diff --git a/cloudinit/sources/DataSourceAzure.py b/cloudinit/sources/DataSourceAzure.py
index 261993fe1ce..414619342f6 100644
--- a/cloudinit/sources/DataSourceAzure.py
+++ b/cloudinit/sources/DataSourceAzure.py
@@ -5,7 +5,6 @@
 # This file is part of cloud-init. See LICENSE file for license information.
 
 import base64
-import functools
 import logging
 import os
 import os.path
@@ -50,31 +49,6 @@
 )
 from cloudinit.url_helper import UrlError
 
-try:
-    with warnings.catch_warnings():
-        warnings.simplefilter("ignore", category=DeprecationWarning)
-        import crypt  # pylint: disable=W4901
-
-    blowfish_hash: Any = functools.partial(
-        crypt.crypt, salt=f"$6${util.rand_str(strlen=16)}"
-    )
-except (ImportError, AttributeError):
-    try:
-        import passlib.hash
-
-        blowfish_hash = passlib.hash.sha512_crypt.hash
-    except ImportError:
-
-        def blowfish_hash(_):
-            """Raise when called so that importing this module doesn't throw
-            ImportError when ds_detect() returns false. In this case, crypt
-            and passlib are not needed.
-            """
-            raise ImportError(
-                "crypt and passlib not found, missing dependency"
-            )
-
-
 LOG = logging.getLogger(__name__)
 
 DS_NAME = "Azure"
@@ -166,6 +140,35 @@ def find_dev_from_busdev(camcontrol_out: str, busdev: str) -> Optional[str]:
     return None
 
 
+def hash_password(password: str) -> str:
+    """Hash a password using SHA-512 crypt.
+
+    Try to use crypt, falling back to passlib.
+
+    If neither are available, raise ReportableErrorImportError.
+
+    :param password: plaintext password to hash.
+    :return: The hashed password string.
+    :raises ReportableErrorImportError: If crypt and passlib are unavailable.
+    """
+    try:
+        with warnings.catch_warnings():
+            warnings.simplefilter("ignore", category=DeprecationWarning)
+            import crypt  # pylint: disable=W4901
+
+        salt = crypt.mksalt(crypt.METHOD_SHA512)
+        return crypt.crypt(password, salt)
+    except (ImportError, AttributeError):
+        pass
+
+    try:
+        import passlib.hash
+
+        return passlib.hash.sha512_crypt.hash(password)
+    except ImportError as error:
+        raise errors.ReportableErrorImportError(error=error) from error
+
+
 def normalize_mac_address(mac: str) -> str:
     """Normalize mac address with colons and lower-case."""
     if len(mac) == 12:
@@ -1984,7 +1987,7 @@ def read_azure_ovf(contents):
     if ovf_env.password:
         defuser["lock_passwd"] = False
         if DEF_PASSWD_REDACTION != ovf_env.password:
-            defuser["hashed_passwd"] = encrypt_pass(ovf_env.password)
+            defuser["hashed_passwd"] = hash_password(ovf_env.password)
 
     if defuser:
         cfg["system_info"] = {"default_user": defuser}
@@ -2009,10 +2012,6 @@ def read_azure_ovf(contents):
     return (md, ud, cfg)
 
 
-def encrypt_pass(password):
-    return blowfish_hash(password)
-
-
 def find_primary_nic():
     candidate_nics = net.find_candidate_nics()
     if candidate_nics:
diff --git a/cloudinit/sources/azure/errors.py b/cloudinit/sources/azure/errors.py
index ae676a08d29..8ef9515304b 100644
--- a/cloudinit/sources/azure/errors.py
+++ b/cloudinit/sources/azure/errors.py
@@ -168,6 +168,13 @@ def __init__(self, *, exception: ValueError) -> None:
         self.supporting_data["exception"] = repr(exception)
 
