diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.cpp
index 7c2f26042f..d2edbcce32 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.cpp
@@ -170,6 +170,15 @@ namespace AzToolsFramework
             return m_filter;
         }
 
+        QSharedPointer<CompositeFilter> SearchWidget::GetStringFilter() const
+        {
+            return m_stringFilter;
+        }
+
+        QSharedPointer<CompositeFilter> SearchWidget::GetTypesFilter() const
+        {
+            return m_typesFilter;
+        }
     } // namespace AssetBrowser
 } // namespace AzToolsFramework
 
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.h b/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.h
index 0453333c94..be649bc81d 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.h
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/AssetBrowser/Search/SearchWidget.h
@@ -39,6 +39,10 @@ namespace AzToolsFramework
 
             QSharedPointer<CompositeFilter> GetFilter() const;
 
+            QSharedPointer<CompositeFilter> GetStringFilter() const;
+
+            QSharedPointer<CompositeFilter> GetTypesFilter() const;
+
             QString GetFilterString() const { return textFilter(); }
             void ClearStringFilter() { ClearTextFilter(); }
 
diff --git a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.cpp b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.cpp
index 76aee99e52..6c30540392 100644
--- a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.cpp
+++ b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.cpp
@@ -26,8 +26,14 @@
 namespace MaterialEditor
 {
     CreateMaterialDialog::CreateMaterialDialog(QWidget* parent)
+        : CreateMaterialDialog(QString(AZ::IO::FileIOBase::GetInstance()->GetAlias("@devassets@")) + AZ_CORRECT_FILESYSTEM_SEPARATOR + "Materials", parent)
+    {
+    }
+
+    CreateMaterialDialog::CreateMaterialDialog(const QString& path, QWidget* parent)
         : QDialog(parent)
         , m_ui(new Ui::CreateMaterialDialog)
+        , m_path(path)
     {
         m_ui->setupUi(this);
 
@@ -77,8 +83,7 @@ namespace MaterialEditor
     {
         //Select a default location and unique name for the new material
         m_materialFileInfo = AtomToolsFramework::GetUniqueFileInfo(
-            QString(AZ::IO::FileIOBase::GetInstance()->GetAlias("@devassets@")) +
-            AZ_CORRECT_FILESYSTEM_SEPARATOR + "Materials" +
+            m_path +
             AZ_CORRECT_FILESYSTEM_SEPARATOR + "untitled." +
             AZ::RPI::MaterialSourceData::Extension).absoluteFilePath();
 
diff --git a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.h b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.h
index 54d7c2175d..63d166e95c 100644
--- a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.h
+++ b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/CreateMaterialDialog/CreateMaterialDialog.h
@@ -27,6 +27,7 @@ namespace MaterialEditor
         Q_OBJECT
     public:
         CreateMaterialDialog(QWidget* parent = nullptr);
+        CreateMaterialDialog(const QString& path, QWidget* parent = nullptr);
         ~CreateMaterialDialog() = default;
 
         QFileInfo m_materialFileInfo;
@@ -34,6 +35,8 @@ namespace MaterialEditor
 
     private:
         QScopedPointer<Ui::CreateMaterialDialog> m_ui;
+        QString m_path;
+
         void InitMaterialTypeSelection();
         void InitMaterialFileSelection();
         void UpdateMaterialTypeSelection();
diff --git a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserInteractions.cpp b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserInteractions.cpp
index b0412c001c..39654af211 100644
--- a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserInteractions.cpp
+++ b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserInteractions.cpp
@@ -29,6 +29,7 @@
 #include <Atom/Document/MaterialDocumentSystemRequestBus.h>
 
 #include <Source/Window/MaterialBrowserInteractions.h>
+#include <Window/CreateMaterialDialog/CreateMaterialDialog.h>
 
 #include <Atom/RPI.Reflect/Material/MaterialAsset.h>
 #include <Atom/RPI.Edit/Material/MaterialSourceData.h>
@@ -246,6 +247,24 @@ namespace MaterialEditor
                 }
             }
         });
+
+        menu->addSeparator();
+
+        QAction* createMaterialAction = menu->addAction(QObject::tr("Create Material..."));
+        QObject::connect(createMaterialAction, &QAction::triggered, caller, [caller, entry]()
+            {
+                CreateMaterialDialog createDialog(entry->GetFullPath().c_str(), caller);
+                createDialog.adjustSize();
+
+                if (createDialog.exec() == QDialog::Accepted &&
+                    !createDialog.m_materialFileInfo.absoluteFilePath().isEmpty() &&
+                    !createDialog.m_materialTypeFileInfo.absoluteFilePath().isEmpty())
+                {
+                    MaterialDocumentSystemRequestBus::Broadcast(&MaterialDocumentSystemRequestBus::Events::CreateDocumentFromFile,
+                        createDialog.m_materialTypeFileInfo.absoluteFilePath().toUtf8().constData(),
+                        createDialog.m_materialFileInfo.absoluteFilePath().toUtf8().constData());
+                }
+            });
     }
 
     void MaterialBrowserInteractions::AddPerforceMenuActions([[maybe_unused]] QWidget* caller, QMenu* menu, const AzToolsFramework::AssetBrowser::AssetBrowserEntry* entry)
diff --git a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserWidget.cpp b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserWidget.cpp
index 3c4134b7e0..0dec1c6d23 100644
--- a/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserWidget.cpp
+++ b/Gems/Atom/Tools/MaterialEditor/Code/Source/Window/MaterialBrowserWidget.cpp
@@ -110,19 +110,30 @@ namespace MaterialEditor
     {
         using namespace AzToolsFramework::AssetBrowser;
 
+        // Material Browser uses the following filters:
+        // 1. [All source files (no products) that contain products matching the assetType specified by searchWidget (default is materials and textures)]
+        // 2. [All folders (including empty folders)]
+        // 3. [All Sources and folders matching the search text typed in search widget]
+        // Final filter = ((1 OR 2) AND 3)
+
         QSharedPointer<EntryTypeFilter> sourceFilter(new EntryTypeFilter);
         sourceFilter->SetEntryType(AssetBrowserEntry::AssetEntryType::Source);
 
+        QSharedPointer<CompositeFilter> assetTypeFilter(new CompositeFilter(CompositeFilter::LogicOperatorType::AND));
+        assetTypeFilter->AddFilter(sourceFilter);
+        assetTypeFilter->AddFilter(m_ui->m_searchWidget->GetTypesFilter());
+
         QSharedPointer<EntryTypeFilter> folderFilter(new EntryTypeFilter);
         folderFilter->SetEntryType(AssetBrowserEntry::AssetEntryType::Folder);
 
         QSharedPointer<CompositeFilter> sourceOrFolderFilter(new CompositeFilter(CompositeFilter::LogicOperatorType::OR));
-        sourceOrFolderFilter->AddFilter(sourceFilter);
+        sourceOrFolderFilter->AddFilter(assetTypeFilter);
         sourceOrFolderFilter->AddFilter(folderFilter);
 
         QSharedPointer<CompositeFilter> finalFilter(new CompositeFilter(CompositeFilter::LogicOperatorType::AND));
         finalFilter->AddFilter(sourceOrFolderFilter);
-        finalFilter->AddFilter(m_ui->m_searchWidget->GetFilter());
+        finalFilter->AddFilter(m_ui->m_searchWidget->GetStringFilter());
+        finalFilter->SetFilterPropagation(AssetBrowserEntryFilter::PropagateDirection::Down);
 
         return finalFilter;
     }