diff --git a/docs/content/3.docs/2.directory-structure/5.composables.md b/docs/content/3.docs/2.directory-structure/5.composables.md
index f4f33bd7e3..cdd33d068c 100644
--- a/docs/content/3.docs/2.directory-structure/5.composables.md
+++ b/docs/content/3.docs/2.directory-structure/5.composables.md
@@ -6,4 +6,41 @@ head.title: Composables directory
 
 # Composables directory
 
-Nuxt will soon support a `composables/` directory to auto import your Vue composables into your application when used, learn more on the [open issue](https://github.com/nuxt/framework/issues/639).
+Nuxt 3 supports `composables/` directory to auto import your Vue composables into your application and use using auto imports!
+
+
+Example: (using named exports)
+
+```js [composables/useFoo.ts]
+import { useState } from '#app'
+
+export const useFoo () {
+  return useState('foo', () => 'bar')
+}
+```
+
+Example: (using default export)
+
+```js [composables/use-foo.ts or composables/useFoo.ts]
+import { useState } from '#app'
+
+// It will be available as useFoo()
+export default function () {
+  return 'foo'
+}
+```
+
+You can now auto import it:
+
+```vue [app.vue]
+<template>
+  <div>
+    {{ foo }}
+  </div>
+</template>
+
+<script setup>
+const foo = useFoo()
+</script>
+```
+
diff --git a/examples/with-composables/app.vue b/examples/with-composables/app.vue
new file mode 100644
index 0000000000..8c8715d8d6
--- /dev/null
+++ b/examples/with-composables/app.vue
@@ -0,0 +1,17 @@
+<template>
+  <div>
+    {{ a }}
+    {{ b }}
+    {{ c }}
+    {{ d }}
+    {{ foo }}
+  </div>
+</template>
+
+<script setup>
+const a = useA()
+const b = useB()
+const c = useC()
+const d = useD()
+const foo = useFoo()
+</script>
diff --git a/examples/with-composables/composables/use-foo.ts b/examples/with-composables/composables/use-foo.ts
new file mode 100644
index 0000000000..3550421ffe
--- /dev/null
+++ b/examples/with-composables/composables/use-foo.ts
@@ -0,0 +1,23 @@
+import { useState } from '#app'
+
+export function useA () {
+  return 'a'
+}
+
+function useB () {
+  return 'b'
+}
+
+function _useC () {
+  return 'c'
+}
+
+export const useD = () => {
+  return 'd'
+}
+
+export { useB, _useC as useC }
+
+export default function () {
+  return useState('foo', () => 'bar')
+}
diff --git a/examples/with-composables/nuxt.config.ts b/examples/with-composables/nuxt.config.ts
new file mode 100644
index 0000000000..a3e4d68096
--- /dev/null
+++ b/examples/with-composables/nuxt.config.ts
@@ -0,0 +1,4 @@
+import { defineNuxtConfig } from 'nuxt3'
+
+export default defineNuxtConfig({
+})
diff --git a/examples/with-composables/package.json b/examples/with-composables/package.json
new file mode 100644
index 0000000000..1fb77a9a04
--- /dev/null
+++ b/examples/with-composables/package.json
@@ -0,0 +1,12 @@
+{
+  "name": "example-with-composables",
+  "private": true,
+  "devDependencies": {
+    "nuxt3": "latest"
+  },
+  "scripts": {
+    "dev": "nuxt dev",
+    "build": "nuxt build",
+    "start": "node .output/server/index.mjs"
+  }
+}
diff --git a/packages/kit/src/types/hooks.ts b/packages/kit/src/types/hooks.ts
index e27b71f537..5de25042ca 100644
--- a/packages/kit/src/types/hooks.ts
+++ b/packages/kit/src/types/hooks.ts
@@ -41,6 +41,7 @@ export interface NuxtHooks {
   // Auto imports
   'autoImports:sources': (autoImportSources: AutoImportSource[]) => HookResult
   'autoImports:extend': (autoImports: AutoImport[]) => HookResult
+  'autoImports:dirs': (dirs: string[]) => HookResult
 
