diff --git a/compiler/packages/babel-plugin-react-compiler/src/Validation/ValidateNoDerivedComputationsInEffects_exp.ts b/compiler/packages/babel-plugin-react-compiler/src/Validation/ValidateNoDerivedComputationsInEffects_exp.ts
index 5c9462fd55106..af5927548af52 100644
--- a/compiler/packages/babel-plugin-react-compiler/src/Validation/ValidateNoDerivedComputationsInEffects_exp.ts
+++ b/compiler/packages/babel-plugin-react-compiler/src/Validation/ValidateNoDerivedComputationsInEffects_exp.ts
@@ -22,6 +22,7 @@ import {
   BasicBlock,
   isUseRefType,
   SourceLocation,
+  ArrayExpression,
 } from '../HIR';
 import {eachInstructionLValue, eachInstructionOperand} from '../HIR/visitors';
 import {isMutable} from '../ReactiveScopes/InferReactiveScopeVariables';
@@ -36,11 +37,17 @@ type DerivationMetadata = {
   isStateSource: boolean;
 };
 
+type EffectMetadata = {
+  effect: HIRFunction;
+  dependencies: ArrayExpression;
+};
+
 type ValidationContext = {
   readonly functions: Map<IdentifierId, FunctionExpression>;
+  readonly candidateDependencies: Map<IdentifierId, ArrayExpression>;
   readonly errors: CompilerError;
   readonly derivationCache: DerivationCache;
-  readonly effects: Set<HIRFunction>;
+  readonly effectsCache: Map<IdentifierId, EffectMetadata>;
   readonly setStateLoads: Map<IdentifierId, IdentifierId | null>;
   readonly setStateUsages: Map<IdentifierId, Set<SourceLocation>>;
 };
@@ -175,18 +182,20 @@ export function validateNoDerivedComputationsInEffects_exp(
   fn: HIRFunction,
 ): Result<void, CompilerError> {
   const functions: Map<IdentifierId, FunctionExpression> = new Map();
+  const candidateDependencies: Map<IdentifierId, ArrayExpression> = new Map();
   const derivationCache = new DerivationCache();
   const errors = new CompilerError();
-  const effects: Set<HIRFunction> = new Set();
+  const effectsCache: Map<IdentifierId, EffectMetadata> = new Map();
 
   const setStateLoads: Map<IdentifierId, IdentifierId> = new Map();
   const setStateUsages: Map<IdentifierId, Set<SourceLocation>> = new Map();
 
   const context: ValidationContext = {
     functions,
+    candidateDependencies,
     errors,
     derivationCache,
-    effects,
+    effectsCache,
     setStateLoads,
     setStateUsages,
   };
@@ -229,8 +238,8 @@ export function validateNoDerivedComputationsInEffects_exp(
     isFirstPass = false;
   } while (context.derivationCache.snapshot());
 
-  for (const effect of effects) {
-    validateEffect(effect, context);
+  for (const [, effect] of effectsCache) {
+    validateEffect(effect.effect, effect.dependencies, context);
   }
 
   return errors.asResult();
@@ -354,8 +363,14 @@ function recordInstructionDerivations(
       value.args[1].kind === 'Identifier'
     ) {
       const effectFunction = context.functions.get(value.args[0].identifier.id);
-      if (effectFunction != null) {
-        context.effects.add(effectFunction.loweredFunc.func);
+      const deps = context.candidateDependencies.get(
+        value.args[1].identifier.id,
+      );
+      if (effectFunction != null && deps != null) {
+        context.effectsCache.set(value.args[0].identifier.id, {
+          effect: effectFunction.loweredFunc.func,
+          dependencies: deps,
+        });
       }
     } else if (isUseStateType(lvalue.identifier) && value.args.length > 0) {
       typeOfValue = 'fromState';
@@ -367,6 +382,8 @@ function recordInstructionDerivations(
       );
       return;
     }
+  } else if (value.kind === 'ArrayExpression') {
+    context.candidateDependencies.set(lvalue.identifier.id, value);
   }
 
   for (const operand of eachInstructionOperand(instr)) {
@@ -596,6 +613,7 @@ function getFnLocalDeps(
 
 function validateEffect(
   effectFunction: HIRFunction,
+  dependencies: ArrayExpression,
   context: ValidationContext,
 ): void {
   const seenBlocks: Set<BlockId> = new Set();
@@ -612,6 +630,16 @@ function validateEffect(
     Set<SourceLocation>
   > = new Map();
 
