diff --git a/.changeset/bitter-sheep-cry.md b/.changeset/bitter-sheep-cry.md
new file mode 100644
index 000000000..814fc9ba5
--- /dev/null
+++ b/.changeset/bitter-sheep-cry.md
@@ -0,0 +1,6 @@
+---
+"@callstack/repack-dev-server": patch
+"@callstack/repack": patch
+---
+
+Fix opening stack frame source file from LogBox
diff --git a/.changeset/chatty-taxes-hug.md b/.changeset/chatty-taxes-hug.md
new file mode 100644
index 000000000..b7556c979
--- /dev/null
+++ b/.changeset/chatty-taxes-hug.md
@@ -0,0 +1,5 @@
+---
+"@callstack/repack": minor
+---
+
+Handle displaying relative paths to sourcefiles in DevTools similarly to Metro
diff --git a/.changeset/evil-geckos-play.md b/.changeset/evil-geckos-play.md
new file mode 100644
index 000000000..a7b7b1ee9
--- /dev/null
+++ b/.changeset/evil-geckos-play.md
@@ -0,0 +1,5 @@
+---
+"@callstack/repack": patch
+---
+
+Don't include 3rd party lib sourcemaps by default into the final sourcemaps
diff --git a/apps/tester-app/package.json b/apps/tester-app/package.json
index 6e4ab80cf..799629896 100644
--- a/apps/tester-app/package.json
+++ b/apps/tester-app/package.json
@@ -3,9 +3,9 @@
   "version": "0.0.1",
   "private": true,
   "scripts": {
-    "android": "react-native run-android --appId com.testerapp",
+    "android": "react-native run-android --appId com.testerapp --no-packager",
     "android:release": "node ./scripts/release.js android",
-    "ios": "react-native run-ios",
+    "ios": "react-native run-ios --no-packager",
     "ios:release": "node ./scripts/release.js ios",
     "pods": "(cd ios && bundle install && (bundle exec pod install || bundle exec pod update))",
     "pods:update": "(cd ios && bundle install && bundle exec pod update)",
diff --git a/apps/tester-federation-v2/package.json b/apps/tester-federation-v2/package.json
index 2c79549ca..bf49a7be8 100644
--- a/apps/tester-federation-v2/package.json
+++ b/apps/tester-federation-v2/package.json
@@ -3,8 +3,8 @@
   "version": "0.0.1",
   "private": true,
   "scripts": {
-    "android": "react-native run-android --appId com.tester.federationV2",
-    "ios": "react-native run-ios",
+    "android": "react-native run-android --appId com.tester.federationV2 --no-packager",
+    "ios": "react-native run-ios --no-packager",
     "pods": "(cd ios && bundle install && (bundle exec pod install || bundle exec pod update))",
     "pods:update": "(cd ios && bundle install && bundle exec pod update)",
     "start:hostapp": "react-native webpack-start --config config.host-app.mts",
diff --git a/apps/tester-federation/package.json b/apps/tester-federation/package.json
index c7350564e..91b712a9a 100644
--- a/apps/tester-federation/package.json
+++ b/apps/tester-federation/package.json
@@ -3,8 +3,8 @@
   "version": "0.0.1",
   "private": true,
   "scripts": {
-    "android": "react-native run-android --appId com.tester.federation",
-    "ios": "react-native run-ios",
+    "android": "react-native run-android --appId com.tester.federation --no-packager",
+    "ios": "react-native run-ios --no-packager",
     "pods": "(cd ios && bundle install && (bundle exec pod install || bundle exec pod update))",
     "pods:update": "(cd ios && bundle install && bundle exec pod update)",
     "start:hostapp": "react-native webpack-start --config config.host-app.mts",
diff --git a/packages/dev-server/src/createServer.ts b/packages/dev-server/src/createServer.ts
index 166310bd8..5ab29b36e 100644
--- a/packages/dev-server/src/createServer.ts
+++ b/packages/dev-server/src/createServer.ts
@@ -138,7 +138,7 @@ export async function createServer(config: Server.Config) {
     delegate,
   });
   await instance.register(devtoolsPlugin, {
-    rootDir: options.rootDir,
+    delegate,
   });
   await instance.register(symbolicatePlugin, {
     delegate,
diff --git a/packages/dev-server/src/plugins/compiler/compilerPlugin.ts b/packages/dev-server/src/plugins/compiler/compilerPlugin.ts
index a34fb091b..5555aeae4 100644
--- a/packages/dev-server/src/plugins/compiler/compilerPlugin.ts
+++ b/packages/dev-server/src/plugins/compiler/compilerPlugin.ts
@@ -21,10 +21,10 @@ async function compilerPlugin(
       },
     },
     handler: async (request, reply) => {
-      const filename = (request.params as { '*'?: string })['*'];
+      const filepath = (request.params as { '*'?: string })['*'];
       let { platform } = request.query as { platform?: string };
 