   // Components
   'components:dirs': (dirs: ComponentsOptions['dirs']) => HookResult
diff --git a/packages/kit/src/types/imports.ts b/packages/kit/src/types/imports.ts
index c46655dff4..990645d0e7 100644
--- a/packages/kit/src/types/imports.ts
+++ b/packages/kit/src/types/imports.ts
@@ -46,4 +46,10 @@ export interface AutoImportsOptions {
    * [experimental] Use globalThis injection instead of transform for development
    */
   global?: boolean
+  /**
+   * Additional directories to scan composables from
+   *
+   * By default <rootDir>/composables is added
+   */
+   dirs?: []
 }
diff --git a/packages/nuxi/src/commands/dev.ts b/packages/nuxi/src/commands/dev.ts
index d86957e9f7..cd6629efb7 100644
--- a/packages/nuxi/src/commands/dev.ts
+++ b/packages/nuxi/src/commands/dev.ts
@@ -74,20 +74,26 @@ export default defineNuxtCommand({
     // TODO: Watcher service, modules, and requireTree
     const dLoad = debounce(load, 250)
     const watcher = chokidar.watch([rootDir], { ignoreInitial: true, depth: 1 })
-    watcher.on('all', (_event, file) => {
+    watcher.on('all', (event, file) => {
       if (!currentNuxt) { return }
       if (file.startsWith(currentNuxt.options.buildDir)) { return }
       if (file.match(/nuxt\.config\.(js|ts|mjs|cjs)$/)) {
         dLoad(true, `${relative(rootDir, file)} updated`)
       }
-      if (['addDir', 'unlinkDir'].includes(_event) && file.match(/pages$/)) {
-        dLoad(true, `Directory \`pages/\` ${_event === 'addDir' ? 'created' : 'removed'}`)
-      }
-      if (['addDir', 'unlinkDir'].includes(_event) && file.match(/components$/)) {
-        dLoad(true, `Directory \`components/\` ${_event === 'addDir' ? 'created' : 'removed'}`)
-      }
-      if (['add', 'unlink'].includes(_event) && file.match(/app\.(js|ts|mjs|jsx|tsx|vue)$/)) {
-        dLoad(true, `\`${relative(rootDir, file)}\` ${_event === 'add' ? 'created' : 'removed'}`)
+
+      const isDirChange = ['addDir', 'unlinkDir'].includes(event)
+      const isFileChange = ['add', 'unlink'].includes(event)
+      const reloadDirs = ['pages', 'components', 'composables']
+
+      if (isDirChange) {
+        const dir = reloadDirs.find(dir => file.endsWith(dir))
+        if (dir) {
+          dLoad(true, `Directory \`${dir}/\` ${event === 'addDir' ? 'created' : 'removed'}`)
+        }
+      } else if (isFileChange) {
+        if (file.match(/app\.(js|ts|mjs|jsx|tsx|vue)$/)) {
+          dLoad(true, `\`${relative(rootDir, file)}\` ${event === 'add' ? 'created' : 'removed'}`)
+        }
       }
     })
 
