diff --git a/CHANGELOG.md b/CHANGELOG.md
index f046da58c0f9..49e087548bd5 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -9,6 +9,7 @@ and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0
 
 ### Fixed
 
+- Ensure CSS variables in arbitrary values are properly decoded ([#16206](https://github.com/tailwindlabs/tailwindcss/pull/16206))
 - Ensure that the `containers` JS theme key is added to the `--container-*` namespace ([#16169](https://github.com/tailwindlabs/tailwindcss/pull/16169))
 - Fix missing `@keyframes` definition ([#16237](https://github.com/tailwindlabs/tailwindcss/pull/16237))
 - Vite: Skip parsing stylesheets with the `?commonjs-proxy` flag ([#16238](https://github.com/tailwindlabs/tailwindcss/pull/16238))
diff --git a/packages/@tailwindcss-upgrade/src/template/candidates.test.ts b/packages/@tailwindcss-upgrade/src/template/candidates.test.ts
index 74f5974fcb8d..5ec45fa81c06 100644
--- a/packages/@tailwindcss-upgrade/src/template/candidates.test.ts
+++ b/packages/@tailwindcss-upgrade/src/template/candidates.test.ts
@@ -110,6 +110,10 @@ const candidates = [
   ['!bg-[#0088cc]', 'bg-[#0088cc]!'],
   ['bg-[var(--spacing)-1px]', 'bg-[var(--spacing)-1px]'],
   ['bg-[var(--spacing)_-_1px]', 'bg-[var(--spacing)-1px]'],
+  ['bg-[var(--_spacing)]', 'bg-(--_spacing)'],
+  ['bg-(--_spacing)', 'bg-(--_spacing)'],
+  ['bg-[var(--\_spacing)]', 'bg-(--_spacing)'],
+  ['bg-(--\_spacing)', 'bg-(--_spacing)'],
   ['bg-[-1px_-1px]', 'bg-[-1px_-1px]'],
   ['p-[round(to-zero,1px)]', 'p-[round(to-zero,1px)]'],
   ['w-1/2', 'w-1/2'],
diff --git a/packages/@tailwindcss-upgrade/src/template/candidates.ts b/packages/@tailwindcss-upgrade/src/template/candidates.ts
index 6a0ab65bd78f..e292168a5d5a 100644
--- a/packages/@tailwindcss-upgrade/src/template/candidates.ts
+++ b/packages/@tailwindcss-upgrade/src/template/candidates.ts
@@ -241,13 +241,8 @@ function recursivelyEscapeUnderscores(ast: ValueParser.ValueAstNode[]) {
           node.value === 'theme' ||
           node.value.endsWith('_theme')
         ) {
-          // Don't decode underscores in the first argument of var() and theme()
-          // but do decode the function name
           node.value = escapeUnderscore(node.value)
           for (let i = 0; i < node.nodes.length; i++) {
-            if (i == 0 && node.nodes[i].kind === 'word') {
-              continue
-            }
             recursivelyEscapeUnderscores([node.nodes[i]])
           }
           break
diff --git a/packages/tailwindcss/src/candidate.test.ts b/packages/tailwindcss/src/candidate.test.ts
index 20f89a940d3c..2892f0053c9e 100644
--- a/packages/tailwindcss/src/candidate.test.ts
+++ b/packages/tailwindcss/src/candidate.test.ts
@@ -935,6 +935,154 @@ it('should parse a utility with an implicit variable as the modifier', () => {
   `)
 })
 