-      if (!filename) {
+      if (!filepath) {
         // This technically should never happen - this route should not be called if file is missing.
         request.log.debug('File was not provided');
         return reply.notFound('File was not provided');
@@ -49,12 +49,12 @@ async function compilerPlugin(
 
       try {
         const asset = await delegate.compiler.getAsset(
-          filename,
+          filepath,
           platform,
           sendProgress
         );
         const mimeType = delegate.compiler.getMimeType(
-          filename,
+          filepath,
           platform,
           asset
         );
diff --git a/packages/dev-server/src/plugins/devtools/devtoolsPlugin.ts b/packages/dev-server/src/plugins/devtools/devtoolsPlugin.ts
index 5644a46e1..7ffe06063 100644
--- a/packages/dev-server/src/plugins/devtools/devtoolsPlugin.ts
+++ b/packages/dev-server/src/plugins/devtools/devtoolsPlugin.ts
@@ -2,6 +2,7 @@ import type { FastifyInstance } from 'fastify';
 import fastifyPlugin from 'fastify-plugin';
 import launchEditor from 'launch-editor';
 import open from 'open';
+import type { Server } from '../../types.js';
 
 interface OpenURLRequestBody {
   url: string;
@@ -18,7 +19,10 @@ function parseRequestBody<T>(body: unknown): T {
   throw new Error(`Unsupported body type: ${typeof body}`);
 }
 
-async function devtoolsPlugin(instance: FastifyInstance) {
+async function devtoolsPlugin(
+  instance: FastifyInstance,
+  { delegate }: { delegate: Server.Delegate }
+) {
   // reference implementation in `@react-native-community/cli-server-api`:
   // https://github.com/react-native-community/cli/blob/46436a12478464752999d34ed86adf3212348007/packages/cli-server-api/src/openURLMiddleware.ts
   instance.route({
@@ -40,8 +44,8 @@ async function devtoolsPlugin(instance: FastifyInstance) {
       const { file, lineNumber } = parseRequestBody<OpenStackFrameRequestBody>(
         request.body
       );
-      // TODO fix rewriting of `webpack://` to rootDir of the project
-      launchEditor(`${file}:${lineNumber}`, process.env.REACT_EDITOR);
+      const filepath = delegate.devTools?.resolveProjectPath(file) ?? file;
+      launchEditor(`${filepath}:${lineNumber}`, process.env.REACT_EDITOR);
       reply.send('OK');
     },
   });
diff --git a/packages/dev-server/src/plugins/symbolicate/Symbolicator.ts b/packages/dev-server/src/plugins/symbolicate/Symbolicator.ts
index 05ec13fc6..bdb022209 100644
--- a/packages/dev-server/src/plugins/symbolicate/Symbolicator.ts
+++ b/packages/dev-server/src/plugins/symbolicate/Symbolicator.ts
@@ -162,17 +162,23 @@ export class Symbolicator {
       };
     }
 
-    const lookup = consumer.originalPositionFor({
+    let lookup = consumer.originalPositionFor({
       line: frame.lineNumber,
       column: frame.column,
       bias: SourceMapConsumer.LEAST_UPPER_BOUND,
     });
 
-    // If lookup fails, we get the same shape object, but with
-    // all values set to null
     if (!lookup.source) {
-      // It is better to gracefully return the original frame
-      // than to throw an exception
+      // fallback to GREATEST_LOWER_BOUND
+      lookup = consumer.originalPositionFor({
+        line: frame.lineNumber,
+        column: frame.column,
+        bias: SourceMapConsumer.GREATEST_LOWER_BOUND,
+      });
+    }
+
+    // return the original frame when both lookups fail
+    if (!lookup.source) {
       return {
         ...frame,
         collapse: false,
diff --git a/packages/dev-server/src/types.ts b/packages/dev-server/src/types.ts
index 083d37c56..ab76392b3 100644
--- a/packages/dev-server/src/types.ts
+++ b/packages/dev-server/src/types.ts
@@ -77,6 +77,9 @@ export namespace Server {
     /** A compiler delegate. */
     compiler: CompilerDelegate;
 