diff --git a/packages/nuxt3/src/auto-imports/composables.ts b/packages/nuxt3/src/auto-imports/composables.ts
new file mode 100644
index 0000000000..1000ee1283
--- /dev/null
+++ b/packages/nuxt3/src/auto-imports/composables.ts
@@ -0,0 +1,39 @@
+import { promises as fsp, existsSync } from 'fs'
+import { parse as parsePath, join } from 'pathe'
+import globby from 'globby'
+import { findExports } from 'mlly'
+import { camelCase } from 'scule'
+import { AutoImport } from '@nuxt/kit'
+import { filterInPlace } from './utils'
+
+export async function scanForComposables (dir: string, autoImports: AutoImport[]) {
+  if (!existsSync(dir)) { return }
+
+  const files = await globby(['*.{ts,js,tsx,jsx,mjs,cjs,mts,cts}'], { cwd: dir })
+
+  await Promise.all(
+    files.map(async (file) => {
+      const importPath = join(dir, file)
+
+      // Remove original entries from the same import (for build watcher)
+      filterInPlace(autoImports, i => i.from !== importPath)
+
+      const code = await fsp.readFile(join(dir, file), 'utf-8')
+      const exports = findExports(code)
+      const defaultExport = exports.find(i => i.type === 'default')
+
+      if (defaultExport) {
+        autoImports.push({ name: 'default', as: camelCase(parsePath(file).name), from: importPath })
+      }
+      for (const exp of exports) {
+        if (exp.type === 'named') {
+          for (const name of exp.names) {
+            autoImports.push({ name, as: name, from: importPath })
+          }
+        } else if (exp.type === 'declaration') {
+          autoImports.push({ name: exp.name, as: exp.name, from: importPath })
+        }
+      }
+    })
+  )
+}
diff --git a/packages/nuxt3/src/auto-imports/context.ts b/packages/nuxt3/src/auto-imports/context.ts
new file mode 100644
index 0000000000..78bf9f9598
--- /dev/null
+++ b/packages/nuxt3/src/auto-imports/context.ts
@@ -0,0 +1,42 @@
+import type { AutoImport } from '@nuxt/kit'
+
+export interface AutoImportContext {
+  autoImports: AutoImport[]
+  matchRE: RegExp
+  map: Map<string, AutoImport>
+}
+
+export function createAutoImportContext (): AutoImportContext {
+  return {
+    autoImports: [],
+    map: new Map(),
+    matchRE: /__never__/
+  }
+}
+
+export function updateAutoImportContext (ctx: AutoImportContext) {
+  // Detect duplicates
+  const usedNames = new Set()
+  for (const autoImport of ctx.autoImports) {
+    if (usedNames.has(autoImport.as)) {
+      autoImport.disabled = true
+      console.warn(`Disabling duplicate auto import '${autoImport.as}' (imported from '${autoImport.from}')`)
+    } else {
+      usedNames.add(autoImport.as)
+    }
+  }
+
+  // Filter out disabled auto imports
+  ctx.autoImports = ctx.autoImports.filter(i => i.disabled !== true)
+
+  // Create regex
+  ctx.matchRE = new RegExp(`\\b(${ctx.autoImports.map(i => i.as).join('|')})\\b`, 'g')
+
+  // Create map
+  ctx.map.clear()
+  for (const autoImport of ctx.autoImports) {
+    ctx.map.set(autoImport.as, autoImport)
+  }
+
+  return ctx
+}
diff --git a/packages/nuxt3/src/auto-imports/module.ts b/packages/nuxt3/src/auto-imports/module.ts
index 1141711123..0a6cf1bb5b 100644
--- a/packages/nuxt3/src/auto-imports/module.ts
+++ b/packages/nuxt3/src/auto-imports/module.ts
@@ -1,15 +1,19 @@
-import { addVitePlugin, addWebpackPlugin, defineNuxtModule, addTemplate, resolveAlias, addPluginTemplate, AutoImport } from '@nuxt/kit'
+import { addVitePlugin, addWebpackPlugin, defineNuxtModule, addTemplate, resolveAlias, addPluginTemplate, useNuxt } from '@nuxt/kit'
 import type { AutoImportsOptions } from '@nuxt/kit'
-import { isAbsolute, relative, resolve } from 'pathe'
+import { isAbsolute, join, relative, resolve, normalize } from 'pathe'
 import { TransformPlugin } from './transform'
 import { Nuxt3AutoImports } from './imports'
+import { scanForComposables } from './composables'
+import { toImports } from './utils'
+import { AutoImportContext, createAutoImportContext, updateAutoImportContext } from './context'
 
 export default defineNuxtModule<AutoImportsOptions>({
   name: 'auto-imports',
   configKey: 'autoImports',
   defaults: {
     sources: Nuxt3AutoImports,
-    global: false
+    global: false,
+    dirs: []
   },
   async setup (options, nuxt) {
     // Allow modules extending sources
@@ -18,91 +22,96 @@ export default defineNuxtModule<AutoImportsOptions>({
     // Filter disabled sources
     options.sources = options.sources.filter(source => source.disabled !== true)
 
