diff --git a/packages/core/rxjs-interop/src/to_observable.ts b/packages/core/rxjs-interop/src/to_observable.ts
index c59c354e6ed..e67d4b87b81 100644
--- a/packages/core/rxjs-interop/src/to_observable.ts
+++ b/packages/core/rxjs-interop/src/to_observable.ts
@@ -6,8 +6,8 @@
  * found in the LICENSE file at https://angular.io/license
  */
 
-import {assertInInjectionContext, effect, inject, Injector, Signal} from '@angular/core';
-import {Observable} from 'rxjs';
+import {assertInInjectionContext, DestroyRef, effect, EffectRef, inject, Injector, Signal, untracked} from '@angular/core';
+import {Observable, ReplaySubject} from 'rxjs';
 
 /**
  * Options for `toObservable`.
@@ -38,20 +38,23 @@ export function toObservable<T>(
     ): Observable<T> {
   !options?.injector && assertInInjectionContext(toObservable);
   const injector = options?.injector ?? inject(Injector);
+  const subject = new ReplaySubject<T>(1);
 
-  // Creating a new `Observable` allows the creation of the effect to be lazy. This allows for all
-  // references to `source` to be dropped if the `Observable` is fully unsubscribed and thrown away.
-  return new Observable(observer => {
-    const watcher = effect(() => {
-      let value: T;
-      try {
-        value = source();
-      } catch (err) {
-        observer.error(err);
-        return;
-      }
-      observer.next(value);
-    }, {injector, manualCleanup: true, allowSignalWrites: true});
-    return () => watcher.destroy();
+  const watcher = effect(() => {
+    let value: T;
+    try {
+      value = source();
+    } catch (err) {
+      untracked(() => subject.error(err));
+      return;
+    }
+    untracked(() => subject.next(value));
+  }, {injector, manualCleanup: true});
+
+  injector.get(DestroyRef).onDestroy(() => {
+    watcher.destroy();
+    subject.complete();
   });
+
+  return subject.asObservable();
 }
diff --git a/packages/core/rxjs-interop/test/to_observable_spec.ts b/packages/core/rxjs-interop/test/to_observable_spec.ts
index 15095febf94..a1919ad0eb1 100644
--- a/packages/core/rxjs-interop/test/to_observable_spec.ts
+++ b/packages/core/rxjs-interop/test/to_observable_spec.ts
@@ -6,14 +6,14 @@
  * found in the LICENSE file at https://angular.io/license
  */
 
-import {Component, computed, Injector, signal} from '@angular/core';
+import {Component, computed, createEnvironmentInjector, EnvironmentInjector, Injector, Signal, signal} from '@angular/core';
 import {toObservable} from '@angular/core/rxjs-interop';
 import {ComponentFixture, TestBed} from '@angular/core/testing';
 import {take, toArray} from 'rxjs/operators';
 
 describe('toObservable()', () => {
   let fixture!: ComponentFixture<unknown>;
-  let injector!: Injector;
+  let injector!: EnvironmentInjector;
 
   @Component({
     template: '',
@@ -24,7 +24,7 @@ describe('toObservable()', () => {
 
   beforeEach(() => {
     fixture = TestBed.createComponent(Cmp);
-    injector = TestBed.inject(Injector);
+    injector = TestBed.inject(EnvironmentInjector);
   });
 
   function flushEffects(): void {
@@ -81,7 +81,7 @@ describe('toObservable()', () => {
     sub.unsubscribe();
   });
 
-  it('should not monitor the signal if the Observable is never subscribed', () => {
+  it('monitors the signal even if the Observable is never subscribed', () => {
     let counterRead = false;
     const counter = computed(() => {
       counterRead = true;
@@ -93,12 +93,12 @@ describe('toObservable()', () => {
     // Simply creating the Observable shouldn't trigger a signal read.
     expect(counterRead).toBeFalse();
 
-    // Nor should the signal be read after effects have run.
+    // The signal is read after effects have run.
     flushEffects();
-    expect(counterRead).toBeFalse();
+    expect(counterRead).toBeTrue();
   });
 
-  it('should not monitor the signal if the Observable has no active subscribers', () => {
+  it('should still monitor the signal if the Observable has no active subscribers', () => {
     const counter = signal(0);
 