+  // Consider setStates in the effect's dependency array as being part of effectSetStateUsages
+  for (const dep of dependencies.elements) {
+    if (dep.kind === 'Identifier') {
+      const root = getRootSetState(dep.identifier.id, context.setStateLoads);
+      if (root !== null) {
+        effectSetStateUsages.set(root, new Set([dep.loc]));
+      }
+    }
+  }
+
   let cleanUpFunctionDeps: Set<IdentifierId> | undefined;
 
   const globals: Set<IdentifierId> = new Set();
@@ -662,6 +690,18 @@ function validateEffect(
         instr.value.args.length === 1 &&
         instr.value.args[0].kind === 'Identifier'
       ) {
+        const calleeMetadata = context.derivationCache.cache.get(
+          instr.value.callee.identifier.id,
+        );
+
+        /*
+         * If the setState comes from a source other than local state skip
+         * since the fix is not to calculate in render
+         */
+        if (calleeMetadata?.typeOfValue != 'fromState') {
+          continue;
+        }
+
         const argMetadata = context.derivationCache.cache.get(
           instr.value.args[0].identifier.id,
         );
diff --git a/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/effect-used-in-dep-array-still-errors.expect.md b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/effect-used-in-dep-array-still-errors.expect.md
new file mode 100644
index 0000000000000..6a3593a3b27c3
--- /dev/null
+++ b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/effect-used-in-dep-array-still-errors.expect.md
@@ -0,0 +1,63 @@
+
+## Input
+
+```javascript
+// @validateNoDerivedComputationsInEffects_exp @loggerTestOnly
+
+function Component({prop}) {
+  const [s, setS] = useState(0);
+  useEffect(() => {
+    setS(prop);
+  }, [prop, setS]);
+
+  return <div>{prop}</div>;
+}
+
+```
+
+## Code
+
+```javascript
+import { c as _c } from "react/compiler-runtime"; // @validateNoDerivedComputationsInEffects_exp @loggerTestOnly
+
+function Component(t0) {
+  const $ = _c(5);
+  const { prop } = t0;
+  const [, setS] = useState(0);
+  let t1;
+  let t2;
+  if ($[0] !== prop) {
+    t1 = () => {
+      setS(prop);
+    };
+    t2 = [prop, setS];
+    $[0] = prop;
+    $[1] = t1;
+    $[2] = t2;
+  } else {
+    t1 = $[1];
+    t2 = $[2];
+  }
+  useEffect(t1, t2);
+  let t3;
+  if ($[3] !== prop) {
+    t3 = <div>{prop}</div>;
+    $[3] = prop;
+    $[4] = t3;
+  } else {
+    t3 = $[4];
+  }
+  return t3;
+}
+
+```
+
+## Logs
+
+```
+{"kind":"CompileError","detail":{"options":{"description":"Using an effect triggers an additional render which can hurt performance and user experience, potentially briefly showing stale values to the user\n\nThis setState call is setting a derived value that depends on the following reactive sources:\n\nProps: [prop]\n\nData Flow Tree:\n└── prop (Prop)\n\nSee: https://react.dev/learn/you-might-not-need-an-effect#updating-state-based-on-props-or-state","category":"EffectDerivationsOfState","reason":"You might not need an effect. Derive values in render, not effects.","details":[{"kind":"error","loc":{"start":{"line":6,"column":4,"index":150},"end":{"line":6,"column":8,"index":154},"filename":"effect-used-in-dep-array-still-errors.ts","identifierName":"setS"},"message":"This should be computed during render, not in an effect"}]}},"fnLoc":null}
+{"kind":"CompileSuccess","fnLoc":{"start":{"line":3,"column":0,"index":64},"end":{"line":10,"column":1,"index":212},"filename":"effect-used-in-dep-array-still-errors.ts"},"fnName":"Component","memoSlots":5,"memoBlocks":2,"memoValues":3,"prunedMemoBlocks":0,"prunedMemoValues":0}
+```
+      
+### Eval output
+(kind: exception) Fixture not implemented
\ No newline at end of file
diff --git a/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/effect-used-in-dep-array-still-errors.js b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/effect-used-in-dep-array-still-errors.js
new file mode 100644
index 0000000000000..1df99a191dcfe
--- /dev/null
+++ b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/effect-used-in-dep-array-still-errors.js
@@ -0,0 +1,10 @@
+// @validateNoDerivedComputationsInEffects_exp @loggerTestOnly
+
+function Component({prop}) {
+  const [s, setS] = useState(0);
+  useEffect(() => {
+    setS(prop);
+  }, [prop, setS]);
+
+  return <div>{prop}</div>;
+}