+    // Create a context to share state between module internals
+    const ctx = createAutoImportContext()
+
     // Resolve autoimports from sources
-    let autoImports: AutoImport[] = []
     for (const source of options.sources) {
       for (const importName of source.names) {
         if (typeof importName === 'string') {
-          autoImports.push({ name: importName, as: importName, from: source.from })
+          ctx.autoImports.push({ name: importName, as: importName, from: source.from })
         } else {
-          autoImports.push({ name: importName.name, as: importName.as || importName.name, from: source.from })
+          ctx.autoImports.push({ name: importName.name, as: importName.as || importName.name, from: source.from })
         }
       }
     }
 
-    // Allow modules extending resolved imports
-    await nuxt.callHook('autoImports:extend', autoImports)
+    // composables/ dirs
+    let composablesDirs = [
+      join(nuxt.options.srcDir, 'composables'),
+      ...options.dirs
+    ]
+    await nuxt.callHook('autoImports:dirs', composablesDirs)
+    composablesDirs = composablesDirs.map(dir => normalize(dir))
 
-    // Disable duplicate auto imports
-    const usedNames = new Set()
-    for (const autoImport of autoImports) {
-      if (usedNames.has(autoImport.as)) {
-        autoImport.disabled = true
-        console.warn(`Disabling duplicate auto import '${autoImport.as}' (imported from '${autoImport.from}')`)
-      } else {
-        usedNames.add(autoImport.as)
-      }
-    }
-
-    // Filter disabled imports
-    autoImports = autoImports.filter(i => i.disabled !== true)
-
-    // temporary disable #746
-    // @ts-ignore
+    // Transpile and injection
+    // @ts-ignore temporary disabled due to #746
     if (nuxt.options.dev && options.global) {
       // Add all imports to globalThis in development mode
       addPluginTemplate({
         filename: 'auto-imports.mjs',
         src: '',
         getContents: () => {
-          const imports = toImports(autoImports)
-          const globalThisSet = autoImports.map(i => `globalThis.${i.as} = ${i.as};`).join('\n')
+          const imports = toImports(ctx.autoImports)
+          const globalThisSet = ctx.autoImports.map(i => `globalThis.${i.as} = ${i.as};`).join('\n')
           return `${imports}\n\n${globalThisSet}\n\nexport default () => {};`
         }
       })
     } else {
       // Transform to inject imports in production mode
-      addVitePlugin(TransformPlugin.vite(autoImports))
-      addWebpackPlugin(TransformPlugin.webpack(autoImports))
+      addVitePlugin(TransformPlugin.vite(ctx))
+      addWebpackPlugin(TransformPlugin.webpack(ctx))
     }
 
-    // Add types
-    const resolved = {}
-    const r = (id: string) => {
-      if (resolved[id]) { return resolved[id] }
-      let path = resolveAlias(id, nuxt.options.alias)
-      if (isAbsolute(path)) {
-        path = relative(nuxt.options.buildDir, path)
+    const updateAutoImports = async () => {
+      // Scan composables/
+      for (const composablesDir of composablesDirs) {
+        await scanForComposables(composablesDir, ctx.autoImports)
       }
-      // Remove file extension for benefit of TypeScript
-      path = path.replace(/\.[a-z]+$/, '')
-      resolved[id] = path
-      return path
+      // Allow modules extending
+      await nuxt.callHook('autoImports:extend', ctx.autoImports)
+      // Update context
+      updateAutoImportContext(ctx)
+      // Generate types
+      generateDts(ctx)
     }
+    await updateAutoImports()
 
-    addTemplate({
-      filename: 'auto-imports.d.ts',
-      write: true,
-      getContents: () => `// Generated by auto imports
-declare global {
-${autoImports.map(i => `  const ${i.as}: typeof import('${r(i.from)}')['${i.name}']`).join('\n')}
-}\nexport {}`
-    })
-    nuxt.hook('prepare:types', ({ references }) => {
-      references.push({ path: resolve(nuxt.options.buildDir, 'auto-imports.d.ts') })
+    // Watch composables/ directory
+    nuxt.hook('builder:watch', async (_, path) => {
+      const _resolved = resolve(nuxt.options.srcDir, path)
+      if (composablesDirs.find(dir => _resolved.startsWith(dir))) {
+        await updateAutoImports()
+      }
     })
   }
 })
 
