diff --git a/aws-xray-recorder-sdk-core/build.gradle.kts b/aws-xray-recorder-sdk-core/build.gradle.kts
index e1c7d7c5..e65ac527 100644
--- a/aws-xray-recorder-sdk-core/build.gradle.kts
+++ b/aws-xray-recorder-sdk-core/build.gradle.kts
@@ -6,6 +6,7 @@ plugins {
 dependencies {
     api("commons-logging:commons-logging:1.3.5")
 
+    implementation("software.amazon.awssdk:utils-lite:2.34.0")
     implementation("com.fasterxml.jackson.core:jackson-annotations:2.17.0")
     implementation("com.fasterxml.jackson.core:jackson-databind:2.17.0")
     implementation("com.google.auto.value:auto-value-annotations:1.10.4")
diff --git a/aws-xray-recorder-sdk-core/src/main/java/com/amazonaws/xray/contexts/LambdaSegmentContext.java b/aws-xray-recorder-sdk-core/src/main/java/com/amazonaws/xray/contexts/LambdaSegmentContext.java
index 02c67e72..0f1173dd 100644
--- a/aws-xray-recorder-sdk-core/src/main/java/com/amazonaws/xray/contexts/LambdaSegmentContext.java
+++ b/aws-xray-recorder-sdk-core/src/main/java/com/amazonaws/xray/contexts/LambdaSegmentContext.java
@@ -30,20 +30,28 @@
 import java.util.Objects;
 import org.apache.commons.logging.Log;
 import org.apache.commons.logging.LogFactory;
+import software.amazon.awssdk.utilslite.SdkInternalThreadLocal;
 
 public class LambdaSegmentContext implements SegmentContext {
     private static final Log logger = LogFactory.getLog(LambdaSegmentContext.class);
 
     private static final String LAMBDA_TRACE_HEADER_KEY = "_X_AMZN_TRACE_ID";
-    
+    private static final String CONCURRENT_TRACE_ID_KEY = "AWS_LAMBDA_X_TRACE_ID";
+
     // See: https://github.com/aws/aws-xray-sdk-java/issues/251
     private static final String LAMBDA_TRACE_HEADER_PROP = "com.amazonaws.xray.traceHeader";
 
     public static TraceHeader getTraceHeaderFromEnvironment() {
-        String lambdaTraceHeaderKey = System.getenv(LAMBDA_TRACE_HEADER_KEY);
-        return TraceHeader.fromString(lambdaTraceHeaderKey != null && lambdaTraceHeaderKey.length() > 0 
-            ? lambdaTraceHeaderKey 
-            : System.getProperty(LAMBDA_TRACE_HEADER_PROP));
+        String lambdaTraceHeaderKeyFromMdc = SdkInternalThreadLocal.get(CONCURRENT_TRACE_ID_KEY);
+        String lambdaTraceHeaderKeyFromEnvVar = System.getenv(LAMBDA_TRACE_HEADER_KEY);
+
+        if (lambdaTraceHeaderKeyFromMdc != null && lambdaTraceHeaderKeyFromMdc.length() > 0) {
+            return TraceHeader.fromString(lambdaTraceHeaderKeyFromMdc);
+        } else if (lambdaTraceHeaderKeyFromEnvVar != null && lambdaTraceHeaderKeyFromEnvVar.length() > 0) {
+            return TraceHeader.fromString(lambdaTraceHeaderKeyFromEnvVar);
+        } else {
+            return TraceHeader.fromString(System.getProperty(LAMBDA_TRACE_HEADER_PROP));
+        }
     }
 
     // SuppressWarnings is needed for passing Root TraceId to noOp segment
diff --git a/aws-xray-recorder-sdk-core/src/test/java/com/amazonaws/xray/contexts/LambdaSegmentContextTest.java b/aws-xray-recorder-sdk-core/src/test/java/com/amazonaws/xray/contexts/LambdaSegmentContextTest.java
index 2f7a728b..5213a8a6 100644
--- a/aws-xray-recorder-sdk-core/src/test/java/com/amazonaws/xray/contexts/LambdaSegmentContextTest.java
+++ b/aws-xray-recorder-sdk-core/src/test/java/com/amazonaws/xray/contexts/LambdaSegmentContextTest.java
@@ -40,6 +40,7 @@
 import org.mockito.junit.jupiter.MockitoExtension;
 import org.mockito.junit.jupiter.MockitoSettings;
 import org.mockito.quality.Strictness;
+import software.amazon.awssdk.utilslite.SdkInternalThreadLocal;
 
