diff --git a/packages/block-library/src/image/edit.js b/packages/block-library/src/image/edit.js
index fb11b3f50a5b6..b7c25595dcfcc 100644
--- a/packages/block-library/src/image/edit.js
+++ b/packages/block-library/src/image/edit.js
@@ -23,6 +23,7 @@ import { useEffect, useRef, useState } from '@wordpress/element';
 import { __, sprintf } from '@wordpress/i18n';
 import { image as icon, plugins as pluginsIcon } from '@wordpress/icons';
 import { store as noticesStore } from '@wordpress/notices';
+import { useResizeObserver } from '@wordpress/compose';
 
 /**
  * Internal dependencies
@@ -109,6 +110,9 @@ export function ImageEdit( {
 	} = attributes;
 	const [ temporaryURL, setTemporaryURL ] = useState( attributes.blob );
 
+	const [ contentResizeListener, { width: containerWidth } ] =
+		useResizeObserver();
+
 	const altRef = useRef();
 	useEffect( () => {
 		altRef.current = alt;
@@ -364,35 +368,43 @@ export function ImageEdit( {
 	};
 
 	return (
-		<figure { ...blockProps }>
-			<Image
-				temporaryURL={ temporaryURL }
-				attributes={ attributes }
-				setAttributes={ setAttributes }
-				isSingleSelected={ isSingleSelected }
-				insertBlocksAfter={ insertBlocksAfter }
-				onReplace={ onReplace }
-				onSelectImage={ onSelectImage }
-				onSelectURL={ onSelectURL }
-				onUploadError={ onUploadError }
-				context={ context }
-				clientId={ clientId }
-				blockEditingMode={ blockEditingMode }
-				parentLayoutType={ parentLayout?.type }
-			/>
-			<MediaPlaceholder
-				icon={ <BlockIcon icon={ icon } /> }
-				onSelect={ onSelectImage }
-				onSelectURL={ onSelectURL }
-				onError={ onUploadError }
-				placeholder={ placeholder }
-				accept="image/*"
-				allowedTypes={ ALLOWED_MEDIA_TYPES }
-				value={ { id, src } }
-				mediaPreview={ mediaPreview }
-				disableMediaButtons={ temporaryURL || url }
-			/>
-		</figure>
+		<>
+			<figure { ...blockProps }>
+				<Image
+					temporaryURL={ temporaryURL }
+					attributes={ attributes }
+					setAttributes={ setAttributes }
+					isSingleSelected={ isSingleSelected }
+					insertBlocksAfter={ insertBlocksAfter }
+					onReplace={ onReplace }
+					onSelectImage={ onSelectImage }
+					onSelectURL={ onSelectURL }
+					onUploadError={ onUploadError }
+					context={ context }
+					clientId={ clientId }
+					blockEditingMode={ blockEditingMode }
+					parentLayoutType={ parentLayout?.type }
+					containerWidth={ containerWidth }
+				/>
+				<MediaPlaceholder
+					icon={ <BlockIcon icon={ icon } /> }
+					onSelect={ onSelectImage }
+					onSelectURL={ onSelectURL }
+					onError={ onUploadError }
+					placeholder={ placeholder }
+					accept="image/*"
+					allowedTypes={ ALLOWED_MEDIA_TYPES }
+					value={ { id, src } }
+					mediaPreview={ mediaPreview }
+					disableMediaButtons={ temporaryURL || url }
+				/>
+			</figure>
+			{
+				// The listener cannot be placed as the first element as it will break the in-between inserter.
+				// See https://github.com/WordPress/gutenberg/blob/71134165868298fc15e22896d0c28b41b3755ff7/packages/block-editor/src/components/block-list/use-in-between-inserter.js#L120
+				contentResizeListener
+			}
+		</>
 	);
 }
 
diff --git a/packages/block-library/src/image/image.js b/packages/block-library/src/image/image.js
index 646299bb7e089..3ad12d8dca4b6 100644
--- a/packages/block-library/src/image/image.js
+++ b/packages/block-library/src/image/image.js
@@ -109,6 +109,7 @@ export default function Image( {
 	clientId,
 	blockEditingMode,
 	parentLayoutType,
+	containerWidth,
 } ) {
 	const {
 		url = '',
@@ -928,6 +929,7 @@ export default function Image( {
 		// @todo It would be good to revisit this once a content-width variable
 		// becomes available.
 		const maxWidthBuffer = maxWidth * 2.5;
+		const maxContentWidth = containerWidth || maxWidthBuffer;
 
 		let showRightHandle = false;
 		let showLeftHandle = false;
@@ -973,9 +975,9 @@ export default function Image( {
 				} }
 				showHandle={ isSingleSelected }
 				minWidth={ minWidth }
-				maxWidth={ maxWidthBuffer }
+				maxWidth={ maxContentWidth }
 				minHeight={ minHeight }
-				maxHeight={ maxWidthBuffer / ratio }
+				maxHeight={ maxContentWidth / ratio }
 				lockAspectRatio={ ratio }
 				enable={ {
 					top: false,
@@ -986,6 +988,21 @@ export default function Image( {
 				onResizeStart={ onResizeStart }
 				onResizeStop={ ( event, direction, elt ) => {
 					onResizeStop();
+
+					// Clear hardcoded width if the resized width is close to the max-content width.
+					if (
+						// Only do this if the image is bigger than the container to prevent it from being squished.
+						// TODO: Remove this check if the image support setting 100% width.
+						naturalWidth >= maxContentWidth &&
+						Math.abs( elt.offsetWidth - maxContentWidth ) < 10
+					) {
+						setAttributes( {
+							width: undefined,
+							height: undefined,
+						} );
+						return;
+					}
+
 					// Since the aspect ratio is locked when resizing, we can
 					// use the width of the resized element to calculate the
 					// height in CSS to prevent stretching when the max-width