 
+class ReportableErrorImportError(ReportableError):
+    def __init__(self, *, error: ImportError) -> None:
+        super().__init__(f"error importing {error.name} library")
+
+        self.supporting_data["error"] = repr(error)
+
+
 class ReportableErrorOsDiskPpsFailure(ReportableError):
     def __init__(self) -> None:
         super().__init__("error waiting for host shutdown")
diff --git a/tests/unittests/sources/azure/test_errors.py b/tests/unittests/sources/azure/test_errors.py
index d9dcf13d555..7b405368d39 100644
--- a/tests/unittests/sources/azure/test_errors.py
+++ b/tests/unittests/sources/azure/test_errors.py
@@ -211,6 +211,15 @@ def test_imds_metadata_parsing_exception():
     assert error.supporting_data["exception"] == repr(exception)
 
 
+def test_import_error():
+    exception = ImportError("No module named 'foobar'", name="foobar")
+
+    error = errors.ReportableErrorImportError(error=exception)
+
+    assert error.reason == "error importing foobar library"
+    assert error.supporting_data["error"] == repr(exception)
+
+
 def test_ovf_parsing_exception():
     error = None
     try:
diff --git a/tests/unittests/sources/test_azure.py b/tests/unittests/sources/test_azure.py
index 67373e1ef1e..3f552dab559 100644
--- a/tests/unittests/sources/test_azure.py
+++ b/tests/unittests/sources/test_azure.py
@@ -1,16 +1,21 @@
 # This file is part of cloud-init. See LICENSE file for license information.
 # pylint: disable=attribute-defined-outside-init
 
+import builtins
 import copy
 import datetime
 import json
 import logging
 import os
 import stat
+import sys
 import xml.etree.ElementTree as ET
 from pathlib import Path
 
-import passlib.hash
+try:
+    import passlib.hash
+except ImportError:
+    passlib = None  # type: ignore
 import pytest
 import requests
 
@@ -1732,12 +1737,13 @@ def test_username_used(self, get_ds):
 
         assert "ssh_pwauth" not in dsrc.cfg
 
+    @pytest.mark.skipif(passlib is None, reason="passlib not installed")
     def test_password_given(self, get_ds, mocker):
         # The crypt module has platform-specific behavior and the purpose of
         # this test isn't to verify the differences between crypt and passlib,
         # so hardcode passlib usage as crypt is deprecated.
         mocker.patch.object(
-            dsaz, "blowfish_hash", passlib.hash.sha512_crypt.hash
+            dsaz, "hash_password", passlib.hash.sha512_crypt.hash
         )
         data = {
             "ovfcontent": construct_ovf_env(
@@ -2434,6 +2440,19 @@ def test_wb_invalid_ovf_env_xml_calls_read_azure_ovf(self, tmp_path):
             == cm.value.reason
         )
 
+    def test_import_error_from_failed_import(self):
+        """Attempt to import a module that is not present"""
+        try:
+            import nonexistent_module_that_will_never_exist  # type: ignore[import-not-found] # noqa: F401 # isort:skip
+        except ImportError as error:
+            reportable_error = errors.ReportableErrorImportError(error=error)
+
+            assert (
+                reportable_error.reason == "error importing "
+                "nonexistent_module_that_will_never_exist library"
+            )
+            assert reportable_error.supporting_data["error"] == repr(error)
+
 
 class TestReadAzureOvf:
     def test_invalid_xml_raises_non_azure_ds(self):
@@ -5630,14 +5649,6 @@ def test_missing_secondary(
         assert azure_ds.validate_imds_network_metadata(imds_md) is False
 
