diff --git a/src/multiselect/__tests__/multiselect-embedded.test.tsx b/src/multiselect/__tests__/multiselect-embedded.test.tsx
index 046cd31acc..ee3087297b 100644
--- a/src/multiselect/__tests__/multiselect-embedded.test.tsx
+++ b/src/multiselect/__tests__/multiselect-embedded.test.tsx
@@ -1,9 +1,10 @@
 // Copyright Amazon.com, Inc. or its affiliates. All Rights Reserved.
 // SPDX-License-Identifier: Apache-2.0
 
-import * as React from 'react';
+import React, { useState } from 'react';
 import { render } from '@testing-library/react';
 
+import { KeyCode } from '@cloudscape-design/component-toolkit/internal';
 import { createWrapper } from '@cloudscape-design/test-utils-core/dom';
 
 import '../../__a11y__/to-validate-a11y';
@@ -32,12 +33,26 @@ const defaultProps: EmbeddedMultiselectProps = {
   errorText: 'Error',
 };
 
+function StatefulEmbeddedMultiselect(props: EmbeddedMultiselectProps) {
+  const [selectedOptions, setSelectedOptions] = useState(props.selectedOptions);
+  return (
+    <EmbeddedMultiselect
+      {...props}
+      selectedOptions={selectedOptions}
+      onChange={event => {
+        props.onChange?.(event);
+        setSelectedOptions(event.detail.selectedOptions);
+      }}
+    />
+  );
+}
+
 function renderComponent(props: Partial<EmbeddedMultiselectProps>) {
   const { container } = render(
     <div>
       <label htmlFor="list-control">Input name</label>
       <input id="list-control" />
-      <EmbeddedMultiselect {...defaultProps} {...props} />
+      <StatefulEmbeddedMultiselect {...defaultProps} {...props} />
     </div>
   );
   return { container };
@@ -83,13 +98,39 @@ test('ARIA labels', () => {
   expect(list).toHaveAccessibleDescription('Loading...');
 });
 
-test('highlights first option when list is focused', () => {
+test('highlights first option when list is focused and removes highlight when the focus is lost', () => {
   renderComponent({});
 
   const list = createWrapper().find('ul')!.getElement();
   list.focus();
 
+  const highlightedItemsAfterFocus = createWrapper().findAllByClassName(selectableItemsStyles.highlighted);
+  expect(highlightedItemsAfterFocus).toHaveLength(1);
+  expect(highlightedItemsAfterFocus[0].getElement()).toHaveTextContent('First');
+
+  list.blur();
+
+  const highlightedItemsAfterBlur = createWrapper().findAllByClassName(selectableItemsStyles.highlighted);
+  expect(highlightedItemsAfterBlur).toHaveLength(0);
+});
+
+test('selects options with Enter and Space and keeps highlight after Esc is pressed', () => {
+  renderComponent({});
+
+  createWrapper().find('ul')!.focus();
+  createWrapper().find('ul')!.keydown(KeyCode.enter);
+  createWrapper().find('ul')!.keydown(KeyCode.down);
+  createWrapper().find('ul')!.keydown(KeyCode.space);
+
   const highlightedItems = createWrapper().findAllByClassName(selectableItemsStyles.highlighted);
+  const selectedItems = createWrapper().findAllByClassName(selectableItemsStyles.selected);
   expect(highlightedItems).toHaveLength(1);
-  expect(highlightedItems[0].getElement()).toHaveTextContent('First');
+  expect(selectedItems).toHaveLength(2);
+
+  createWrapper().find('ul')!.keydown(KeyCode.escape);
+
+  const highlightedItemsAfterEscape = createWrapper().findAllByClassName(selectableItemsStyles.highlighted);
+  const selectedItemsAfterEscape = createWrapper().findAllByClassName(selectableItemsStyles.selected);
+  expect(highlightedItemsAfterEscape).toHaveLength(1);
+  expect(selectedItemsAfterEscape).toHaveLength(2);
 });
diff --git a/src/select/utils/use-select.ts b/src/select/utils/use-select.ts
index 5b5cd6c2ee..9017c829bb 100644
--- a/src/select/utils/use-select.ts
+++ b/src/select/utils/use-select.ts
@@ -66,7 +66,7 @@ export function useSelect({
   const filterRef = useRef<HTMLInputElement>(null);
   const triggerRef = useRef<HTMLButtonElement>(null);
   const menuRef = useRef<HTMLUListElement>(null);
-  const hasFilter = filteringType !== 'none';
+  const hasFilter = filteringType !== 'none' && !embedded;
   const activeRef = hasFilter ? filterRef : menuRef;
   const __selectedOptions = connectOptionsByValue(options, selectedOptions);
   const __selectedValuesSet = selectedOptions.reduce((selectedValuesSet: Set<string>, item: OptionDefinition) => {
@@ -146,8 +146,10 @@ export function useSelect({
     goHome: goHomeWithKeyboard,
     goEnd: goEndWithKeyboard,
     closeDropdown: () => {
-      triggerRef.current?.focus();
-      closeDropdown();
+      if (!embedded) {
+        triggerRef.current?.focus();
+        closeDropdown();
+      }
     },
     preventNativeSpace: !hasFilter,
   });
@@ -228,7 +230,7 @@ export function useSelect({
       },
       statusType,
     };
-    if (!hasFilter || embedded) {
+    if (!hasFilter) {
       menuProps.onKeyDown = activeKeyDownHandler;
       menuProps.nativeAttributes = {
         'aria-activedescendant': highlightedOptionId,
@@ -236,7 +238,12 @@ export function useSelect({
     }
     if (embedded) {
       menuProps.onFocus = () => {
-        goHomeWithKeyboard();
+        if (!highlightedOption) {
+          goHomeWithKeyboard();
+        }
+      };
+      menuProps.onBlur = () => {
+        resetHighlightWithKeyboard();
       };
     }
     return menuProps;
@@ -298,13 +305,13 @@ export function useSelect({
   ]);
 
   useEffect(() => {
-    if (isOpen) {
+    if (isOpen && !embedded) {
       // dropdown-fit calculations ensure that the dropdown will fit inside the current
       // viewport, so prevent the browser from trying to scroll it into view (e.g. if
       // scroll-padding-top is set on a parent)
       activeRef.current?.focus({ preventScroll: true });
     }
-  }, [isOpen, activeRef]);
+  }, [isOpen, activeRef, embedded]);
 
   useForwardFocus(externalRef, triggerRef as React.RefObject<HTMLElement>);
   const highlightedGroupSelected =