.ts
new file mode 100644
index 0000000000..54b23cd97e
--- /dev/null
+++ b/test/fixtures/runtime-compiler/components/Name.ts
@@ -0,0 +1,15 @@
+export default defineNuxtComponent({
+  props: ['template', 'name'],
+
+  /**
+   * most of the time, vue compiler need at least a VNode, use h() to render the component
+   */
+  render () {
+    return h({
+      props: ['name'],
+      template: this.template
+    }, {
+      name: this.name
+    })
+  }
+})
diff --git a/test/fixtures/runtime-compiler/components/ShowTemplate.vue b/test/fixtures/runtime-compiler/components/ShowTemplate.vue
new file mode 100644
index 0000000000..02456fa6ae
--- /dev/null
+++ b/test/fixtures/runtime-compiler/components/ShowTemplate.vue
@@ -0,0 +1,35 @@
+<template>
+  <component :is="showIt" :name="name" />
+</template>
+
+<script>
+
+export default defineNuxtComponent({
+  props: {
+    template: {
+      required: true,
+      type: String
+    },
+    name: {
+      type: String,
+      default: () => '(missing name prop)'
+    }
+  },
+  setup (props) {
+    const showIt = h({
+      template: props.template,
+      props: {
+
+        name: {
+          type: String,
+          default: () => '(missing name prop)'
+        }
+      }
+    })
+
+    return {
+      showIt
+    }
+  }
+})
+</script>
diff --git a/test/fixtures/runtime-compiler/nuxt.config.ts b/test/fixtures/runtime-compiler/nuxt.config.ts
new file mode 100644
index 0000000000..604986a3fc
--- /dev/null
+++ b/test/fixtures/runtime-compiler/nuxt.config.ts
@@ -0,0 +1,8 @@
+// https://nuxt.com/docs/api/configuration/nuxt-config
+export default defineNuxtConfig({
+  experimental: {
+    runtimeVueCompiler: true,
+    externalVue: false
+  },
+  builder: process.env.TEST_BUILDER as 'webpack' | 'vite' ?? 'vite'
+})
diff --git a/test/fixtures/runtime-compiler/package.json b/test/fixtures/runtime-compiler/package.json
new file mode 100644
index 0000000000..cf133dcd9b
--- /dev/null
+++ b/test/fixtures/runtime-compiler/package.json
@@ -0,0 +1,10 @@
+{
+  "private": true,
+  "name": "fixture-runtime-compiler",
+  "scripts": {
+    "build": "nuxi build"
+  },
+  "dependencies": {
+    "nuxt": "workspace:*"
+  }
+}
diff --git a/test/fixtures/runtime-compiler/pages/index.vue b/test/fixtures/runtime-compiler/pages/index.vue
new file mode 100644
index 0000000000..42fd3135f7
--- /dev/null
+++ b/test/fixtures/runtime-compiler/pages/index.vue
@@ -0,0 +1,66 @@
+<script setup lang="ts">
+import type { Component } from 'vue'
+import Helloworld from '../components/Helloworld.vue'
+const count = ref(0)
+
+const compTemplate = computed(() => `
+<div class='border'>
+    <div>hello i am defined in the setup of app.vue</div>
+    <div>This component template is in a computed refreshed on count</div>
+    count: <span class="count">${count.value}</span>.
+    I dont recommend you to do this for performance issue, prefer passing props for mutable data.
+</div>`
+)
+
+const ComponentDefinedInSetup = computed(() => h({
+  template: compTemplate.value
+}) as Component)
+
+const { data, pending } = await useAsyncData('templates', async () => {
+  const [interactiveComponent, templateString] = await Promise.all([
+    $fetch('/api/full-component'),
+    $fetch('/api/template')
+  ])
+
+  return {
+    interactiveComponent,
+    templateString
+  }
+}, {})
+
+const Interactive = h({
+  template: data.value?.interactiveComponent.template,
+  setup (props) {
+    // eslint-disable-next-line no-new-func
+    return new Function(
+      'ref',
+      'computed',
+      'props',
+      data.value?.interactiveComponent.setup ?? ''
+    )(ref, computed, props)
+  },
+  props: data.value?.interactiveComponent.props
+}) as Component
+</script>
+
+<template>
+  <!-- Edit this file to play around with Nuxt but never commit changes! -->
+  <div>
+    <Helloworld id="hello-world" />
+    <ComponentDefinedInSetup id="component-defined-in-setup" />
+    <button id="increment-count" @click="count++">
+      {{ count }}
+    </button>
+    <template v-if="!pending">
+      <Name id="name" template="<div>I am the Name.ts component</div>" />
+      <show-template id="show-template" :template="data?.templateString ?? ''" name="John" />
+      <Interactive id="interactive" lastname="Doe" firstname="John" />
+    </template>
+  </div>
+</template>
+
+<style>
+.border {
+  border: 1px solid burlywood;
+}
+</style>
diff --git a/test/fixtures/runtime-compiler/public/favicon.ico b/test/fixtures/runtime-compiler/public/favicon.ico
new file mode 100644
index 0000000000..d44088fe25
Binary files /dev/null and b/test/fixtures/runtime-compiler/public/favicon.ico differ
diff --git a/test/fixtures/runtime-compiler/server/api/full-component.get.ts b/test/fixtures/runtime-compiler/server/api/full-component.get.ts
new file mode 100644
index 0000000000..26baa9d6c7
--- /dev/null
+++ b/test/fixtures/runtime-compiler/server/api/full-component.get.ts
@@ -0,0 +1,18 @@
+/**
+ * sometimes, CMS wants to give full control on components. This might not be a good practice.