-function toImports (autoImports: AutoImport[]) {
-  const map: Record<string, Set<string>> = {}
-  for (const autoImport of autoImports) {
-    if (!map[autoImport.from]) {
-      map[autoImport.from] = new Set()
+function generateDts (ctx: AutoImportContext) {
+  const nuxt = useNuxt()
+
+  const resolved = {}
+  const r = (id: string) => {
+    if (resolved[id]) { return resolved[id] }
+    let path = resolveAlias(id, nuxt.options.alias)
+    if (isAbsolute(path)) {
+      path = relative(nuxt.options.buildDir, path)
     }
-    map[autoImport.from].add(autoImport.as)
+    // Remove file extension for benefit of TypeScript
+    path = path.replace(/\.[a-z]+$/, '')
+    resolved[id] = path
+    return path
   }
-  return Object.entries(map)
-    .map(([name, imports]) => `import { ${Array.from(imports).join(', ')} } from '${name}';`)
-    .join('\n')
+
+  addTemplate({
+    filename: 'auto-imports.d.ts',
+    write: true,
+    getContents: () => `// Generated by auto imports
+declare global {
+${ctx.autoImports.map(i => `  const ${i.as}: typeof import('${r(i.from)}')['${i.name}']`).join('\n')}
+}
+
+export {}
+`
+  })
 }
diff --git a/packages/nuxt3/src/auto-imports/transform.ts b/packages/nuxt3/src/auto-imports/transform.ts
index 233bcee231..cc2c7a3d54 100644
--- a/packages/nuxt3/src/auto-imports/transform.ts
+++ b/packages/nuxt3/src/auto-imports/transform.ts
@@ -1,6 +1,7 @@
 import { createUnplugin } from 'unplugin'
 import { parseQuery, parseURL } from 'ufo'
-import type { AutoImport } from '@nuxt/kit'
+import { toImports } from './utils'
+import { AutoImportContext } from './context'
 
 const excludeRE = [
   // imported from other module
@@ -22,15 +23,7 @@ function stripeComments (code: string) {
     .replace(singlelineCommentsRE, '')
 }
 
-export const TransformPlugin = createUnplugin((autoImports: AutoImport[]) => {
-  const matchRE = new RegExp(`\\b(${autoImports.map(i => i.as).join('|')})\\b`, 'g')
-
-  // Create an internal map for faster lookup
-  const autoImportMap = new Map<string, AutoImport>()
-  for (const autoImport of autoImports) {
-    autoImportMap.set(autoImport.as, autoImport)
-  }
-
+export const TransformPlugin = createUnplugin((ctx: AutoImportContext) => {
   return {
     name: 'nuxt-auto-imports-transform',
     enforce: 'post',
@@ -60,7 +53,7 @@ export const TransformPlugin = createUnplugin((autoImports: AutoImport[]) => {
       const withoutComment = stripeComments(code)
 
       // find all possible injection
-      const matched = new Set(Array.from(withoutComment.matchAll(matchRE)).map(i => i[1]))
+      const matched = new Set(Array.from(withoutComment.matchAll(ctx.matchRE)).map(i => i[1]))
 
       // remove those already defined
       for (const regex of excludeRE) {
@@ -78,28 +71,11 @@ export const TransformPlugin = createUnplugin((autoImports: AutoImport[]) => {
         return null
       }
 
-      const modules: Record<string, string[]> = {}
-
-      // group by module name
-      Array.from(matched).forEach((name) => {
-        const moduleName = autoImportMap.get(name).from
-        if (!modules[moduleName]) {
-          modules[moduleName] = []
-        }
-        modules[moduleName].push(name)
-      })
-
-      // Needed for webpack4/bridge support
+      // For webpack4/bridge support
       const isCJSContext = code.includes('require(')
 
