diff --git a/core/config/project_settings.cpp b/core/config/project_settings.cpp
index c65a2a5bc6c..28fbc785011 100644
--- a/core/config/project_settings.cpp
+++ b/core/config/project_settings.cpp
@@ -1250,6 +1250,9 @@ ProjectSettings::ProjectSettings() {
 	GLOBAL_DEF_INTERNAL("application/config/features", PackedStringArray());
 	GLOBAL_DEF_INTERNAL("internationalization/locale/translation_remaps", PackedStringArray());
 	GLOBAL_DEF_INTERNAL("internationalization/locale/translations", PackedStringArray());
+
+	GLOBAL_DEF("rendering/textures/vram_compression/minimum_size", 512);
+	custom_prop_info["rendering/textures/vram_compression/minimum_size"] = PropertyInfo(Variant::INT, "rendering/textures/vram_compression/minimum_size", PROPERTY_HINT_RANGE, "16,16384,1");
 }
 
 ProjectSettings::~ProjectSettings() {
diff --git a/doc/classes/ProjectSettings.xml b/doc/classes/ProjectSettings.xml
index 6fd3f9f9fc0..2c28a297cf6 100644
--- a/doc/classes/ProjectSettings.xml
+++ b/doc/classes/ProjectSettings.xml
@@ -1933,6 +1933,11 @@
 			If [code]true[/code], the texture importer will import VRAM-compressed textures using the S3 Texture Compression algorithm. This algorithm is only supported on desktop platforms and consoles.
 			[b]Note:[/b] Changing this setting does [i]not[/i] impact textures that were already imported before. To make this setting apply to textures that were already imported, exit the editor, remove the [code].godot/imported/[/code] folder located inside the project folder then restart the editor (see [member application/config/use_hidden_project_data_directory]).
 		</member>
+		<member name="rendering/textures/vram_compression/minimum_size" type="int" setter="" getter="" default="512">
+			When a texture is detected as used in 3D in the editor, only enable VRAM compression if its size is greater than or equal to [code]minimum_size * minimum_size[/code] pixels. This is done to prevent reducing texture quality when it doesn't save much video memory, especially for pixel art.
+			For non-square textures, the pixel count is used. For example, with [member rendering/textures/vram_compression/minimum_size] set to [code]512[/code], a 512×512 texture will use VRAM compression, while 256×256 textures, 256×512 and 1024×64 textures will keep their existing compression mode (Lossless by default).
+			[b]Note:[/b] This project setting only affects textures that are detected to be used in 3D at a given time. Textures that were already imported will not be affected by changes to this setting. To force 3D detection to occur again, select a texture in the FileSystem dock, change its Detect 3D import option in the Import dock to [b]VRAM Compressed[/b] or [b]Basis Universal[/b] then click [b]Reimport[/b].
+		</member>
 		<member name="rendering/vulkan/descriptor_pools/max_descriptors_per_pool" type="int" setter="" getter="" default="64">
 		</member>
 		<member name="rendering/vulkan/rendering/back_end" type="int" setter="" getter="" default="0">
diff --git a/editor/import/resource_importer_texture.cpp b/editor/import/resource_importer_texture.cpp
index deb30478649..a055dca8ada 100644
--- a/editor/import/resource_importer_texture.cpp
+++ b/editor/import/resource_importer_texture.cpp
@@ -65,6 +65,15 @@ void ResourceImporterTexture::_texture_reimport_3d(const Ref<CompressedTexture2D
 	}
 
 	singleton->make_flags[path].flags |= MAKE_3D_FLAG;
+
+	// For small textures, don't use VRAM compression as it decreases quality too much compared to the memory saved.
+	// The minimum size for VRAM compression is defined on each axis.
+	// It is then squared to handle non-square input texture sizes in a more human-readable manner.
+	const float minimum_size = float(GLOBAL_GET("rendering/textures/vram_compression/minimum_size"));
+	if (p_tex->get_width() * p_tex->get_height() >= int(Math::pow(minimum_size, 2.0f) - CMP_EPSILON)) {
+		// Texture is larger than `minimum_size × minimum_size` pixels (if square).
+		singleton->make_flags[path].flags |= MAKE_VRAM_COMPRESS_FLAG;
+	}
 }
 
 void ResourceImporterTexture::_texture_reimport_normal(const Ref<CompressedTexture2D> &p_tex) {
@@ -103,7 +112,33 @@ void ResourceImporterTexture::update_imports() {
 
 			bool changed = false;
 
