diff --git a/CHANGELOG.md b/CHANGELOG.md
index 2b7dc36084..75e434c2e6 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -7,6 +7,10 @@ and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0
 
 ## Unreleased
 
+- `opentelemetry-instrumentation-aws-lambda` Adds an option to configure `disable_aws_context_propagation` by
+  environment variable: `OTEL_LAMBDA_DISABLE_AWS_CONTEXT_PROPAGATION`
+  ([#1507](https://github.com/open-telemetry/opentelemetry-python-contrib/pull/1507))
+
 ## Version 1.15.0/0.36b0 (2022-12-10)
 
 - Add uninstrument test for sqlalchemy
diff --git a/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py b/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py
index 35dcec9491..d33da79876 100644
--- a/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py
+++ b/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py
@@ -101,6 +101,9 @@ def custom_event_context_extractor(lambda_event):
 OTEL_INSTRUMENTATION_AWS_LAMBDA_FLUSH_TIMEOUT = (
     "OTEL_INSTRUMENTATION_AWS_LAMBDA_FLUSH_TIMEOUT"
 )
+OTEL_LAMBDA_DISABLE_AWS_CONTEXT_PROPAGATION = (
+    "OTEL_LAMBDA_DISABLE_AWS_CONTEXT_PROPAGATION"
+)
 
 
 def _default_event_context_extractor(lambda_event: Any) -> Context:
@@ -408,6 +411,16 @@ def _instrument(self, **kwargs):
                 flush_timeout_env,
             )
 
+        disable_aws_context_propagation = kwargs.get(
+            "disable_aws_context_propagation", False
+        ) or os.getenv(
+            OTEL_LAMBDA_DISABLE_AWS_CONTEXT_PROPAGATION, "False"
+        ).strip().lower() in (
+            "true",
+            "1",
+            "t",
+        )
+
         _instrument(
             self._wrapped_module_name,
             self._wrapped_function_name,
@@ -416,9 +429,7 @@ def _instrument(self, **kwargs):
                 "event_context_extractor", _default_event_context_extractor
             ),
             tracer_provider=kwargs.get("tracer_provider"),
-            disable_aws_context_propagation=kwargs.get(
-                "disable_aws_context_propagation", False
-            ),
+            disable_aws_context_propagation=disable_aws_context_propagation,
         )
 
     def _uninstrument(self, **kwargs):
diff --git a/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py b/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py
index 3837c0bdaa..b828be5487 100644
--- a/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py
+++ b/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py
@@ -27,6 +27,7 @@
     _HANDLER,
     _X_AMZN_TRACE_ID,
     OTEL_INSTRUMENTATION_AWS_LAMBDA_FLUSH_TIMEOUT,
+    OTEL_LAMBDA_DISABLE_AWS_CONTEXT_PROPAGATION,
     AwsLambdaInstrumentor,
 )
 from opentelemetry.propagate import get_global_textmap
@@ -168,6 +169,7 @@ class TestCase:
             expected_state_value: str = None
             expected_trace_state_len: int = 0
             disable_aws_context_propagation: bool = False
+            disable_aws_context_propagation_envvar: str = ""
 
         def custom_event_context_extractor(lambda_event):
             return get_global_textmap().extract(lambda_event["foo"]["headers"])
@@ -238,6 +240,23 @@ def custom_event_context_extractor(lambda_event):
                 expected_state_value=MOCK_W3C_TRACE_STATE_VALUE,
                 xray_traceid=MOCK_XRAY_TRACE_CONTEXT_SAMPLED,
             ),
+            TestCase(
+                name="no_custom_extractor_xray_disable_aws_propagation_via_env_var",
+                custom_extractor=None,
+                context={
+                    "headers": {
+                        TraceContextTextMapPropagator._TRACEPARENT_HEADER_NAME: MOCK_W3C_TRACE_CONTEXT_SAMPLED,
+                        TraceContextTextMapPropagator._TRACESTATE_HEADER_NAME: f"{MOCK_W3C_TRACE_STATE_KEY}={MOCK_W3C_TRACE_STATE_VALUE},foo=1,bar=2",
+                    }
+                },
+                disable_aws_context_propagation=False,
+                disable_aws_context_propagation_envvar="true",
+                expected_traceid=MOCK_W3C_TRACE_ID,
+                expected_parentid=MOCK_W3C_PARENT_SPAN_ID,
+                expected_trace_state_len=3,
+                expected_state_value=MOCK_W3C_TRACE_STATE_VALUE,
+                xray_traceid=MOCK_XRAY_TRACE_CONTEXT_SAMPLED,
+            ),
         ]
         for test in tests:
             test_env_patch = mock.patch.dict(
@@ -246,6 +265,7 @@ def custom_event_context_extractor(lambda_event):
                     **os.environ,
                     # NOT Active Tracing
                     _X_AMZN_TRACE_ID: test.xray_traceid,
+                    OTEL_LAMBDA_DISABLE_AWS_CONTEXT_PROPAGATION: test.disable_aws_context_propagation_envvar,
                     # NOT using the X-Ray Propagator
                     OTEL_PROPAGATORS: "tracecontext",
                 },