+    /** A DevTools delegate. */
+    devTools?: DevToolsDelegate;
+
     /** A symbolicator delegate. */
     symbolicator: SymbolicatorDelegate;
 
@@ -139,6 +142,19 @@ export namespace Server {
     onMessage: (log: any) => void;
   }
 
+  /**
+   * Delegate with implementation for dev tools functions.
+   */
+  export interface DevToolsDelegate {
+    /**
+     * Resolve the project filepath with [projectRoot] prefix.
+     *
+     * @param filepath The filepath to resolve.
+     * @returns The resolved project path.
+     */
+    resolveProjectPath: (filepath: string) => string;
+  }
+
   /**
    * Delegate with implementation for messages used in route handlers.
    */
diff --git a/packages/repack/babel.config.js b/packages/repack/babel.config.js
index ba56551cc..c64d92ff5 100644
--- a/packages/repack/babel.config.js
+++ b/packages/repack/babel.config.js
@@ -6,6 +6,10 @@ module.exports = {
       include: ['./src/**/implementation'],
       comments: false,
     },
+    {
+      include: ['./src/**/implementation', './src/modules'],
+      sourceMaps: false,
+    },
     {
       exclude: ['./src/**/implementation', './src/modules'],
       presets: [
diff --git a/packages/repack/package.json b/packages/repack/package.json
index a371dfdbe..a2bd72ef7 100644
--- a/packages/repack/package.json
+++ b/packages/repack/package.json
@@ -47,7 +47,7 @@
     "access": "public"
   },
   "scripts": {
-    "build:js": "babel src --out-dir dist --extensions \".js,.ts\" --source-maps --ignore \"**/__tests__/**\" --delete-dir-on-start",
+    "build:js": "babel src --out-dir dist --extensions \".js,.ts\" --ignore \"**/__tests__/**\" --delete-dir-on-start",
     "build:ts": "tsc -p tsconfig.build.json --emitDeclarationOnly",
     "build": "pnpm run \"/^build:.*/\"",
     "test": "jest",
diff --git a/packages/repack/src/commands/common/__tests__/parseUrl.test.ts b/packages/repack/src/commands/common/__tests__/parseUrl.test.ts
new file mode 100644
index 000000000..6ad96c9ea
--- /dev/null
+++ b/packages/repack/src/commands/common/__tests__/parseUrl.test.ts
@@ -0,0 +1,101 @@
+import { parseUrl } from '../parseUrl.js';
+
+describe('parseUrl', () => {
+  const expectParsed = (
+    url: string,
+    expected: { resourcePath: string; platform?: string },
+    platformList = ['ios', 'android', 'web']
+  ) => {
+    expect(parseUrl(url, platformList)).toEqual(expected);
+  };
+
+  it('should parse URLs with platform from query parameters', () => {
+    expectParsed('src/index.js?platform=ios', {
+      resourcePath: 'src/index.js',
+      platform: 'ios',
+    });
+    expectParsed('components/Button.tsx?platform=android', {
+      resourcePath: 'components/Button.tsx',
+      platform: 'android',
+    });
+    expectParsed('/absolute/path/file.js?platform=web', {
+      resourcePath: 'absolute/path/file.js',
+      platform: 'web',
+    });
+  });
+
+  it('should parse URLs with platform from pathname', () => {
+    expectParsed('/ios/src/index.js', {
+      resourcePath: 'src/index.js',
+      platform: 'ios',
+    });
+    expectParsed('/android/components/Button.tsx', {
+      resourcePath: 'components/Button.tsx',
+      platform: 'android',
+    });
+    expectParsed('/web/utils/helper.js', {
+      resourcePath: 'utils/helper.js',
+      platform: 'web',
+    });
+  });
+
+  it('should parse URLs with platform from file extension', () => {
+    expectParsed('src/index.ios.js', {
+      resourcePath: 'src/index.ios.js',
+      platform: 'ios',
+    });
+    expectParsed('components/Button.android.tsx', {
