diff --git a/cli/args/mod.rs b/cli/args/mod.rs
index de5725a482..f936f9c256 100644
--- a/cli/args/mod.rs
+++ b/cli/args/mod.rs
@@ -280,6 +280,10 @@ impl CliOptions {
     self.overrides.import_map_specifier = Some(path);
   }
 
+  pub fn node_modules_dir(&self) -> bool {
+    self.flags.node_modules_dir
+  }
+
   /// Resolves the path to use for a local node_modules folder.
   pub fn resolve_local_node_modules_folder(
     &self,
diff --git a/cli/node/mod.rs b/cli/node/mod.rs
index 64e08becb7..190f386a76 100644
--- a/cli/node/mod.rs
+++ b/cli/node/mod.rs
@@ -391,14 +391,19 @@ static RESERVED_WORDS: Lazy<HashSet<&str>> = Lazy::new(|| {
 
 pub async fn initialize_runtime(
   js_runtime: &mut JsRuntime,
+  uses_local_node_modules_dir: bool,
 ) -> Result<(), AnyError> {
   let source_code = &format!(
-    r#"(async function loadBuiltinNodeModules(moduleAllUrl, nodeGlobalThisName) {{
+    r#"(async function loadBuiltinNodeModules(moduleAllUrl, nodeGlobalThisName, usesLocalNodeModulesDir) {{
       const moduleAll = await import(moduleAllUrl);
       Deno[Deno.internal].node.initialize(moduleAll.default, nodeGlobalThisName);
-    }})('{}', '{}');"#,
+      if (usesLocalNodeModulesDir) {{
+        Deno[Deno.internal].require.setUsesLocalNodeModulesDir();
+      }}
+    }})('{}', '{}', {});"#,
     MODULE_ALL_URL.as_str(),
     NODE_GLOBAL_THIS_NAME.as_str(),
+    uses_local_node_modules_dir,
   );
 
   let value =
diff --git a/cli/tools/repl/session.rs b/cli/tools/repl/session.rs
index f67396d42b..3f6528f3b1 100644
--- a/cli/tools/repl/session.rs
+++ b/cli/tools/repl/session.rs
@@ -456,7 +456,11 @@ impl ReplSession {
     if !npm_imports.is_empty() {
       if !self.has_initialized_node_runtime {
         self.proc_state.prepare_node_std_graph().await?;
-        crate::node::initialize_runtime(&mut self.worker.js_runtime).await?;
+        crate::node::initialize_runtime(
+          &mut self.worker.js_runtime,
+          self.proc_state.options.node_modules_dir(),
+        )
+        .await?;
         self.has_initialized_node_runtime = true;
       }
 
diff --git a/cli/worker.rs b/cli/worker.rs
index 03d0728e68..81dcf5ca25 100644
--- a/cli/worker.rs
+++ b/cli/worker.rs
@@ -309,7 +309,11 @@ impl CliMainWorker {
 
   async fn initialize_main_module_for_node(&mut self) -> Result<(), AnyError> {
     self.ps.prepare_node_std_graph().await?;
-    node::initialize_runtime(&mut self.worker.js_runtime).await?;
+    node::initialize_runtime(
+      &mut self.worker.js_runtime,
+      self.ps.options.node_modules_dir(),
+    )
+    .await?;
     if let DenoSubcommand::Run(flags) = self.ps.options.sub_command() {
       if let Ok(pkg_ref) = NpmPackageReference::from_str(&flags.script) {
         // if the user ran a binary command, we'll need to set process.argv[0]
@@ -621,7 +625,11 @@ fn create_web_worker_pre_execute_module_callback(
     let fut = async move {
       // this will be up to date after pre-load
       if ps.npm_resolver.has_packages() {
-        node::initialize_runtime(&mut worker.js_runtime).await?;
+        node::initialize_runtime(
+          &mut worker.js_runtime,
+          ps.options.node_modules_dir(),
+        )
+        .await?;
       }
 
       Ok(worker)
diff --git a/ext/node/02_require.js b/ext/node/02_require.js
index 53921c2425..2174ff8a9f 100644
--- a/ext/node/02_require.js
+++ b/ext/node/02_require.js
@@ -71,6 +71,8 @@
   let mainModule = null;
   let hasBrokenOnInspectBrk = false;
   let hasInspectBrk = false;
+  // Are we running with --node-modules-dir flag?
+  let usesLocalNodeModulesDir = false;
 
   function stat(filename) {
     // TODO: required only on windows
@@ -359,10 +361,10 @@
       const isRelative = ops.op_require_is_request_relative(
         request,
       );
-      // TODO(bartlomieju): could be a single op
-      const basePath = (isDenoDirPackage && !isRelative)
-        ? pathResolve(curPath, packageSpecifierSubPath(request))
-        : pathResolve(curPath, request);
+      const basePath =
+        (isDenoDirPackage && !isRelative && !usesLocalNodeModulesDir)
+          ? pathResolve(curPath, packageSpecifierSubPath(request))
+          : pathResolve(curPath, request);
       let filename;
 
       const rc = stat(basePath);
@@ -915,6 +917,9 @@
   window.__bootstrap.internals = {
     ...window.__bootstrap.internals ?? {},
     require: {
+      setUsesLocalNodeModulesDir() {
+        usesLocalNodeModulesDir = true;
+      },
       setInspectBrk() {
         hasInspectBrk = true;
       },