diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
index 1e9cc35230..46c3eaefe4 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
@@ -89,7 +89,7 @@ namespace AzToolsFramework
                 if (!RetrieveAndSortPrefabEntitiesAndInstances(inputEntityList, commonRootEntityOwningInstance->get(), entities, instances))
                 {
                     return AZ::Failure(
-                        AZStd::string("Could not create a new prefab out of the entities provided - entities do not share a common root."));
+                        AZStd::string("Could not create a new prefab out of the entities provided - invalid selection."));
                 }
 
                 // When we create a prefab with other prefab instances, we have to remove the existing links between the source and 
@@ -142,9 +142,13 @@ namespace AzToolsFramework
                 // Mark them as dirty so this change is correctly applied to the template
                 for (AZ::Entity* topLevelEntity : topLevelEntities)
                 {
-                    m_prefabUndoCache.UpdateCache(topLevelEntity->GetId());
-                    undoBatch.MarkEntityDirty(topLevelEntity->GetId());
-                    AZ::TransformBus::Event(topLevelEntity->GetId(), &AZ::TransformBus::Events::SetParent, containerEntityId);
+                    AZ::EntityId topLevelEntityId = topLevelEntity->GetId();
+                    if (topLevelEntityId.IsValid() && !IsLevelInstanceContainerEntity(topLevelEntityId))
+                    {
+                        m_prefabUndoCache.UpdateCache(topLevelEntityId);
+                        undoBatch.MarkEntityDirty(topLevelEntityId);
+                        AZ::TransformBus::Event(topLevelEntityId, &AZ::TransformBus::Events::SetParent, containerEntityId);
+                    }
                 }
                 
                 // Select Container Entity
@@ -223,6 +227,14 @@ namespace AzToolsFramework
             // Retrieve entityList from entityIds
             inputEntityList = EntityIdListToEntityList(entityIds);
 
+            // Remove Level Container Entity if it's part of the list
+            AZ::Entity* levelEntity = GetEntityById(GetLevelInstanceContainerEntityId());
+            auto levelEntityIter = AZStd::find(inputEntityList.begin(), inputEntityList.end(), levelEntity);
+            if (levelEntityIter != inputEntityList.end())
+            {
+                inputEntityList.erase(levelEntityIter);
+            }
+
             // Find common root and top level entities
             bool entitiesHaveCommonRoot = false;
 
@@ -840,7 +852,7 @@ namespace AzToolsFramework
                 outInstances.push_back(AZStd::move(commonRootEntityOwningInstance.DetachNestedInstance(instancePtr->GetInstanceAlias())));
             }
 
-            return true;
+            return (outEntities.size() + outInstances.size()) > 0;
         }
 
         bool PrefabPublicHandler::EntitiesBelongToSameInstance(const EntityIdList& entityIds) const
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/UI/Prefab/PrefabIntegrationManager.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/UI/Prefab/PrefabIntegrationManager.cpp
index 6ce3fdc755..71354b8a1b 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/UI/Prefab/PrefabIntegrationManager.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/UI/Prefab/PrefabIntegrationManager.cpp
@@ -151,32 +151,36 @@ namespace AzToolsFramework
                 {
                     if (!selectedEntities.empty())
                     {
-                        bool layerInSelection = false;
-
-                        for (AZ::EntityId entityId : selectedEntities)
+                        // Hide if the only selected entity is the Level Container
+                        if (selectedEntities.size() > 1 || !s_prefabPublicInterface->IsLevelInstanceContainerEntity(selectedEntities[0]))
                         {
-                            if (!layerInSelection)
-                            {
-                                AzToolsFramework::Layers::EditorLayerComponentRequestBus::EventResult(
-                                    layerInSelection, entityId,
-                                    &AzToolsFramework::Layers::EditorLayerComponentRequestBus::Events::HasLayer);
+                            bool layerInSelection = false;
 
-                                if (layerInSelection)
+                            for (AZ::EntityId entityId : selectedEntities)
+                            {
+                                if (!layerInSelection)
                                 {
-                                    break;
+                                    AzToolsFramework::Layers::EditorLayerComponentRequestBus::EventResult(
+                                        layerInSelection, entityId,
+                                        &AzToolsFramework::Layers::EditorLayerComponentRequestBus::Events::HasLayer);
+
+                                    if (layerInSelection)
+                                    {
+                                        break;
+                                    }
                                 }
                             }
-                        }
 
-                        // Layers can't be in prefabs.
-                        if (!layerInSelection)
-                        {
-                            QAction* createAction = menu->addAction(QObject::tr("Create Prefab..."));
-                            createAction->setToolTip(QObject::tr("Creates a prefab out of the currently selected entities."));
+                            // Layers can't be in prefabs.
+                            if (!layerInSelection)
+                            {
+                                QAction* createAction = menu->addAction(QObject::tr("Create Prefab..."));
+                                createAction->setToolTip(QObject::tr("Creates a prefab out of the currently selected entities."));
 
-                            QObject::connect(createAction, &QAction::triggered, createAction, [this, selectedEntities] {
-                                ContextMenu_CreatePrefab(selectedEntities);
-                            });
+                                QObject::connect(createAction, &QAction::triggered, createAction, [this, selectedEntities] {
+                                    ContextMenu_CreatePrefab(selectedEntities);
+                                });
+                            }
                         }
                     }
                 }