diff --git a/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/from-props-setstate-in-effect-no-error.expect.md b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/from-props-setstate-in-effect-no-error.expect.md
new file mode 100644
index 0000000000000..f23f51d6cb8bb
--- /dev/null
+++ b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/from-props-setstate-in-effect-no-error.expect.md
@@ -0,0 +1,65 @@
+
+## Input
+
+```javascript
+// @validateNoDerivedComputationsInEffects_exp @enableTreatSetIdentifiersAsStateSetters @loggerTestOnly
+
+function Component({setParentState, prop}) {
+  useEffect(() => {
+    setParentState(prop);
+  }, [prop]);
+
+  return <div>{prop}</div>;
+}
+
+```
+
+## Code
+
+```javascript
+import { c as _c } from "react/compiler-runtime"; // @validateNoDerivedComputationsInEffects_exp @enableTreatSetIdentifiersAsStateSetters @loggerTestOnly
+
+function Component(t0) {
+  const $ = _c(7);
+  const { setParentState, prop } = t0;
+  let t1;
+  if ($[0] !== prop || $[1] !== setParentState) {
+    t1 = () => {
+      setParentState(prop);
+    };
+    $[0] = prop;
+    $[1] = setParentState;
+    $[2] = t1;
+  } else {
+    t1 = $[2];
+  }
+  let t2;
+  if ($[3] !== prop) {
+    t2 = [prop];
+    $[3] = prop;
+    $[4] = t2;
+  } else {
+    t2 = $[4];
+  }
+  useEffect(t1, t2);
+  let t3;
+  if ($[5] !== prop) {
+    t3 = <div>{prop}</div>;
+    $[5] = prop;
+    $[6] = t3;
+  } else {
+    t3 = $[6];
+  }
+  return t3;
+}
+
+```
+
+## Logs
+
+```
+{"kind":"CompileSuccess","fnLoc":{"start":{"line":3,"column":0,"index":105},"end":{"line":9,"column":1,"index":240},"filename":"from-props-setstate-in-effect-no-error.ts"},"fnName":"Component","memoSlots":7,"memoBlocks":3,"memoValues":3,"prunedMemoBlocks":0,"prunedMemoValues":0}
+```
+      
+### Eval output
+(kind: exception) Fixture not implemented
\ No newline at end of file
diff --git a/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/from-props-setstate-in-effect-no-error.js b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/from-props-setstate-in-effect-no-error.js
new file mode 100644
index 0000000000000..4075975b32549
--- /dev/null
+++ b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/from-props-setstate-in-effect-no-error.js
@@ -0,0 +1,9 @@
+// @validateNoDerivedComputationsInEffects_exp @enableTreatSetIdentifiersAsStateSetters @loggerTestOnly
+
+function Component({setParentState, prop}) {
+  useEffect(() => {
+    setParentState(prop);
+  }, [prop]);
+
+  return <div>{prop}</div>;
+}
diff --git a/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/usestate-derived-from-prop-no-show-in-data-flow-tree.expect.md b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/usestate-derived-from-prop-no-show-in-data-flow-tree.expect.md
index 87cf7722da353..602fb9fff3a6c 100644
--- a/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/usestate-derived-from-prop-no-show-in-data-flow-tree.expect.md
+++ b/compiler/packages/babel-plugin-react-compiler/src/__tests__/fixtures/compiler/effect-derived-computations/usestate-derived-from-prop-no-show-in-data-flow-tree.expect.md
@@ -64,7 +64,6 @@ function Component(t0) {
 ## Logs
 
 ```
-{"kind":"CompileError","detail":{"options":{"description":"Using an effect triggers an additional render which can hurt performance and user experience, potentially briefly showing stale values to the user\n\nThis setState call is setting a derived value that depends on the following reactive sources:\n\nState: [second]\n\nData Flow Tree:\n└── second (State)\n\nSee: https://react.dev/learn/you-might-not-need-an-effect#updating-state-based-on-props-or-state","category":"EffectDerivationsOfState","reason":"You might not need an effect. Derive values in render, not effects.","details":[{"kind":"error","loc":{"start":{"line":14,"column":4,"index":443},"end":{"line":14,"column":8,"index":447},"filename":"usestate-derived-from-prop-no-show-in-data-flow-tree.ts","identifierName":"setS"},"message":"This should be computed during render, not in an effect"}]}},"fnLoc":null}
 {"kind":"CompileSuccess","fnLoc":{"start":{"line":3,"column":0,"index":64},"end":{"line":18,"column":1,"index":500},"filename":"usestate-derived-from-prop-no-show-in-data-flow-tree.ts"},"fnName":"Component","memoSlots":5,"memoBlocks":2,"memoValues":3,"prunedMemoBlocks":0,"prunedMemoValues":0}
 ```