+      resourcePath: 'components/Button.android.tsx',
+      platform: 'android',
+    });
+    expectParsed('styles/theme.web.css', {
+      resourcePath: 'styles/theme.web.css',
+      platform: 'web',
+    });
+  });
+
+  it('should handle URLs without platform detection', () => {
+    expectParsed('src/index.js', {
+      resourcePath: 'src/index.js',
+      platform: undefined,
+    });
+    expectParsed('/components/Button.tsx', {
+      resourcePath: 'components/Button.tsx',
+      platform: undefined,
+    });
+    expectParsed('utils/helper.unknown.js', {
+      resourcePath: 'utils/helper.unknown.js',
+      platform: undefined,
+    });
+  });
+
+  it('should prioritize query parameter over pathname and extension', () => {
+    expectParsed('/android/src/index.ios.js?platform=web', {
+      resourcePath: 'android/src/index.ios.js',
+      platform: 'web',
+    });
+    expectParsed('/ios/components/Button.android.tsx?platform=web', {
+      resourcePath: 'ios/components/Button.android.tsx',
+      platform: 'web',
+    });
+  });
+
+  it('should work with different platform lists', () => {
+    expectParsed(
+      '/react-native/src/index.js',
+      {
+        resourcePath: 'src/index.js',
+        platform: 'react-native',
+      },
+      ['react-native', 'macos']
+    );
+    expectParsed(
+      'app.macos.js',
+      {
+        resourcePath: 'app.macos.js',
+        platform: 'macos',
+      },
+      ['react-native', 'macos']
+    );
+  });
+});
diff --git a/packages/repack/src/commands/common/__tests__/resolveProjectPath.test.ts b/packages/repack/src/commands/common/__tests__/resolveProjectPath.test.ts
new file mode 100644
index 000000000..89d2e06c2
--- /dev/null
+++ b/packages/repack/src/commands/common/__tests__/resolveProjectPath.test.ts
@@ -0,0 +1,44 @@
+import { resolveProjectPath } from '../resolveProjectPath.js';
+
+describe('resolveProjectPath', () => {
+  const expectResolved = (
+    input: string,
+    expected: string,
+    root = '/project/root'
+  ) => {
+    expect(resolveProjectPath(input, root)).toBe(expected);
+  };
+
+  it('should resolve [projectRoot] prefix correctly', () => {
+    expectResolved('[projectRoot]/src/index.js', '/project/root/src/index.js');
+    expectResolved(
+      '[projectRoot]/build/output.js',
+      '/apps/my-app/build/output.js',
+      '/apps/my-app'
+    );
+    expectResolved(
+      '[projectRoot]/special-file@2x.png',
+      '/project/root/special-file@2x.png'
+    );
+    expectResolved(
+      '[projectRoot]/file with spaces.txt',
+      '/project/root/file with spaces.txt'
+    );
+  });
+
+  it('should resolve [projectRoot^N] prefix with up-level navigation', () => {
+    expectResolved('[projectRoot^1]/src/index.js', '/project/src/index.js');
+    expectResolved('[projectRoot^2]/shared/utils.js', '/shared/utils.js');
+    expectResolved('[projectRoot^3]/global/config.json', '/global/config.json');
+    expectResolved(
+      '[projectRoot^2]/utils/helper.js',
+      '/deep/nested/utils/helper.js',
+      '/deep/nested/project/folder'
+    );
+    expectResolved(
+      '[projectRoot^5]/very/deep/file.js',
+      '/a/very/deep/file.js',
+      '/a/b/c/d/e/f'
+    );
+  });
+});
diff --git a/packages/repack/src/commands/common/index.ts b/packages/repack/src/commands/common/index.ts
index 2242a8f1a..af36e22e8 100644
--- a/packages/repack/src/commands/common/index.ts
+++ b/packages/repack/src/commands/common/index.ts
@@ -1,7 +1,8 @@
 export * from './adaptFilenameToPlatform.js';
 export * from './getMimeType.js';
