diff --git a/.chronus/changes/copilot-fix-interpolating-invalid-references-2026-1-9-13-16-6.md b/.chronus/changes/copilot-fix-interpolating-invalid-references-2026-1-9-13-16-6.md
new file mode 100644
index 00000000000..6368670162f
--- /dev/null
+++ b/.chronus/changes/copilot-fix-interpolating-invalid-references-2026-1-9-13-16-6.md
@@ -0,0 +1,7 @@
+---
+changeKind: fix
+packages:
+  - "@typespec/compiler"
+---
+
+Don't report `non-literal-string-template` diagnostic when interpolating an invalid reference
\ No newline at end of file
diff --git a/packages/compiler/src/core/helpers/string-template-utils.ts b/packages/compiler/src/core/helpers/string-template-utils.ts
index 3fd9cb660c6..349f74ad746 100644
--- a/packages/compiler/src/core/helpers/string-template-utils.ts
+++ b/packages/compiler/src/core/helpers/string-template-utils.ts
@@ -1,5 +1,6 @@
 import { createDiagnosticCollector } from "../diagnostics.js";
 import { createDiagnostic } from "../messages.js";
+import { isErrorType } from "../type-utils.js";
 import type { Diagnostic, StringTemplate } from "../types.js";
 
 export function isStringTemplateSerializable(
@@ -35,12 +36,14 @@ export function explainStringTemplateNotSerializable(
           }
         // eslint-disable-next-line no-fallthrough
         default:
-          diagnostics.add(
-            createDiagnostic({
-              code: "non-literal-string-template",
-              target: span,
-            }),
-          );
+          if (!isErrorType(span.type)) {
+            diagnostics.add(
+              createDiagnostic({
+                code: "non-literal-string-template",
+                target: span,
+              }),
+            );
+          }
       }
     }
   }
diff --git a/packages/compiler/test/checker/values/string-values.test.ts b/packages/compiler/test/checker/values/string-values.test.ts
index 383adc1f08d..f8642586c83 100644
--- a/packages/compiler/test/checker/values/string-values.test.ts
+++ b/packages/compiler/test/checker/values/string-values.test.ts
@@ -87,6 +87,14 @@ describe("string templates", () => {
         "Value interpolated in this string template cannot be converted to a string. Only literal types can be automatically interpolated.",
     });
   });
+
+  it("only emit invalid-ref error when interpolating an invalid reference, not non-literal-string-template", async () => {
+    const diagnostics = await diagnoseValue(`string("Some \${bad}")`);
+    expectDiagnostics(diagnostics, {
+      code: "invalid-ref",
+      message: "Unknown identifier bad",
+    });
+  });
 });
 
 describe("validate literal are assignable", () => {