     // Tracks how many reads of `counter()` there have been.
@@ -122,15 +122,52 @@ describe('toObservable()', () => {
     flushEffects();
     expect(readCount).toBe(2);
 
-    // Tear down the only subscription and hence the effect that's monitoring the signal.
+    // Tear down the only subscription.
     sub.unsubscribe();
 
-    // Now, setting the signal shouldn't trigger any additional reads, as the Observable is no
-    // longer interested in its value.
-
+    // Now, setting the signal still triggers additional reads
     counter.set(2);
     flushEffects();
+    expect(readCount).toBe(3);
+  });
 
-    expect(readCount).toBe(2);
+  it('stops monitoring the signal once injector is destroyed', () => {
+    const counter = signal(0);
+
+    // Tracks how many reads of `counter()` there have been.
+    let readCount = 0;
+    const trackedCounter = computed(() => {
+      readCount++;
+      return counter();
+    });
+
+    const childInjector = createEnvironmentInjector([], injector);
+    toObservable(trackedCounter, {injector: childInjector});
+
+    expect(readCount).toBe(0);
+
+    flushEffects();
+    expect(readCount).toBe(1);
+
+    // Now, setting the signal shouldn't trigger any additional reads, as the Injector was destroyed
+    childInjector.destroy();
+    counter.set(2);
+    flushEffects();
+    expect(readCount).toBe(1);
+  });
+
+  it('does not track downstream signal reads in the effect', () => {
+    const counter = signal(0);
+    const emits = signal(0);
+    toObservable(counter, {injector}).subscribe(() => {
+      // Read emits. If we are still tracked in the effect, this will cause an infinite loop by
+      // triggering the effect again.
+      emits();
+      emits.update(v => v + 1);
+    });
+    flushEffects();
+    expect(emits()).toBe(1);
+    flushEffects();
+    expect(emits()).toBe(1);
   });
 });
diff --git a/packages/core/test/render3/BUILD.bazel b/packages/core/test/render3/BUILD.bazel
index b124a114bf0..73cb765a827 100644
--- a/packages/core/test/render3/BUILD.bazel
+++ b/packages/core/test/render3/BUILD.bazel
@@ -25,6 +25,7 @@ ts_library(
         "//packages/common",
         "//packages/compiler",
         "//packages/core",
+        "//packages/core/rxjs-interop",
         "//packages/core/src/di/interface",
         "//packages/core/src/interface",
         "//packages/core/src/util",
diff --git a/packages/core/test/render3/reactivity_spec.ts b/packages/core/test/render3/reactivity_spec.ts
index 469a90f3b64..825c891d027 100644
--- a/packages/core/test/render3/reactivity_spec.ts
+++ b/packages/core/test/render3/reactivity_spec.ts
@@ -6,7 +6,9 @@
  * found in the LICENSE file at https://angular.io/license
  */
 
+import {AsyncPipe} from '@angular/common';
 import {AfterViewInit, Component, ContentChildren, createComponent, destroyPlatform, effect, EnvironmentInjector, inject, Injector, Input, NgZone, OnChanges, QueryList, signal, SimpleChanges, ViewChild} from '@angular/core';
+import {toObservable} from '@angular/core/rxjs-interop';
 import {TestBed} from '@angular/core/testing';
 import {bootstrapApplication} from '@angular/platform-browser';
 import {withBody} from '@angular/private/testing';
@@ -386,4 +388,21 @@ describe('effects', () => {
     fixture.detectChanges();
     expect(fixture.componentInstance.noOfCmpCreated).toBe(1);
   });
+
+  it('should allow toObservable subscription in template (with async pipe)', () => {
+    @Component({
+      selector: 'test-cmp',
+      standalone: true,
+      imports: [AsyncPipe],
+      template: '{{counter$ | async}}',
+    })
+    class Cmp {
+      counter$ = toObservable(signal(0));
+    }
+
+    const fixture = TestBed.createComponent(Cmp);
+    expect(() => fixture.detectChanges(true)).not.toThrow();
+    fixture.detectChanges();
+    expect(fixture.nativeElement.textContent).toBe('0');
+  });
 });