+export * from './resolveProjectPath.js';
 export * from './runAdbReverse.js';
-export * from './parseFileUrl.js';
+export * from './parseUrl.js';
 export * from './resetPersistentCache.js';
 export * from './setupInteractions.js';
 export * from './setupStatsWriter.js';
diff --git a/packages/repack/src/commands/common/parseFileUrl.ts b/packages/repack/src/commands/common/parseFileUrl.ts
deleted file mode 100644
index a059ce251..000000000
--- a/packages/repack/src/commands/common/parseFileUrl.ts
+++ /dev/null
@@ -1,29 +0,0 @@
-export function parseFileUrl(fileUrl: string, base?: string) {
-  const url = new URL(fileUrl, base);
-  const { pathname, searchParams } = url;
-
-  let platform = searchParams.get('platform');
-  let filename = pathname;
-
-  if (!platform) {
-    const pathArray = pathname.split('/');
-    const platformFromPath = pathArray[1];
-
-    if (platformFromPath === 'ios' || platformFromPath === 'android') {
-      platform = platformFromPath;
-      filename = pathArray.slice(2).join('/');
-    }
-  }
-
-  if (!platform) {
-    const [, platformOrName, name] = filename.split('.').reverse();
-    if (name !== undefined) {
-      platform = platformOrName;
-    }
-  }
-
-  return {
-    filename: filename.replace(/^\//, ''),
-    platform: platform || undefined,
-  };
-}
diff --git a/packages/repack/src/commands/common/parseUrl.ts b/packages/repack/src/commands/common/parseUrl.ts
new file mode 100644
index 000000000..06b840d89
--- /dev/null
+++ b/packages/repack/src/commands/common/parseUrl.ts
@@ -0,0 +1,28 @@
+export function parseUrl(url: string, platforms: string[], base = 'file:///') {
+  const { pathname, searchParams } = new URL(url, base);
+
+  let path = pathname;
+  let platform = searchParams.get('platform');
+
+  if (!platform) {
+    const pathArray = pathname.split('/');
+    const platformFromPath = pathArray[1];
+
+    if (platforms.includes(platformFromPath)) {
+      platform = platformFromPath;
+      path = pathArray.slice(2).join('/');
+    }
+  }
+
+  if (!platform) {
+    const [, platformOrName, name] = path.split('.').reverse();
+    if (name !== undefined && platforms.includes(platformOrName)) {
+      platform = platformOrName;
+    }
+  }
+
+  return {
+    resourcePath: path.replace(/^\//, ''),
+    platform: platform || undefined,
+  };
+}
diff --git a/packages/repack/src/commands/common/resolveProjectPath.ts b/packages/repack/src/commands/common/resolveProjectPath.ts
new file mode 100644
index 000000000..f5c293aa9
--- /dev/null
+++ b/packages/repack/src/commands/common/resolveProjectPath.ts
@@ -0,0 +1,19 @@
+import path from 'node:path';
+
+const projectRootPattern = /^\[projectRoot(?:\^(\d+))?\]$/;
+
+function isProjectPath(filepath: string) {
+  const root = filepath.split('/')[0];
+  return root.match(projectRootPattern);
+}
+
+// Resolve [projectRoot] and [projectRoot^N] prefixes
+export function resolveProjectPath(filepath: string, rootDir: string) {
+  const match = isProjectPath(filepath);
+  if (!match) return filepath;
+
+  const [prefix, upLevels] = match;
+  const upPath = '../'.repeat(Number(upLevels ?? 0));
+  const rootPath = path.join(rootDir, upPath);
+  return path.resolve(filepath.replace(prefix, rootPath));
+}
diff --git a/packages/repack/src/commands/rspack/Compiler.ts b/packages/repack/src/commands/rspack/Compiler.ts
index 50a007c9e..129b8789c 100644
--- a/packages/repack/src/commands/rspack/Compiler.ts
+++ b/packages/repack/src/commands/rspack/Compiler.ts
@@ -241,7 +241,9 @@ export class Compiler {
     }
 
