diff --git a/management/server/peer.go b/management/server/peer.go
index 78ecbfcae..f7cb6a0f1 100644
--- a/management/server/peer.go
+++ b/management/server/peer.go
@@ -249,7 +249,7 @@ func (am *DefaultAccountManager) UpdatePeer(ctx context.Context, accountID, user
 			if err != nil {
 				newLabel = ""
 			} else {
-				_, err := transaction.GetPeerIdByLabel(ctx, store.LockingStrengthNone, accountID, update.Name)
+				_, err := transaction.GetPeerIdByLabel(ctx, store.LockingStrengthNone, accountID, newLabel)
 				if err == nil {
 					newLabel = ""
 				}
diff --git a/management/server/peer_test.go b/management/server/peer_test.go
index b17757ffd..51c16d730 100644
--- a/management/server/peer_test.go
+++ b/management/server/peer_test.go
@@ -37,6 +37,7 @@ import (
 	"github.com/netbirdio/netbird/management/server/job"
 	"github.com/netbirdio/netbird/management/server/permissions"
 	"github.com/netbirdio/netbird/management/server/settings"
+	"github.com/netbirdio/netbird/shared/auth"
 	"github.com/netbirdio/netbird/shared/management/status"
 
 	"github.com/netbirdio/netbird/management/server/util"
@@ -2738,3 +2739,70 @@ func TestProcessPeerAddAuth(t *testing.T) {
 		assert.Empty(t, config.GroupsToAdd)
 	})
 }
+
+func TestUpdatePeer_DnsLabelCollisionWithFQDN(t *testing.T) {
+	manager, _, err := createManager(t)
+	require.NoError(t, err, "unable to create account manager")
+
+	accountID, err := manager.GetAccountIDByUserID(context.Background(), auth.UserAuth{UserId: userID})
+	require.NoError(t, err, "unable to create an account")
+
+	// Add first peer with hostname that produces DNS label "netbird1"
+	key1, err := wgtypes.GenerateKey()
+	require.NoError(t, err)
+	peer1, _, _, err := manager.AddPeer(context.Background(), "", "", userID, &nbpeer.Peer{
+		Key:  key1.PublicKey().String(),
+		Meta: nbpeer.PeerSystemMeta{Hostname: "netbird1.netbird.cloud"},
+	}, false)
+	require.NoError(t, err, "unable to add first peer")
+	assert.Equal(t, "netbird1", peer1.DNSLabel)
+
+	// Add second peer with a different hostname
+	key2, err := wgtypes.GenerateKey()
+	require.NoError(t, err)
+	peer2, _, _, err := manager.AddPeer(context.Background(), "", "", userID, &nbpeer.Peer{
+		Key:  key2.PublicKey().String(),
+		Meta: nbpeer.PeerSystemMeta{Hostname: "ip-10-29-5-130"},
+	}, false)
+	require.NoError(t, err)
+
+	update := peer2.Copy()
+	update.Name = "netbird1.demo.netbird.cloud"
+	updated, err := manager.UpdatePeer(context.Background(), accountID, userID, update)
+	require.NoError(t, err, "renaming peer should not fail with duplicate DNS label error")
+	assert.Equal(t, "netbird1.demo.netbird.cloud", updated.Name)
+	assert.NotEqual(t, "netbird1", updated.DNSLabel, "DNS label should not collide with existing peer")
+	assert.Contains(t, updated.DNSLabel, "netbird1-", "DNS label should be IP-based fallback")
+}
+
+func TestUpdatePeer_DnsLabelUniqueName(t *testing.T) {
+	manager, _, err := createManager(t)
+	require.NoError(t, err, "unable to create account manager")
+
+	accountID, err := manager.GetAccountIDByUserID(context.Background(), auth.UserAuth{UserId: userID})
+	require.NoError(t, err, "unable to create an account")
+
+	key1, err := wgtypes.GenerateKey()
+	require.NoError(t, err)
+	peer1, _, _, err := manager.AddPeer(context.Background(), "", "", userID, &nbpeer.Peer{
+		Key:  key1.PublicKey().String(),
+		Meta: nbpeer.PeerSystemMeta{Hostname: "web-server"},
+	}, false)
+	require.NoError(t, err)
+	assert.Equal(t, "web-server", peer1.DNSLabel)
+
+	// Add second peer and rename it to a unique FQDN whose first label doesn't collide
+	key2, err := wgtypes.GenerateKey()
+	require.NoError(t, err)
+	peer2, _, _, err := manager.AddPeer(context.Background(), "", "", userID, &nbpeer.Peer{
+		Key:  key2.PublicKey().String(),
+		Meta: nbpeer.PeerSystemMeta{Hostname: "old-name"},
+	}, false)
+	require.NoError(t, err)
+
+	update := peer2.Copy()
+	update.Name = "api-server.example.com"
+	updated, err := manager.UpdatePeer(context.Background(), accountID, userID, update)
+	require.NoError(t, err, "renaming to unique FQDN should succeed")
+	assert.Equal(t, "api-server", updated.DNSLabel, "DNS label should be first label of FQDN")
+}