 @ExtendWith(MockitoExtension.class)
 @MockitoSettings(strictness = Strictness.LENIENT)
@@ -174,4 +175,118 @@ private static void testContextResultsInNoOpSegmentParent() {
         mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
         assertThat(AWSXRay.getTraceEntity()).isNull();
     }
+
+    @Test
+    @SetSystemProperty(key = "com.amazonaws.xray.traceHeader", value = TRACE_HEADER)
+    void testSystemPropertyFallbackWithTraceValidation() {
+        LambdaSegmentContext mockContext = new LambdaSegmentContext();
+        Subsegment subsegment = mockContext.beginSubsegment(AWSXRay.getGlobalRecorder(), "test");
+        FacadeSegment parent = (FacadeSegment) subsegment.getParent();
+
+        // Verify system property values are used correctly
+        assertThat(parent.getTraceId().toString()).isEqualTo("1-57ff426a-80c11c39b0c928905eb0828d");
+        assertThat(parent.getId()).isEqualTo("1234abcd1234abcd");
+        assertThat(parent.isSampled()).isTrue();
+
+        mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
+    }
+
+    @Test
+    @SetEnvironmentVariable(key = "_X_AMZN_TRACE_ID", value = TRACE_HEADER)
+    void testEnvironmentVariableFallbackWithTraceValidation() {
+        LambdaSegmentContext mockContext = new LambdaSegmentContext();
+        Subsegment subsegment = mockContext.beginSubsegment(AWSXRay.getGlobalRecorder(), "test");
+        FacadeSegment parent = (FacadeSegment) subsegment.getParent();
+
+        // Verify system property values are used correctly
+        assertThat(parent.getTraceId().toString()).isEqualTo("1-57ff426a-80c11c39b0c928905eb0828d");
+        assertThat(parent.getId()).isEqualTo("1234abcd1234abcd");
+        assertThat(parent.isSampled()).isTrue();
+
+        mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
+    }
+
+    @Test
+    @SetSystemProperty(key = "com.amazonaws.xray.traceHeader", value = TRACE_HEADER_2)
+    void testSdkInternalThreadLocalTakesPriorityOverSystemProperty() {
+        SdkInternalThreadLocal.put("AWS_LAMBDA_X_TRACE_ID", TRACE_HEADER);
+
+        try {
+            LambdaSegmentContext mockContext = new LambdaSegmentContext();
+            Subsegment subsegment = mockContext.beginSubsegment(AWSXRay.getGlobalRecorder(), "test");
+            FacadeSegment parent = (FacadeSegment) subsegment.getParent();
+
+            // Verify SdkInternalThreadLocal values are used (TRACE_HEADER), not system property values (TRACE_HEADER_2)
+            assertThat(parent.getTraceId().toString()).isEqualTo("1-57ff426a-80c11c39b0c928905eb0828d");
+            assertThat(parent.getId()).isEqualTo("1234abcd1234abcd");
+            assertThat(parent.isSampled()).isTrue();
+
+            mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
+        } finally {
+            SdkInternalThreadLocal.remove("AWS_LAMBDA_X_TRACE_ID");
+        }
+    }
+
+    @Test
+    @SetSystemProperty(key = "com.amazonaws.xray.traceHeader", value = TRACE_HEADER)
+    void testSdkInternalThreadLocalWithEmptyStringFallsBackToSystemProperty() {
+        SdkInternalThreadLocal.put("AWS_LAMBDA_X_TRACE_ID", "");
+
+        try {
+            LambdaSegmentContext mockContext = new LambdaSegmentContext();
+            Subsegment subsegment = mockContext.beginSubsegment(AWSXRay.getGlobalRecorder(), "test");
+            FacadeSegment parent = (FacadeSegment) subsegment.getParent();
+
+            // Verify system property values are used as fallback when SdkInternalThreadLocal returns empty string
+            assertThat(parent.getTraceId().toString()).isEqualTo("1-57ff426a-80c11c39b0c928905eb0828d");
+            assertThat(parent.getId()).isEqualTo("1234abcd1234abcd");
+            assertThat(parent.isSampled()).isTrue();
+
+            mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
+        } finally {
+            SdkInternalThreadLocal.remove("AWS_LAMBDA_X_TRACE_ID");
+        }
+    }
+
+    @Test
+    @SetEnvironmentVariable(key = "_X_AMZN_TRACE_ID", value = TRACE_HEADER_2)
+    void testSdkInternalThreadLocalTakesPriorityOverEnvironmentVariable() {
+        SdkInternalThreadLocal.put("AWS_LAMBDA_X_TRACE_ID", TRACE_HEADER);
+
+        try {
+            LambdaSegmentContext mockContext = new LambdaSegmentContext();
+            Subsegment subsegment = mockContext.beginSubsegment(AWSXRay.getGlobalRecorder(), "test");
+            FacadeSegment parent = (FacadeSegment) subsegment.getParent();
+
+            // Verify SdkInternalThreadLocal values are used (TRACE_HEADER), not environment variable values (TRACE_HEADER_2)
+            assertThat(parent.getTraceId().toString()).isEqualTo("1-57ff426a-80c11c39b0c928905eb0828d");
+            assertThat(parent.getId()).isEqualTo("1234abcd1234abcd");
+            assertThat(parent.isSampled()).isTrue();
+
+            mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
+        } finally {
+            SdkInternalThreadLocal.remove("AWS_LAMBDA_X_TRACE_ID");
+        }
+    }
+
+    @Test
+    @SetEnvironmentVariable(key = "_X_AMZN_TRACE_ID", value = TRACE_HEADER)
+    void testSdkInternalThreadLocalWithEmptyStringFallsBackToEnvironmentVariable() {
+        SdkInternalThreadLocal.put("AWS_LAMBDA_X_TRACE_ID", "");
+
+        try {
+            LambdaSegmentContext mockContext = new LambdaSegmentContext();
+            Subsegment subsegment = mockContext.beginSubsegment(AWSXRay.getGlobalRecorder(), "test");
+            FacadeSegment parent = (FacadeSegment) subsegment.getParent();
+
+            // Verify environment variable values are used as fallback when SdkInternalThreadLocal returns empty string
+            assertThat(parent.getTraceId().toString()).isEqualTo("1-57ff426a-80c11c39b0c928905eb0828d");
+            assertThat(parent.getId()).isEqualTo("1234abcd1234abcd");
+            assertThat(parent.isSampled()).isTrue();
+
+            mockContext.endSubsegment(AWSXRay.getGlobalRecorder());
+        } finally {
+            SdkInternalThreadLocal.remove("AWS_LAMBDA_X_TRACE_ID");
+        }
+    }
 }