     try {
-      const filePath = path.join(this.rootDir, filename);
+      const filePath = path.isAbsolute(filename)
+        ? filename
+        : path.join(this.rootDir, filename);
       const source = await fs.promises.readFile(filePath, 'utf8');
       return source;
     } catch {
diff --git a/packages/repack/src/commands/rspack/start.ts b/packages/repack/src/commands/rspack/start.ts
index 4d46d22d6..814f9562b 100644
--- a/packages/repack/src/commands/rspack/start.ts
+++ b/packages/repack/src/commands/rspack/start.ts
@@ -11,8 +11,9 @@ import { CLIError } from '../common/cliError.js';
 import { makeCompilerConfig } from '../common/config/makeCompilerConfig.js';
 import {
   getMimeType,
-  parseFileUrl,
+  parseUrl,
   resetPersistentCache,
+  resolveProjectPath,
   setupInteractions,
 } from '../common/index.js';
 import { runAdbReverse } from '../common/index.js';
@@ -41,12 +42,14 @@ export async function start(
     throw new CLIError(`Unrecognized platform: ${args.platform}`);
   }
 
+  const platforms = args.platform ? [args.platform] : detectedPlatforms;
+
   const configs = await makeCompilerConfig<Configuration>({
     args: args,
     bundler: 'rspack',
     command: 'start',
     rootDir: cliConfig.root,
-    platforms: args.platform ? [args.platform] : detectedPlatforms,
+    platforms: platforms,
     reactNativePath: cliConfig.reactNativePath,
   });
 
@@ -132,24 +135,32 @@ export async function start(
 
       return {
         compiler: {
-          getAsset: (filename, platform) => {
-            const parsedUrl = parseFileUrl(filename, 'file:///');
-            return compiler.getSource(parsedUrl.filename, platform);
+          getAsset: (url, platform) => {
+            const { resourcePath } = parseUrl(url, platforms);
+            return compiler.getSource(resourcePath, platform);
+          },
+          getMimeType: (filename) => {
+            return getMimeType(filename);
           },
-          getMimeType: (filename) => getMimeType(filename),
-          inferPlatform: (uri) => {
-            const { platform } = parseFileUrl(uri, 'file:///');
+          inferPlatform: (url) => {
+            const { platform } = parseUrl(url, platforms);
             return platform;
           },
         },
+        devTools: {
+          resolveProjectPath: (filepath) => {
+            return resolveProjectPath(filepath, cliConfig.root);
+          },
+        },
         symbolicator: {
-          getSource: (fileUrl) => {
-            const { filename, platform } = parseFileUrl(fileUrl);
-            return compiler.getSource(filename, platform);
+          getSource: (url) => {
+            let { resourcePath, platform } = parseUrl(url, platforms);
+            resourcePath = resolveProjectPath(resourcePath, cliConfig.root);
+            return compiler.getSource(resourcePath, platform);
           },
-          getSourceMap: (fileUrl) => {
-            const { filename, platform } = parseFileUrl(fileUrl);
-            return compiler.getSourceMap(filename, platform);
+          getSourceMap: (url) => {
+            const { resourcePath, platform } = parseUrl(url, platforms);
+            return compiler.getSourceMap(resourcePath, platform);
           },
           shouldIncludeFrame: (frame) => {
             // If the frame points to internal bootstrap/module system logic, skip the code frame.
diff --git a/packages/repack/src/commands/webpack/start.ts b/packages/repack/src/commands/webpack/start.ts
index b488dea62..b97747574 100644
--- a/packages/repack/src/commands/webpack/start.ts
+++ b/packages/repack/src/commands/webpack/start.ts
@@ -13,8 +13,9 @@ import { CLIError } from '../common/cliError.js';
 import { makeCompilerConfig } from '../common/config/makeCompilerConfig.js';
 import {
   getMimeType,
-  parseFileUrl,
+  parseUrl,
   resetPersistentCache,
+  resolveProjectPath,
   runAdbReverse,
   setupInteractions,
 } from '../common/index.js';
@@ -43,12 +44,14 @@ export async function start(
     throw new CLIError(`Unrecognized platform: ${args.platform}`);
   }
 
+  const platforms = args.platform ? [args.platform] : detectedPlatforms;
+
   const configs = await makeCompilerConfig<Configuration>({
     args: args,
     bundler: 'webpack',
     command: 'start',
     rootDir: cliConfig.root,
-    platforms: args.platform ? [args.platform] : detectedPlatforms,
+    platforms: platforms,
     reactNativePath: cliConfig.reactNativePath,
   });
 
