diff --git a/libp2p/relay/circuit_v2/protocol.py b/libp2p/relay/circuit_v2/protocol.py
index ca7cb6da3..644bcc218 100644
--- a/libp2p/relay/circuit_v2/protocol.py
+++ b/libp2p/relay/circuit_v2/protocol.py
@@ -688,14 +688,27 @@ async def _handle_connect(self, stream: INetStream, msg: HopMessage) -> None:
                 await stream.reset()
                 return
 
-        # Check resource limits
-        if not self.resource_manager.can_accept_connection(peer_id=source_addr):
+        if not self.resource_manager.can_accept_connection(peer_id=peer_id):
+            relay_envelope_bytes, _ = env_to_send_in_RPC(self.host)
+            relay_envelope = unmarshal_envelope(relay_envelope_bytes)
+            await self._send_status(
+                stream,
+                StatusCode.NO_RESERVATION,
+                "Destination peer has no active reservation on this relay",
+                relay_envelope,
+            )
+            await stream.reset()
+            return
+
+        # Separately enforce the source peer's per-reservation connection limit.
+        source_reservation = self.resource_manager._reservations.get(source_addr)
+        if source_reservation and not source_reservation.can_accept_connection():
             relay_envelope_bytes, _ = env_to_send_in_RPC(self.host)
             relay_envelope = unmarshal_envelope(relay_envelope_bytes)
             await self._send_status(
                 stream,
                 StatusCode.RESOURCE_LIMIT_EXCEEDED,
-                "Connection limit exceeded",
+                "Source peer has exceeded its connection limit",
                 relay_envelope,
             )
             await stream.reset()
diff --git a/libp2p/relay/circuit_v2/protocol_buffer.py b/libp2p/relay/circuit_v2/protocol_buffer.py
index 509cea1c6..b141e5180 100644
--- a/libp2p/relay/circuit_v2/protocol_buffer.py
+++ b/libp2p/relay/circuit_v2/protocol_buffer.py
@@ -21,6 +21,7 @@ class StatusCode(IntEnum):
     RESERVATION_REFUSED = 100
     RESOURCE_LIMIT_EXCEEDED = 101
     PERMISSION_DENIED = 102
+    NO_RESERVATION = 103
     CONNECTION_FAILED = 200
     DIAL_REFUSED = 201
     STOP_FAILED = 300
diff --git a/newsfragments/1342.bugfix.rst b/newsfragments/1342.bugfix.rst
new file mode 100644
index 000000000..fc1c52c02
--- /dev/null
+++ b/newsfragments/1342.bugfix.rst
@@ -0,0 +1 @@
+Fixed Circuit Relay v2 issue where a source peer could connect to a destination peer without an active reservation on the relay.
diff --git a/tests/core/relay/test_circuit_v2_transport.py b/tests/core/relay/test_circuit_v2_transport.py
index 34ecabe8c..d08a9bc26 100644
--- a/tests/core/relay/test_circuit_v2_transport.py
+++ b/tests/core/relay/test_circuit_v2_transport.py
@@ -21,6 +21,7 @@
 from libp2p.peer.peerinfo import (
     PeerInfo,
 )
+from libp2p.peer.peerstore import env_to_send_in_RPC
 from libp2p.relay.circuit_v2.config import RelayConfig, RelayRole
 from libp2p.relay.circuit_v2.discovery import (
     RelayDiscovery,
@@ -373,7 +374,24 @@ async def app_echo_handler(stream):
 
         await trio.sleep(SLEEP_TIME)
 
-        # Step 2: Source connects to Relay
+        # Step 2: Destination makes a reservation on the relay.
+        with trio.fail_after(CONNECT_TIMEOUT):
+            dest_relay_stream = await target_host.new_stream(
+                relay_host.get_id(), [PROTOCOL_ID]
+            )
+            envelope_bytes, _ = env_to_send_in_RPC(target_host)
+            reserve_msg = HopMessage(
+                type=HopMessage.RESERVE,
+                peer=target_host.get_id().to_bytes(),
+                senderRecord=envelope_bytes,
+            )
+            await dest_relay_stream.write(reserve_msg.SerializeToString())
+            # Read and discard the STATUS response from the relay
+            await dest_relay_stream.read(1024)
+
+        await trio.sleep(SLEEP_TIME)
+
+        # Step 3: Source connects to Relay
         with trio.fail_after(CONNECT_TIMEOUT):
             await connect(client_host, relay_host)
             assert relay_host.get_id() in client_host.get_network().connections
@@ -383,7 +401,7 @@ async def app_echo_handler(stream):
         relay_id = relay_host.get_id()
         client_discovery.get_relay = lambda: relay_id
 
-        # Step 3: Source tries to dial the destination via p2p-circuit and opens stream
+        # Step 4: Source tries to dial the destination via p2p-circuit and opens stream
         relay_addr = relay_host.get_addrs()[0]
         dest_id = target_host.get_id()
         p2p_circuit_addr = Multiaddr(f"{relay_addr}/p2p-circuit/p2p/{dest_id}")