+ * SO MAKE SURE TO SANITIZE ALL YOUR STRINGS
+ */
+export default defineEventHandler(() => {
+  return {
+    props: ['lastname', 'firstname'],
+    // don't forget to sanitize
+    setup: `
+            const fullName = computed(() => props.lastname + ' ' + props.firstname);
+
+            const count = ref(0);
+
+            return {fullName, count}
+        `,
+    template: '<div>my name is {{ fullName }}, <button id="inc-interactive-count" @click="count++">click here</button> count: <span id="interactive-count">{{count}}</span>. I am defined by Interactive in the setup of App.vue. My full component definition is retrieved from the api </div>'
+  }
+})
diff --git a/test/fixtures/runtime-compiler/server/api/template.get.ts b/test/fixtures/runtime-compiler/server/api/template.get.ts
new file mode 100644
index 0000000000..500bb1ff85
--- /dev/null
+++ b/test/fixtures/runtime-compiler/server/api/template.get.ts
@@ -0,0 +1,7 @@
+/**
+ * mock the behavior of nuxt retrieving data from an api
+ */
+
+export default defineEventHandler(() => {
+  return '<div>Hello my name is : {{name}}, i am defined by ShowTemplate.vue and my template is retrieved from the API</div>'
+})
diff --git a/test/fixtures/runtime-compiler/tsconfig.json b/test/fixtures/runtime-compiler/tsconfig.json
new file mode 100644
index 0000000000..a746f2a70c
--- /dev/null
+++ b/test/fixtures/runtime-compiler/tsconfig.json
@@ -0,0 +1,4 @@
+{
+  // https://nuxt.com/docs/guide/concepts/typescript
+  "extends": "./.nuxt/tsconfig.json"
+}
diff --git a/test/runtime-compiler.test.ts b/test/runtime-compiler.test.ts
new file mode 100644
index 0000000000..b125a47d25
--- /dev/null
+++ b/test/runtime-compiler.test.ts
@@ -0,0 +1,59 @@
+import { fileURLToPath } from 'node:url'
+import { isWindows } from 'std-env'
+import { describe, it, expect } from 'vitest'
+import { setup, $fetch } from '@nuxt/test-utils'
+import { expectNoClientErrors, renderPage } from './utils'
+const isWebpack = process.env.TEST_BUILDER === 'webpack'
+
+await setup({
+  rootDir: fileURLToPath(new URL('./fixtures/runtime-compiler', import.meta.url)),
+  dev: process.env.TEST_ENV === 'dev',
+  server: true,
+  browser: true,
+  setupTimeout: (isWindows ? 240 : 120) * 1000,
+  nuxtConfig: {
+    builder: isWebpack ? 'webpack' : 'vite'
+  }
+})
+
+describe('test basic config', () => {
+  it('expect render page without any error or logs', async () => {
+    await expectNoClientErrors('/')
+  })
+
+  it('test HelloWorld.vue', async () => {
+    const html = await $fetch('/')
+    const { page } = await renderPage('/')
+
+    expect(html).toContain('<div id="hello-world">hello, Helloworld.vue here ! </div>')
+    expect(await page.locator('body').innerHTML()).toContain('<div id="hello-world">hello, Helloworld.vue here ! </div>')
+  })
+
+  it('test Name.ts', async () => {
+    const html = await $fetch('/')
+    const { page } = await renderPage('/')
+
+    expect(html).toContain('<div id="name">I am the Name.ts component</div>')
+    expect(await page.locator('body').innerHTML()).toContain('<div id="name">I am the Name.ts component</div>')
+  })
+
+  it('test ShowTemplate.ts', async () => {
+    const html = await $fetch('/')
+    const { page } = await renderPage('/')
+
+    expect(html).toContain('<div id="show-template">Hello my name is : John, i am defined by ShowTemplate.vue and my template is retrieved from the API</div>')
+    expect(await page.locator('body').innerHTML()).toContain('<div id="show-template">Hello my name is : John, i am defined by ShowTemplate.vue and my template is retrieved from the API</div>')
+  })
+
+  it('test Interactive component.ts', async () => {
+    const html = await $fetch('/')
+    const { page } = await renderPage('/')
+
+    expect(html).toContain('I am defined by Interactive in the setup of App.vue. My full component definition is retrieved from the api')
+    expect(await page.locator('#interactive').innerHTML()).toContain('I am defined by Interactive in the setup of App.vue. My full component definition is retrieved from the api')
+    const button = page.locator('#inc-interactive-count')
+    await button.click()
+    const count = page.locator('#interactive-count')
+    expect(await count.innerHTML()).toBe('1')
+  })
+})