@@ -171,28 +174,32 @@ export async function start(
 
       return {
         compiler: {
-          getAsset: (filename, platform, sendProgress) => {
-            const parsedUrl = parseFileUrl(filename, 'file:///');
-            return compiler.getSource(
-              parsedUrl.filename,
-              platform,
-              sendProgress
-            );
+          getAsset: (url, platform, sendProgress) => {
+            const { resourcePath } = parseUrl(url, platforms);
+            return compiler.getSource(resourcePath, platform, sendProgress);
+          },
+          getMimeType: (filename) => {
+            return getMimeType(filename);
           },
-          getMimeType: (filename) => getMimeType(filename),
-          inferPlatform: (uri) => {
-            const { platform } = parseFileUrl(uri, 'file:///');
+          inferPlatform: (url) => {
+            const { platform } = parseUrl(url, platforms);
             return platform;
           },
         },
+        devTools: {
+          resolveProjectPath: (filepath) => {
+            return resolveProjectPath(filepath, cliConfig.root);
+          },
+        },
         symbolicator: {
-          getSource: (fileUrl) => {
-            const { filename, platform } = parseFileUrl(fileUrl);
-            return compiler.getSource(filename, platform);
+          getSource: (url) => {
+            let { resourcePath, platform } = parseUrl(url, platforms);
+            resourcePath = resolveProjectPath(resourcePath, cliConfig.root);
+            return compiler.getSource(resourcePath, platform);
           },
-          getSourceMap: (fileUrl) => {
-            const { filename, platform } = parseFileUrl(fileUrl);
-            return compiler.getSourceMap(filename, platform);
+          getSourceMap: (url) => {
+            const { resourcePath, platform } = parseUrl(url, platforms);
+            return compiler.getSourceMap(resourcePath, platform);
           },
           shouldIncludeFrame: (frame) => {
             // If the frame points to internal bootstrap/module system logic, skip the code frame.
diff --git a/packages/repack/src/plugins/SourceMapPlugin.ts b/packages/repack/src/plugins/SourceMapPlugin.ts
index 8c36eb405..b91d430a2 100644
--- a/packages/repack/src/plugins/SourceMapPlugin.ts
+++ b/packages/repack/src/plugins/SourceMapPlugin.ts
@@ -1,7 +1,69 @@
-import type { Compiler as RspackCompiler } from '@rspack/core';
+import path from 'node:path';
+import type {
+  Compiler as RspackCompiler,
+  SourceMapDevToolPluginOptions,
+} from '@rspack/core';
 import type { Compiler as WebpackCompiler } from 'webpack';
 import { ConfigurationError } from './utils/ConfigurationError.js';
 
+type ModuleFilenameTemplate =
+  SourceMapDevToolPluginOptions['moduleFilenameTemplate'];
+type ModuleFilenameTemplateFn = Exclude<
+  ModuleFilenameTemplate,
+  string | undefined
+>;
+type ModuleFilenameTemplateFnCtx = Parameters<ModuleFilenameTemplateFn>[0];
+
+function devToolsmoduleFilenameTemplate(
+  namespace: string,
+  info: ModuleFilenameTemplateFnCtx
+) {
+  // inlined modules
+  if (!info.identifier) {
+    return `${namespace}`;
+  }
+
+  const [prefix, ...parts] = info.resourcePath.split('/');
+
+  // prefixed modules like React DevTools Backend
+  if (prefix !== '.' && prefix !== '..') {
+    const resourcePath = parts.filter((part) => part !== '..').join('/');
+    return `webpack://${prefix}/${resourcePath}`;
+  }
+
+  const hasValidAbsolutePath = path.isAbsolute(info.absoluteResourcePath);
+
+  // project root
+  if (hasValidAbsolutePath && info.resourcePath.startsWith('./')) {
+    return `[projectRoot]${info.resourcePath.slice(1)}`;
+  }
+
+  // outside of project root
+  if (hasValidAbsolutePath && info.resourcePath.startsWith('../')) {
+    const parts = info.resourcePath.split('/');
+    const upLevel = parts.filter((part) => part === '..').length;
+    const restPath = parts.slice(parts.lastIndexOf('..') + 1).join('/');
+    const rootRef = `[projectRoot^${upLevel}]`;
+    return `${rootRef}${restPath ? '/' + restPath : ''}`;
+  }
+
+  return `[unknownOrigin]/${path.basename(info.identifier)}`;
+}
+
+function defaultModuleFilenameTemplateHandler(
+  _: string,
+  info: ModuleFilenameTemplateFnCtx
+) {
+  if (!info.absoluteResourcePath.startsWith('/')) {
+    // handle inlined modules
+    if (info.query || info.loaders || info.allLoaders) {
+      return `inlined-${info.hash}`;
+    }
+  }
+  // use absolute path for all other modules
+  return info.absoluteResourcePath;
+}
+
 interface SourceMapPluginConfig {
   platform?: string;
 }
@@ -20,6 +82,18 @@ export class SourceMapPlugin {
       return;
     }
 