-			if (E.value.flags & MAKE_NORMAL_FLAG && int(cf->get_value("params", "compress/normal_map")) == 0) {
+			if (E.value.flags & MAKE_3D_FLAG && bool(cf->get_value("params", "detect_3d/compress_to"))) {
+				if (E.value.flags & MAKE_VRAM_COMPRESS_FLAG) {
+					// Texture is large enough to benefit from VRAM compression.
+					const int compress_to = cf->get_value("params", "detect_3d/compress_to");
+					String compress_string;
+					if (compress_to == 1) {
+						cf->set_value("params", "compress/mode", COMPRESS_VRAM_COMPRESSED);
+						compress_string = "VRAM Compressed (S3TC/ETC/BPTC)";
+					} else if (compress_to == 2) {
+						cf->set_value("params", "compress/mode", COMPRESS_BASIS_UNIVERSAL);
+						compress_string = "Basis Universal";
+					}
+					print_line(vformat(TTR("%s: Texture detected as used in 3D. Enabling mipmap generation and setting the texture compression mode to %s."), String(E.key), compress_string));
+				} else {
+					print_line(vformat(TTR("%s: Small texture detected as used in 3D. Enabling mipmap generation but not VRAM compression."), String(E.key)));
+				}
+
+				cf->set_value("params", "mipmaps/generate", true);
+				cf->set_value("params", "detect_3d/compress_to", 0);
+
+				changed = true;
+			}
+
+			if (E.value.flags & MAKE_NORMAL_FLAG && int(cf->get_value("params", "compress/normal_map")) == 0 && int(cf->get_value("params", "compress/mode")) != COMPRESS_LOSSLESS) {
+				// Normal map compression is not available for textures with Lossless compression.
+				// This is ignored in the importer, but printing a message about normal map compression
+				// being enabled in this case is misleading.
 				print_line(vformat(TTR("%s: Texture detected as used as a normal map in 3D. Enabling red-green texture compression to reduce memory usage (blue channel is discarded)."), String(E.key)));
 				cf->set_value("params", "compress/normal_map", 1);
 				changed = true;
@@ -116,22 +151,6 @@ void ResourceImporterTexture::update_imports() {
 				changed = true;
 			}
 
-			if (E.value.flags & MAKE_3D_FLAG && bool(cf->get_value("params", "detect_3d/compress_to"))) {
-				const int compress_to = cf->get_value("params", "detect_3d/compress_to");
-				String compress_string;
-				cf->set_value("params", "detect_3d/compress_to", 0);
-				if (compress_to == 1) {
-					cf->set_value("params", "compress/mode", COMPRESS_VRAM_COMPRESSED);
-					compress_string = "VRAM Compressed (S3TC/ETC/BPTC)";
-				} else if (compress_to == 2) {
-					cf->set_value("params", "compress/mode", COMPRESS_BASIS_UNIVERSAL);
-					compress_string = "Basis Universal";
-				}
-				print_line(vformat(TTR("%s: Texture detected as used in 3D. Enabling mipmap generation and setting the texture compression mode to %s."), String(E.key), compress_string));
-				cf->set_value("params", "mipmaps/generate", true);
-				changed = true;
-			}
-
 			if (changed) {
 				cf->save(src_path);
 				to_reimport.push_back(E.key);
diff --git a/editor/import/resource_importer_texture.h b/editor/import/resource_importer_texture.h
index 7def2d4f77d..e65c15ae785 100644
--- a/editor/import/resource_importer_texture.h
+++ b/editor/import/resource_importer_texture.h
@@ -54,8 +54,9 @@ public:
 protected:
 	enum {
 		MAKE_3D_FLAG = 1,
-		MAKE_ROUGHNESS_FLAG = 2,
-		MAKE_NORMAL_FLAG = 4
+		MAKE_VRAM_COMPRESS_FLAG = 2,
+		MAKE_ROUGHNESS_FLAG = 4,
+		MAKE_NORMAL_FLAG = 8,
 	};
 
 	Mutex mutex;