diff --git a/lib/rules/prefer-use-template-ref.js b/lib/rules/prefer-use-template-ref.js
index 916583e9f..7d01958b7 100644
--- a/lib/rules/prefer-use-template-ref.js
+++ b/lib/rules/prefer-use-template-ref.js
@@ -6,14 +6,42 @@
 
 const utils = require('../utils')
 
-/** @param expression {Expression | null} */
-function expressionIsRef(expression) {
-  return (
+/**
+ * @typedef ScriptRef
+ * @type {{node: Expression, ref: string}}
+ */
+
+/**
+ * @param declarator {VariableDeclarator}
+ * @returns {ScriptRef}
+ * */
+function convertDeclaratorToScriptRef(declarator) {
+  return {
+    // @ts-ignore
+    node: declarator.init,
     // @ts-ignore
-    expression?.callee?.name === 'ref' ||
+    ref: declarator.id.name
+  }
+}
+
+/**
+ * @param body {(Statement | ModuleDeclaration)[]}
+ * @returns {ScriptRef[]}
+ * */
+function getScriptRefsFromSetupFunction(body) {
+  /** @type {VariableDeclaration[]} */
+  const variableDeclarations = body.filter(
+    (child) => child.type === 'VariableDeclaration'
+  )
+  const variableDeclarators = variableDeclarations.map(
+    (declaration) => declaration.declarations[0]
+  )
+  const refDeclarators = variableDeclarators.filter((declarator) =>
     // @ts-ignore
-    expression?.callee?.name === 'shallowRef'
+    ['ref', 'shallowRef'].includes(declarator.init?.callee?.name)
   )
+
+  return refDeclarators.map(convertDeclaratorToScriptRef)
 }
 
 /** @type {import("eslint").Rule.RuleModule} */
@@ -36,40 +64,33 @@ module.exports = {
     /** @type Set<string> */
     const templateRefs = new Set()
 
-    /**
-     * @typedef ScriptRef
-     * @type {{node: Expression, ref: string}}
-     */
-
     /**
      * @type ScriptRef[] */
     const scriptRefs = []
 
     return utils.compositingVisitors(
-      utils.defineTemplateBodyVisitor(
-        context,
-        {
-          'VAttribute[directive=false]'(node) {
-            if (node.key.name === 'ref' && node.value?.value) {
-              templateRefs.add(node.value.value)
-            }
+      utils.defineTemplateBodyVisitor(context, {
+        'VAttribute[directive=false]'(node) {
+          if (node.key.name === 'ref' && node.value?.value) {
+            templateRefs.add(node.value.value)
           }
-        },
-        {
-          VariableDeclarator(declarator) {
-            if (!expressionIsRef(declarator.init)) {
-              return
-            }
+        }
+      }),
+      utils.defineVueVisitor(context, {
+        onSetupFunctionEnter(node) {
+          // @ts-ignore
+          const newScriptRefs = getScriptRefsFromSetupFunction(node.body.body)
 
-            scriptRefs.push({
-              // @ts-ignore
-              node: declarator.init,
-              // @ts-ignore
-              ref: declarator.id.name
-            })
-          }
+          scriptRefs.push(...newScriptRefs)
+        }
+      }),
+      utils.defineScriptSetupVisitor(context, {
+        Program(node) {
+          const newScriptRefs = getScriptRefsFromSetupFunction(node.body)
+
+          scriptRefs.push(...newScriptRefs)
         }
-      ),
+      }),
       {
         'Program:exit'() {
           for (const templateRef of templateRefs) {
diff --git a/tests/lib/rules/prefer-use-template-ref.js b/tests/lib/rules/prefer-use-template-ref.js
index fe1ee2d2f..77020cdcf 100644
--- a/tests/lib/rules/prefer-use-template-ref.js
+++ b/tests/lib/rules/prefer-use-template-ref.js
@@ -197,6 +197,61 @@ tester.run('prefer-use-template-ref', rule, {
         const button = ref();
         </script>
       `
+    },
+    {
+      filename: 'ref-in-block.vue',
+      code: `
+      <template>
+          <div>
+            <ul>
+              <li ref="firstListItem">Morning</li>
+              <li ref="second">Afternoon</li>
+              <li>Evening</li>
+            </ul>
+          </div>
+      </template>
+      <script setup>
+        import { ref, shallowRef } from 'vue';
+        function getFirstListItemElement() {
+          const firstListItem = ref();
+          const nestedCallback = () => {
+            const second = shallowRef();
+            console.log(second);
+          }
+          nestedCallback();
+        }
+      </script>
+      `
+    },
+    {
+      filename: 'ref-in-block-setup-fn.vue',
+      code: `
+      <template>
+          <div>
+            <ul>
+              <li ref="firstListItem">Morning</li>
+              <li ref="second">Afternoon</li>
+              <li>Evening</li>
+            </ul>
+          </div>
+      </template>
+      <script>
+        import { ref, shallowRef } from 'vue';
+        export default {
+          name: 'ComponentWithRefInBlock',
+          setup() {
+            function getFirstListItemElement() {
+              const firstListItem = shallowRef();
+              const nestedCallback = () => {
+                const second = ref();
+                console.log(second);
+              }
+              nestedCallback();
+            }
+          }
+        }
+      </script>
+      `
     }
   ],
   invalid: [
@@ -278,36 +333,6 @@ tester.run('prefer-use-template-ref', rule, {
         }
       ]
     },
-    {
-      filename: 'ref-in-block.vue',
-      code: `
-      <template>
-          <div>
-            <ul>
-              <li ref="firstListItem">Morning</li>
-              <li>Afternoon</li>
-              <li>Evening</li>
-            </ul>
-          </div>
-      </template>
-      <script setup>
-        import { ref } from 'vue';
-        function getFirstListItemElement() {
-          const firstListItem = ref();
-        }
-      </script>
-      `,
-      errors: [
-        {
-          messageId: 'preferUseTemplateRef',
-          data: {
-            name: 'ref'
-          },
-          line: 14,
-          column: 33
-        }
-      ]
-    },
     {
       filename: 'setup-function-only-refs.vue',
       code: `