diff --git a/sqlmesh/dbt/project.py b/sqlmesh/dbt/project.py
index 4af30958f5..355b18630e 100644
--- a/sqlmesh/dbt/project.py
+++ b/sqlmesh/dbt/project.py
@@ -99,17 +99,20 @@ def load(cls, context: DbtContext, variables: t.Optional[t.Dict[str, t.Any]] = N
             package = package_loader.load(path.parent)
             packages[package.name] = package
 
+        # Variable resolution precedence:
+        # 1. Variable overrides
+        # 2. Package-scoped variables in the root project's dbt_project.yml
+        # 3. Global project variables in the root project's dbt_project.yml
+        # 4. Variables in the package's dbt_project.yml
         all_project_variables = {**(project_yaml.get("vars") or {}), **(variable_overrides or {})}
         for name, package in packages.items():
-            package_vars = all_project_variables.get(name)
-
-            if isinstance(package_vars, dict):
-                package.variables.update(package_vars)
-
-            if name == context.project_name:
-                package.variables.update(all_project_variables)
+            if isinstance(all_project_variables.get(name), dict):
+                project_vars_copy = all_project_variables.copy()
+                package_scoped_vars = project_vars_copy.pop(name)
+                package.variables.update(project_vars_copy)
+                package.variables.update(package_scoped_vars)
             else:
-                package.variables.update(variable_overrides)
+                package.variables.update(all_project_variables)
 
         return Project(context, profile, packages)
 
diff --git a/tests/dbt/test_config.py b/tests/dbt/test_config.py
index 4e3e78eea9..30dae478a1 100644
--- a/tests/dbt/test_config.py
+++ b/tests/dbt/test_config.py
@@ -343,15 +343,26 @@ def test_variables(assert_exp_eq, sushi_test_project):
             "customers:customer_id": "customer_id",
             "some_var": ["foo", "bar"],
         },
+        "some_var": "should be overridden in customers package",
     }
     expected_customer_variables = {
-        "some_var": ["foo", "bar"],
+        "some_var": ["foo", "bar"],  # Takes precedence over the root project variable
         "some_other_var": 5,
-        "yet_another_var": 5,
         "customers:bla": False,
         "customers:customer_id": "customer_id",
+        "yet_another_var": 1,  # Make sure that the project variable takes precedence
+        "top_waiters:limit": "{{ get_top_waiters_limit() }}",
+        "top_waiters:revenue": "revenue",
+        "customers:boo": ["a", "b"],
+        "nested_vars": {
+            "some_nested_var": 2,
+        },
+        "dynamic_test_var": 3,
+        "list_var": [
+            {"name": "item1", "value": 1},
+            {"name": "item2", "value": 2},
+        ],
     }
-
     assert sushi_test_project.packages["sushi"].variables == expected_sushi_variables
     assert sushi_test_project.packages["customers"].variables == expected_customer_variables
 
diff --git a/tests/fixtures/dbt/sushi_test/dbt_project.yml b/tests/fixtures/dbt/sushi_test/dbt_project.yml
index 2a25389e43..920dea7216 100644
--- a/tests/fixtures/dbt/sushi_test/dbt_project.yml
+++ b/tests/fixtures/dbt/sushi_test/dbt_project.yml
@@ -50,6 +50,7 @@ vars:
 
   yet_another_var: 1
   dynamic_test_var: 3
+  some_var: 'should be overridden in customers package'
 
   customers:
     some_var: ["foo", "bar"]
@@ -74,4 +75,4 @@ on-run-start:
 on-run-end:
   - '{{ create_tables(schemas) }}'
   - 'DROP TABLE to_be_executed_last;'
-  - '{{ graph_usage() }}'
\ No newline at end of file
+  - '{{ graph_usage() }}'