diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipInterface.h b/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipInterface.h
index feb2fc12bf..3bd6e656ed 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipInterface.h
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipInterface.h
@@ -56,5 +56,7 @@ namespace AzToolsFramework
         virtual void StopPlayInEditor() = 0;
 
         virtual void CreateNewLevelPrefab(AZStd::string_view filename, const AZStd::string& templateFilename) = 0;
+
+        virtual bool IsRootPrefabAssigned() const = 0;
     };
 }
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.cpp
index 0f2b896b40..e5daf2674d 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.cpp
@@ -79,6 +79,8 @@ namespace AzToolsFramework
 
     void PrefabEditorEntityOwnershipService::Reset()
     {
+        m_isRootPrefabAssigned = false;
+
         if (m_rootInstance)
         {
             AzToolsFramework::ToolsApplicationRequestBus::Broadcast(
@@ -203,6 +205,7 @@ namespace AzToolsFramework
         m_rootInstance->SetTemplateSourcePath(m_loaderInterface->GenerateRelativePath(filename));
         m_rootInstance->SetContainerEntityName("Level");
         m_prefabSystemComponent->PropagateTemplateChanges(templateId);
+        m_isRootPrefabAssigned = true;
 
         return true;
     }
@@ -302,6 +305,12 @@ namespace AzToolsFramework
         }
 
         m_prefabSystemComponent->PropagateTemplateChanges(templateId);
+        m_isRootPrefabAssigned = true;
+    }
+
+    bool PrefabEditorEntityOwnershipService::IsRootPrefabAssigned() const
+    {
+        return m_isRootPrefabAssigned;
     }
 
     Prefab::InstanceOptionalReference PrefabEditorEntityOwnershipService::CreatePrefab(
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.h b/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.h
index a98fce8059..a172e9550c 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.h
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Entity/PrefabEditorEntityOwnershipService.h
@@ -167,6 +167,7 @@ namespace AzToolsFramework
         void StopPlayInEditor() override;
 
         void CreateNewLevelPrefab(AZStd::string_view filename, const AZStd::string& templateFilename) override;
+        bool IsRootPrefabAssigned() const override;
 
     protected:
 
@@ -215,5 +216,6 @@ namespace AzToolsFramework
         Prefab::PrefabLoaderInterface* m_loaderInterface;
         AzFramework::EntityContextId m_entityContextId;
         AZ::SerializeContext m_serializeContext;
+        bool m_isRootPrefabAssigned = false;
     };
 }
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
index 63f042be85..41538d54e8 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
@@ -329,6 +329,11 @@ namespace AzToolsFramework
                 return AZ::Failure(AZStd::string("Could not instantiate prefab - internal error "
                                                  "(PrefabEditorEntityOwnershipInterface unavailable)."));
             }
+            if (!prefabEditorEntityOwnershipInterface->IsRootPrefabAssigned())
+            {
+                return AZ::Failure(AZStd::string("Could not instantiate prefab - no root prefab assigned. "
+                "Currently, prefabs can only be instantiated inside a level"));
+            }
 
             InstanceOptionalReference instanceToParentUnder;