diff --git a/packages/compiler-sfc/__tests__/compileScript/__snapshots__/defineProps.spec.ts.snap b/packages/compiler-sfc/__tests__/compileScript/__snapshots__/defineProps.spec.ts.snap
index 62d9bef5d27..e90d6303bab 100644
--- a/packages/compiler-sfc/__tests__/compileScript/__snapshots__/defineProps.spec.ts.snap
+++ b/packages/compiler-sfc/__tests__/compileScript/__snapshots__/defineProps.spec.ts.snap
@@ -338,6 +338,27 @@ return { props, get defaults() { return defaults } }
 })"
 `;
 
+exports[`defineProps > withDefaults (locally variable) 1`] = `
+"import { mergeDefaults as _mergeDefaults, defineComponent as _defineComponent } from 'vue'
+const defaults = { baz: false }
+    
+export default /*#__PURE__*/_defineComponent({
+  props: _mergeDefaults({
+    baz: { type: Boolean, required: true }
+  }, defaults),
+  setup(__props: any, { expose: __expose }) {
+  __expose();
+
+const props = __props;
+
+    
+    
+return { defaults, props }
+}
+
+})"
+`;
+
 exports[`defineProps > withDefaults (reference) 1`] = `
 "import { mergeDefaults as _mergeDefaults, defineComponent as _defineComponent } from 'vue'
 import { defaults } from './foo'
diff --git a/packages/compiler-sfc/__tests__/compileScript/defineProps.spec.ts b/packages/compiler-sfc/__tests__/compileScript/defineProps.spec.ts
index 43f54b0aa1e..4d2d417d3fb 100644
--- a/packages/compiler-sfc/__tests__/compileScript/defineProps.spec.ts
+++ b/packages/compiler-sfc/__tests__/compileScript/defineProps.spec.ts
@@ -470,6 +470,26 @@ const props = defineProps({ foo: String })
     )
   })
 
+  test('withDefaults (locally variable)', () => {
+    const { content } = compile(`
+    <script setup lang="ts">
+    const defaults = { baz: false }
+    const props = withDefaults(defineProps<{
+      baz: boolean
+    }>(), defaults)
+    </script>
+    `)
+
+    assertCode(content)
+    expect(content).toMatch(`import { mergeDefaults as _mergeDefaults`)
+    expect(content).toMatch(
+      `
+  _mergeDefaults({
+    baz: { type: Boolean, required: true }
+  }, defaults)`.trim()
+    )
+  })
+
   // #7111
   test('withDefaults (dynamic) w/ production mode', () => {
     const { content } = compile(
@@ -607,5 +627,19 @@ const props = defineProps({ foo: String })
         </script>`)
       }).toThrow(`cannot accept both type and non-type arguments`)
     })
+
+    test('withDefaults (locally variable)', () => {
+      expect(() => {
+        compile(`
+        <script setup lang="ts">
+        const defaults = { bar: 1 }
+        withDefaults(defineProps<{
+          bar?: number
+        }>(), defaults)
+        defaults.bar++
+        </script>
+      `)
+      }).toThrow(`cannot reference locally declared variables`)
+    })
   })
 })
diff --git a/packages/compiler-sfc/src/compileScript.ts b/packages/compiler-sfc/src/compileScript.ts
index 046797cfbe5..66acc4cbcf9 100644
--- a/packages/compiler-sfc/src/compileScript.ts
+++ b/packages/compiler-sfc/src/compileScript.ts
@@ -193,6 +193,13 @@ export function compileScript(
   // const ctx.bindingMetadata: BindingMetadata = {}
   const scriptBindings: Record<string, BindingTypes> = Object.create(null)
   const setupBindings: Record<string, BindingTypes> = Object.create(null)
+  const withDefaultsVariables: Record<
+    string,
+    {
+      node: Statement
+      needHoist?: boolean
+    }
+  > = {}
 
   let defaultExport: Node | undefined
   let hasAwait = false
@@ -258,7 +265,11 @@ export function compileScript(
     if (!node) return
     walkIdentifiers(node, id => {
       const binding = setupBindings[id.name]
-      if (binding && binding !== BindingTypes.LITERAL_CONST) {
+      if (
+        binding &&
+        binding !== BindingTypes.LITERAL_CONST &&
+        !withDefaultsVariables[id.name].needHoist
+      ) {
         ctx.error(
           `\`${method}()\` in <script setup> cannot reference locally ` +
             `declared variables because it will be hoisted outside of the ` +
@@ -636,6 +647,30 @@ export function compileScript(
               parent!.type === 'ExpressionStatement'
             )
           }
+
+          if (child.type === 'Identifier') {
+            if (parent!.type === 'VariableDeclarator') {
+              withDefaultsVariables[child.name] = {
+                node
+              }
+            } else if (
+              parent!.type === 'CallExpression' &&
+              parent.callee.type === 'Identifier' &&
+              parent.callee.name === WITH_DEFAULTS &&
+              withDefaultsVariables[child.name]
+            ) {
+              const variable = withDefaultsVariables[child.name]
+              if (variable.needHoist !== false) {
+                variable.needHoist = true
+              }
+            } else if (
+              parent!.type !== 'VariableDeclaration' &&
+              withDefaultsVariables[child.name]
+            ) {
+              const variable = withDefaultsVariables[child.name]
+              variable.needHoist = false
+            }
+          }
         },
         exit(node: Node) {
           if (node.type === 'BlockStatement') scope.pop()
@@ -671,6 +706,13 @@ export function compileScript(
     }
   }
 
+  for (const key in withDefaultsVariables) {
+    const variable = withDefaultsVariables[key]
+    if (variable.needHoist) {
+      hoistNode(variable.node)
+    }
+  }
+
   // 3 props destructure transform
   if (ctx.propsDestructureDecl) {
     transformDestructuredProps(ctx, vueImportAliases)