+    let moduleFilenameTemplateHandler: ModuleFilenameTemplateFn;
+    if (compiler.options.devServer) {
+      const host = compiler.options.devServer.host;
+      const port = compiler.options.devServer.port;
+      const namespace = `http://${host}:${port}`;
+      moduleFilenameTemplateHandler = (info: ModuleFilenameTemplateFnCtx) =>
+        devToolsmoduleFilenameTemplate(namespace, info);
+    } else {
+      moduleFilenameTemplateHandler = (info: ModuleFilenameTemplateFnCtx) =>
+        defaultModuleFilenameTemplateHandler('', info);
+    }
+
     const format = compiler.options.devtool;
     // disable builtin sourcemap generation
     compiler.options.devtool = false;
@@ -30,8 +104,8 @@ export class SourceMapPlugin {
     const devtoolNamespace =
       compiler.options.output.devtoolNamespace ??
       compiler.options.output.uniqueName;
-    const devtoolModuleFilenameTemplate =
-      compiler.options.output.devtoolModuleFilenameTemplate;
+    // const devtoolModuleFilenameTemplate =
+    //   compiler.options.output.devtoolModuleFilenameTemplate;
     const devtoolFallbackModuleFilenameTemplate =
       compiler.options.output.devtoolFallbackModuleFilenameTemplate;
 
@@ -54,14 +128,10 @@ export class SourceMapPlugin {
     const moduleMaps = format.includes('module');
     const noSources = format.includes('nosources');
 
-    // TODO Fix sourcemap directory structure
-    // Right now its very messy and not every node module is inside of the node module
-    // like React Devtools backend etc or some symilinked module appear with relative path
-    // We should normalize this through a custom handler and provide an output similar to Metro
     new compiler.webpack.SourceMapDevToolPlugin({
       test: /\.([cm]?jsx?|bundle)$/,
       filename: '[file].map',
-      moduleFilenameTemplate: devtoolModuleFilenameTemplate,
+      moduleFilenameTemplate: moduleFilenameTemplateHandler,
       fallbackModuleFilenameTemplate: devtoolFallbackModuleFilenameTemplate,
       append: hidden
         ? false
diff --git a/packages/repack/src/utils/getJsTransformRules.ts b/packages/repack/src/utils/getJsTransformRules.ts
index 49f6f7817..480d34754 100644
--- a/packages/repack/src/utils/getJsTransformRules.ts
+++ b/packages/repack/src/utils/getJsTransformRules.ts
@@ -85,15 +85,51 @@ export function getJsTransformRules(options?: GetJsTransformRulesOptions) {
       oneOf: [
         {
           test: /jsx?$/,
-          use: { loader: 'builtin:swc-loader', options: jsRules },
+          include: /node_modules/,
+          use: {
+            loader: 'builtin:swc-loader',
+            options: { ...jsRules, sourceMaps: false },
+          },
+        },
+        {
+          test: /jsx?$/,
+          exclude: /node_modules/,
+          use: {
+            loader: 'builtin:swc-loader',
+            options: { ...jsRules, sourceMaps: true },
+          },
         },
         {
           test: /ts$/,
-          use: { loader: 'builtin:swc-loader', options: tsRules },
+          include: /node_modules/,
+          use: {
+            loader: 'builtin:swc-loader',
+            options: { ...tsRules, sourceMaps: false },
+          },
+        },
+        {
+          test: /ts$/,
+          exclude: /node_modules/,
+          use: {
+            loader: 'builtin:swc-loader',
+            options: { ...tsRules, sourceMaps: true },
+          },
+        },
+        {
+          test: /tsx$/,
+          include: /node_modules/,
+          use: {
+            loader: 'builtin:swc-loader',
+            options: { ...tsxRules, sourceMaps: false },
+          },
         },
         {
           test: /tsx$/,
-          use: { loader: 'builtin:swc-loader', options: tsxRules },
+          exclude: /node_modules/,
+          use: {
+            loader: 'builtin:swc-loader',
+            options: { ...tsxRules, sourceMaps: true },
+          },
         },
       ],
     },