 
-class TestDependencyFallback:
-    def test_dependency_fallback(self):
-        """Ensure that crypt/passlib import failover gets exercised on all
-        Python versions
-        """
-        assert dsaz.encrypt_pass("`")
-
-
 class TestQueryVmId:
     @mock.patch.object(
         identity, "query_system_uuid", side_effect=["test-system-uuid"]
@@ -5700,3 +5711,102 @@ def test_query_vm_id_vm_id_conversion_failure(
 
         mock_query_system_uuid.assert_called_once()
         mock_convert_uuid.assert_called_once_with("test-system-uuid")
+
+
+class TestHashPassword:
+    """Tests for the hash_password function."""
+
+    def test_dependency_fallback(self):
+        """Ensure that crypt/passlib import failover gets exercised on all
+        Python versions
+        """
+        result = dsaz.hash_password("`")
+        assert result
+        assert result.startswith("$6$")
+
+    def test_crypt_working(self):
+        """Test that hash_password uses crypt when available."""
+        mock_crypt = mock.MagicMock()
+        mock_crypt.METHOD_SHA512 = "sha512"
+        mock_crypt.mksalt.return_value = "$6$saltvalue"
+        mock_crypt.crypt.return_value = "$6$saltvalue$hashedpassword"
+
+        with mock.patch.dict("sys.modules", {"crypt": mock_crypt}):
+            result = dsaz.hash_password("testpassword")
+
+        mock_crypt.mksalt.assert_called_once_with("sha512")
+        mock_crypt.crypt.assert_called_once_with(
+            "testpassword", "$6$saltvalue"
+        )
+        assert result == "$6$saltvalue$hashedpassword"
+
+    def test_crypt_not_installed_passlib_fallback(self):
+        """Test that hash_password falls back to passlib when missing crypt."""
+        real_import = builtins.__import__
+        passlib_available = True
+        try:
+            import passlib.hash as _passlib_hash
+        except ImportError:
+            passlib_available = False
+
+        if passlib_available:
+            # passlib is installed; block crypt and let passlib work normally
+            def mock_import(name, *args, **kwargs):
+                if name == "crypt":
+                    raise ImportError("No module named 'crypt'")
+                return real_import(name, *args, **kwargs)
+
+            with mock.patch.object(
+                builtins, "__import__", side_effect=mock_import
+            ):
+                result = dsaz.hash_password("testpassword")
+
+            # Verify we got a valid SHA-512 hash from passlib
+            assert result.startswith("$6$")
+            assert _passlib_hash.sha512_crypt.verify("testpassword", result)
+        else:
+            # passlib is not installed; mock it to return a known hash
+            mock_passlib_hash = mock.MagicMock()
+            mock_passlib_hash.sha512_crypt.hash.return_value = (
+                "$6$mocksalt$mockedhash"
+            )
+
+            def mock_import(name, *args, **kwargs):
+                if name == "crypt":
+                    raise ImportError("No module named 'crypt'")
+                if name == "passlib.hash":
+                    mod = mock.MagicMock()
+                    mod.hash = mock_passlib_hash
+                    sys.modules["passlib"] = mod
+                    sys.modules["passlib.hash"] = mock_passlib_hash
+                    return mod
+                return real_import(name, *args, **kwargs)
+
+            with mock.patch.object(
+                builtins, "__import__", side_effect=mock_import
+            ):
+                result = dsaz.hash_password("testpassword")
+
+            assert result == "$6$mocksalt$mockedhash"
+            mock_passlib_hash.sha512_crypt.hash.assert_called_once_with(
+                "testpassword"
+            )
+
+    def test_crypt_and_passlib_unavailable_raises_error(self):
+        """Test that hash_password raises ReportableErrorImportError."""
+        real_import = builtins.__import__
+
+        def mock_import(name, *args, **kwargs):
+            if name == "crypt":
+                raise ImportError("No module named 'crypt'")
+            if name == "passlib.hash":
+                raise ImportError("No module named 'passlib'", name="passlib")
+            return real_import(name, *args, **kwargs)
+
+        with mock.patch.object(
+            builtins, "__import__", side_effect=mock_import
+        ):
+            with pytest.raises(errors.ReportableErrorImportError) as exc_info:
+                dsaz.hash_password("testpassword")
+
+            assert "passlib" in exc_info.value.reason