diff --git a/src/db/setup.ts b/src/db/setup.ts
index 87ffd8316..3d410deae 100644
--- a/src/db/setup.ts
+++ b/src/db/setup.ts
@@ -74,8 +74,8 @@ export async function resolveDatabaseConfig(nuxt: Nuxt, hub: HubConfig): Promise
         }
         break
       }
-      // Cloudflare D1 (production only - dev uses local libsql)
-      if (hub.hosting.includes('cloudflare') && !nuxt.options.dev) {
+      // Cloudflare D1 (production only - dev/prepare uses local libsql)
+      if (hub.hosting.includes('cloudflare') && !nuxt.options.dev && !nuxt.options._prepare) {
         config.driver = 'd1'
         break
       }
diff --git a/test/database.config.test.ts b/test/database.config.test.ts
index 23c064557..37aeb9c51 100644
--- a/test/database.config.test.ts
+++ b/test/database.config.test.ts
@@ -18,10 +18,12 @@ describe('resolveDatabaseConfig', () => {
     process.env = originalEnv
   })
 
-  const createMockNuxt = (layers: any[] = []) => ({
+  const createMockNuxt = (layers: any[] = [], opts: { dev?: boolean, _prepare?: boolean } = {}) => ({
     options: {
       rootDir: '/',
       srcDir: '/app/',
+      dev: opts.dev ?? false,
+      _prepare: opts._prepare ?? false,
       _layers: layers
     }
   }) as any
@@ -104,8 +106,8 @@ describe('resolveDatabaseConfig', () => {
       })
     })
 
-    it('should use D1 driver when hosting is cloudflare', async () => {
-      const nuxt = createMockNuxt()
+    it('should use D1 driver when hosting is cloudflare (production mode)', async () => {
+      const nuxt = createMockNuxt([], { dev: false, _prepare: false })
       const hub = createBaseHubConfig('sqlite')
       hub.hosting = 'cloudflare'
 
@@ -118,6 +120,34 @@ describe('resolveDatabaseConfig', () => {
       })
     })
 
+    it('should use libsql when hosting is cloudflare in dev mode', async () => {
+      const nuxt = createMockNuxt([], { dev: true })
+      const hub = createBaseHubConfig('sqlite')
+      hub.hosting = 'cloudflare'
+
+      const result = await resolveDatabaseConfig(nuxt, hub)
+
+      expect(result).toMatchObject({
+        dialect: 'sqlite',
+        driver: 'libsql',
+        connection: { url: 'file:/tmp/test-hub/db/sqlite.db' }
+      })
+    })
+
+    it('should use libsql when hosting is cloudflare in prepare mode', async () => {
+      const nuxt = createMockNuxt([], { dev: false, _prepare: true })
+      const hub = createBaseHubConfig('sqlite')
+      hub.hosting = 'cloudflare'
+
+      const result = await resolveDatabaseConfig(nuxt, hub)
+
+      expect(result).toMatchObject({
+        dialect: 'sqlite',
+        driver: 'libsql',
+        connection: { url: 'file:/tmp/test-hub/db/sqlite.db' }
+      })
+    })
+
     it('should preserve custom driver when specified', async () => {
       const nuxt = createMockNuxt()
       const hub = createBaseHubConfig({