-      // stringify import
-      const imports = !isCJSContext
-        ? Object.entries(modules)
-          .map(([moduleName, names]) => `import { ${names.join(',')} } from '${moduleName}';`)
-          .join('')
-        : Object.entries(modules)
-          .map(([moduleName, names]) => `const { ${names.join(',')} } = require('${moduleName}');`)
-          .join('')
+      const matchedImports = Array.from(matched).map(name => ctx.map.get(name)).filter(Boolean)
+      const imports = toImports(matchedImports, isCJSContext)
 
       return imports + code
     }
diff --git a/packages/nuxt3/src/auto-imports/utils.ts b/packages/nuxt3/src/auto-imports/utils.ts
new file mode 100644
index 0000000000..2d7d8789d5
--- /dev/null
+++ b/packages/nuxt3/src/auto-imports/utils.ts
@@ -0,0 +1,36 @@
+import type { AutoImport } from '@nuxt/kit'
+
+export function toImports (autoImports: AutoImport[], isCJS = false) {
+  const aliasKeyword = isCJS ? ' : ' : ' as '
+
+  const map: Record<string, Set<string>> = {}
+  for (const autoImport of autoImports) {
+    if (!map[autoImport.from]) {
+      map[autoImport.from] = new Set()
+    }
+    map[autoImport.from].add(
+      autoImport.name === autoImport.as
+        ? autoImport.name
+        : autoImport.name + aliasKeyword + autoImport.as
+    )
+  }
+
+  if (isCJS) {
+    return Object.entries(map)
+      .map(([name, imports]) => `const { ${Array.from(imports).join(', ')} } = require('${name}');`)
+      .join('\n')
+  } else {
+    return Object.entries(map)
+      .map(([name, imports]) => `import { ${Array.from(imports).join(', ')} } from '${name}';`)
+      .join('\n')
+  }
+}
+
+export function filterInPlace<T> (arr: T[], predicate: (v: T) => any) {
+  let i = arr.length
+  while (i--) {
+    if (!predicate(arr[i])) {
+      arr.splice(i, 1)
+    }
+  }
+}
diff --git a/packages/nuxt3/test/auto-imports.test.ts b/packages/nuxt3/test/auto-imports.test.ts
index 8bb19b29ca..892c77f6f7 100644
--- a/packages/nuxt3/test/auto-imports.test.ts
+++ b/packages/nuxt3/test/auto-imports.test.ts
@@ -1,5 +1,6 @@
 import type { AutoImport } from '@nuxt/kit'
 import { expect } from 'chai'
+import { AutoImportContext, updateAutoImportContext } from '../src/auto-imports/context'
 import { TransformPlugin } from '../src/auto-imports/transform'
 
 describe('auto-imports:transform', () => {
@@ -8,7 +9,10 @@ describe('auto-imports:transform', () => {
     { name: 'computed', as: 'computed', from: 'bar' }
   ]
 
-  const transformPlugin = TransformPlugin.raw(autoImports, { framework: 'rollup' })
+  const ctx = { autoImports, map: new Map() } as AutoImportContext
+  updateAutoImportContext(ctx)
+
+  const transformPlugin = TransformPlugin.raw(ctx, { framework: 'rollup' })
   const transform = (code: string) => transformPlugin.transform.call({ error: null, warn: null }, code, '')
 
   it('should correct inject', async () => {
diff --git a/yarn.lock b/yarn.lock
index 46aad3f41e..4070c1764c 100644
--- a/yarn.lock
+++ b/yarn.lock
@@ -9278,6 +9278,14 @@ __metadata:
   languageName: unknown
   linkType: soft
 
+"example-with-composables@workspace:examples/with-composables":
+  version: 0.0.0-use.local
+  resolution: "example-with-composables@workspace:examples/with-composables"
+  dependencies:
+    nuxt3: latest
+  languageName: unknown
+  linkType: soft
+
 "example-with-layouts@workspace:examples/with-layouts":
   version: 0.0.0-use.local
   resolution: "example-with-layouts@workspace:examples/with-layouts"