+it('should properly decode escaped underscores but not convert underscores to spaces for CSS variables in arbitrary positions', () => {
+  let utilities = new Utilities()
+  utilities.functional('flex', () => [])
+  let variants = new Variants()
+  variants.functional('supports', () => {})
+
+  expect(run('flex-(--\\_foo)', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-(--\\_foo)",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "var(--_foo)",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+  expect(run('flex-(--_foo)', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-(--_foo)",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "var(--_foo)",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+  expect(run('flex-[var(--\\_foo)]', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-[var(--\\_foo)]",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "var(--_foo)",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+  expect(run('flex-[var(--_foo)]', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-[var(--_foo)]",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "var(--_foo)",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+
+  expect(run('flex-[calc(var(--\\_foo)*0.2)]', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-[calc(var(--\\_foo)*0.2)]",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "calc(var(--_foo) * 0.2)",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+  expect(run('flex-[calc(var(--_foo)*0.2)]', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-[calc(var(--_foo)*0.2)]",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "calc(var(--_foo) * 0.2)",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+
+  // Due to limitations in the CSS value parser, the `var(…)` inside the `calc(…)` is not correctly
+  // scanned here.
+  expect(run('flex-[calc(0.2*var(--\\_foo)]', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-[calc(0.2*var(--\\_foo)]",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "calc(0.2 * var(--_foo))",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+  expect(run('flex-[calc(0.2*var(--_foo)]', { utilities, variants })).toMatchInlineSnapshot(`
+    [
+      {
+        "important": false,
+        "kind": "functional",
+        "modifier": null,
+        "raw": "flex-[calc(0.2*var(--_foo)]",
+        "root": "flex",
+        "value": {
+          "dataType": null,
+          "kind": "arbitrary",
+          "value": "calc(0.2 * var(-- foo))",
+        },
+        "variants": [],
+      },
+    ]
+  `)
+})
+
 it('should parse a utility with an implicit variable as the modifier using the shorthand', () => {
   let utilities = new Utilities()
   utilities.functional('bg', () => [])
diff --git a/packages/tailwindcss/src/utils/decode-arbitrary-value.ts b/packages/tailwindcss/src/utils/decode-arbitrary-value.ts
index 11ec871c5b90..145103188131 100644
--- a/packages/tailwindcss/src/utils/decode-arbitrary-value.ts
+++ b/packages/tailwindcss/src/utils/decode-arbitrary-value.ts
@@ -20,7 +20,7 @@ export function decodeArbitraryValue(input: string): string {
  * Convert `_` to ` `, except for escaped underscores `\_` they should be
  * converted to `_` instead.
  */
-function convertUnderscoresToWhitespace(input: string) {
+function convertUnderscoresToWhitespace(input: string, skipUnderscoreToSpace = false) {
   let output = ''
   for (let i = 0; i < input.length; i++) {
     let char = input[i]
@@ -32,7 +32,7 @@ function convertUnderscoresToWhitespace(input: string) {
     }
 
     // Unescaped underscore
-    else if (char === '_') {
+    else if (char === '_' && !skipUnderscoreToSpace) {
       output += ' '
     }
 
@@ -61,11 +61,11 @@ function recursivelyDecodeArbitraryValues(ast: ValueParser.ValueAstNode[]) {
           node.value === 'theme' ||
           node.value.endsWith('_theme')
         ) {
-          // Don't decode underscores in the first argument of var() but do
-          // decode the function name
           node.value = convertUnderscoresToWhitespace(node.value)
           for (let i = 0; i < node.nodes.length; i++) {
+            // Don't decode underscores to spaces in the first argument of var()
             if (i == 0 && node.nodes[i].kind === 'word') {
+              node.nodes[i].value = convertUnderscoresToWhitespace(node.nodes[i].value, true)
               continue
             }
             recursivelyDecodeArbitraryValues([node.nodes[i]])
diff --git a/playgrounds/vite/src/app.tsx b/playgrounds/vite/src/app.tsx
index 4abc17cb52e1..8ec50298951f 100644
--- a/playgrounds/vite/src/app.tsx
+++ b/playgrounds/vite/src/app.tsx
@@ -2,7 +2,6 @@ export function App() {
   return (
     <div className="m-3 p-3 border">
       <h1 className="text-blue-500">Hello World</h1>
-      <div className="-inset-x-full -inset-y-full -space-x-full -space-y-full -inset-full"></div>
     </div>
   )
 }