diff --git a/packages/form-core/src/FormApi.ts b/packages/form-core/src/FormApi.ts
index 5c9de3c1c..2f141532a 100644
--- a/packages/form-core/src/FormApi.ts
+++ b/packages/form-core/src/FormApi.ts
@@ -1066,6 +1066,12 @@ export class FormApi<
    * @private
    */
   private _devtoolsSubmissionOverride: boolean
+  /**
+   * @private
+   * Tracks whether `reset(values)` was called with explicit new default values.
+   * When true, `update()` must not overwrite those values with stale prop values.
+   */
+  private _defaultValuesOverridden: boolean = false
 
   /**
    * Constructs a new `FormApi` instance with the given form options.
@@ -1751,6 +1757,21 @@ export class FormApi<
     // Options need to be updated first so that when the store is updated, the state is correct for the derived state
     this.options = options
 
+    // If reset(newValues) was called, the incoming `options` still carries the
+    // original (pre-reset) defaultValues from the render closure. We must not
+    // let those stale values overwrite what reset() set, so we skip the
+    // shouldUpdateValues branch and clear the flag for the next render.
+    if (this._defaultValuesOverridden) {
+      this._defaultValuesOverridden = false
+      // Keep the defaultValues that reset() stored on this.options so that
+      // future renders compare against them correctly.
+      this.options = {
+        ...options,
+        defaultValues: oldOptions.defaultValues,
+      }
+      return
+    }
+
     const shouldUpdateValues =
       options.defaultValues &&
       !evaluate(options.defaultValues, oldOptions.defaultValues) &&
@@ -1815,6 +1836,7 @@ export class FormApi<
         ...this.options,
         defaultValues: values,
       }
+      this._defaultValuesOverridden = true
     }
 
     this.baseStore.setState(() => {
diff --git a/packages/form-core/tests/FormApi.spec.ts b/packages/form-core/tests/FormApi.spec.ts
index 092d0ed6c..2d2b77021 100644
--- a/packages/form-core/tests/FormApi.spec.ts
+++ b/packages/form-core/tests/FormApi.spec.ts
@@ -144,6 +144,33 @@ describe('form api', () => {
     form.handleSubmit()
   })
 
+  it('should not overwrite reset(newValues) when update() is called with stale options afterwards', async () => {
+    // Simulates the race condition from issue #1681:
+    // reset(newValues) is called inside onSubmit, then the framework calls
+    // update(originalOpts) on the next render - the new values must survive.
+    const originalOptions = { defaultValues: { name: '' } }
+    const form = new FormApi(originalOptions)
+    form.mount()
+
+    form.setFieldValue('name', 'test')
+    await form.handleSubmit()
+
+    // Simulate reset() inside onSubmit having been called with new values
+    form.reset({ name: 'test' })
+
+    // State should now reflect the reset values
+    expect(form.state.values).toEqual({ name: 'test' })
+    expect(form.options.defaultValues).toEqual({ name: 'test' })
+
+    // Simulate the framework calling update() with the original (stale) options
+    // – this is what useIsomorphicLayoutEffect does after every render
+    form.update(originalOptions)
+
+    // Values and defaultValues must NOT revert to the original empty string
+    expect(form.state.values).toEqual({ name: 'test' })
+    expect(form.options.defaultValues).toEqual({ name: 'test' })
+  })
+
   it('should reset and set the new default values that are restored after an empty reset', () => {
     const form = new FormApi({ defaultValues: { name: 'initial' } })
     form.mount()