diff --git a/extensions/sql-database-projects/src/common/constants.ts b/extensions/sql-database-projects/src/common/constants.ts
index 51f0635bd5..2ea87124af 100644
--- a/extensions/sql-database-projects/src/common/constants.ts
+++ b/extensions/sql-database-projects/src/common/constants.ts
@@ -538,6 +538,7 @@ export const hostFileName = 'host.json';
 export const sqlExtensionPackageName = 'Microsoft.Azure.WebJobs.Extensions.Sql';
 export const placeHolderObject = '[dbo].[table1]';
 export const sqlBindingsHelpLink = 'https://github.com/Azure/azure-functions-sql-extension/blob/main/README.md';
+export const passwordPlaceholder = '******';
 
 export const input = localize('input', "Input");
 export const output = localize('output', "Output");
@@ -570,4 +571,9 @@ export const connectionProfile = localize('connectionProfile', 'Select a connect
 export const userConnectionString = localize('userConnectionString', 'Enter connection string');
 export const selectConnectionString = localize('selectConnectionString', 'Select SQL connection string method');
 export const selectConnectionError = (err?: any) => err ? localize('selectConnectionError', "Failed to set connection string app setting: {0}", utils.getErrorMessage(err)) : localize('unableToSetConnectionString', "Failed to set connection string app setting");
-
+export const includePassword = localize('includePassword', 'Do you want to include the password from this connection in your local.settings.json file?');
+export const enterPasswordPrompt = localize('enterPasswordPrompt', 'Enter the password to be used for the connection string');
+export const enterPasswordManually = localize('enterPasswordManually', 'Enter password or press escape to cancel');
+export const userPasswordLater = localize('userPasswordLater', 'In order to user the SQL connection string later you will need to manually enter the password in your local.settings.json file.');
+export const openFile = localize('openFile', "Open File");
+export const closeButton = localize('closeButton', "Close");
diff --git a/extensions/sql-database-projects/src/dialogs/addSqlBindingQuickpick.ts b/extensions/sql-database-projects/src/dialogs/addSqlBindingQuickpick.ts
index c5c8ca3ffb..15f7a3bc94 100644
--- a/extensions/sql-database-projects/src/dialogs/addSqlBindingQuickpick.ts
+++ b/extensions/sql-database-projects/src/dialogs/addSqlBindingQuickpick.ts
@@ -5,7 +5,7 @@
 
 import * as vscode from 'vscode';
 import * as path from 'path';
-import { BindingType } from 'vscode-mssql';
+import { BindingType, IConnectionInfo } from 'vscode-mssql';
 import * as constants from '../common/constants';
 import * as utils from '../common/utils';
 import * as azureFunctionsUtils from '../common/azureFunctionsUtils';
@@ -167,6 +167,8 @@ export async function launchAddSqlBindingQuickpick(uri: vscode.Uri | undefined,
 					}
 
 					let connectionString: string = '';
+					let includePassword: string | undefined;
+					let connectionInfo: IConnectionInfo | undefined;
 					if (selectedConnectionStringMethod === constants.userConnectionString) {
 						// User chooses to enter connection string manually
 						connectionString = await vscode.window.showInputBox(
@@ -180,7 +182,7 @@ export async function launchAddSqlBindingQuickpick(uri: vscode.Uri | undefined,
 					} else {
 						// Let user choose from existing connections to create connection string from
 						let connectionUri: string = '';
-						const connectionInfo = await vscodeMssqlApi.promptForConnection(true);
+						connectionInfo = await vscodeMssqlApi.promptForConnection(true);
 						if (!connectionInfo) {
 							// User cancelled return to selectedConnectionStringMethod prompt
 							continue;
@@ -194,7 +196,22 @@ export async function launchAddSqlBindingQuickpick(uri: vscode.Uri | undefined,
 							continue;
 						}
 						try {
-							connectionString = await vscodeMssqlApi.getConnectionString(connectionUri, false, false);
+							// Prompt to include password in connection string if authentication type is SqlLogin and connection has password saved
+							if (connectionInfo.authenticationType === 'SqlLogin' && connectionInfo.password) {
+								includePassword = await vscode.window.showQuickPick([constants.yesString, constants.noString], {
+									title: constants.includePassword,
+									canPickMany: false,
+									ignoreFocusOut: true
+								});
+								if (includePassword === constants.yesString) {
+									// set connection string to include password
+									connectionString = await vscodeMssqlApi.getConnectionString(connectionUri, true, false);
+								}
+							}
+							// set connection string to not include the password if connection info does not include password, or user chooses to not include password, or authentication type is not sql login
+							if (includePassword !== constants.yesString) {
+								connectionString = await vscodeMssqlApi.getConnectionString(connectionUri, false, false);
+							}
 						} catch (e) {
 							// failed to get connection string for selected connection and will go back to prompt for connection string methods
 							console.warn(e);
@@ -204,7 +221,33 @@ export async function launchAddSqlBindingQuickpick(uri: vscode.Uri | undefined,
 					}
 					if (connectionString) {
 						try {
-							const success = await azureFunctionsUtils.setLocalAppSetting(path.dirname(projectUri.fsPath), newConnectionStringSettingName, connectionString);
+							const projectFolder: string = path.dirname(projectUri.fsPath);
+							const localSettingsPath: string = path.join(projectFolder, constants.azureFunctionLocalSettingsFileName);
+							let userPassword: string | undefined;
+							// Ask user to enter password if auth type is sql login and password is not saved
+							if (connectionInfo?.authenticationType === 'SqlLogin' && !connectionInfo?.password) {
+								userPassword = await vscode.window.showInputBox({
+									prompt: constants.enterPasswordPrompt,
+									placeHolder: constants.enterPasswordManually,
+									ignoreFocusOut: true,
+									password: true,
+									validateInput: input => input ? undefined : constants.valueMustNotBeEmpty
+								});
+								if (userPassword) {
+									// if user enters password replace password placeholder with user entered password
+									connectionString = connectionString.replace(constants.passwordPlaceholder, userPassword);
+								}
+							}
+							if (includePassword !== constants.yesString && !userPassword && connectionInfo?.authenticationType === 'SqlLogin') {
+								// if user does not want to include password or user does not enter password, show warning message that they will have to enter it manually later in local.settings.json
+								void vscode.window.showWarningMessage(constants.userPasswordLater, constants.openFile, constants.closeButton).then(async (result) => {
+									if (result === constants.openFile) {
+										// open local.settings.json file
+										void vscode.commands.executeCommand(constants.vscodeOpenCommand, vscode.Uri.file(localSettingsPath));
+									}
+								});
+							}
+							const success = await azureFunctionsUtils.setLocalAppSetting(projectFolder, newConnectionStringSettingName, connectionString);
 							if (success) {
 								// exit both loops and insert binding
 								connectionStringSettingName = newConnectionStringSettingName;