diff --git a/docker/dev/.env b/.env.dev.example
similarity index 68%
rename from docker/dev/.env
rename to .env.dev.example
index 8e5aaf70..a39f96f9 100644
--- a/docker/dev/.env
+++ b/.env.dev.example
@@ -1,3 +1,4 @@
+# Development environment configuration for Docker
 APP_ENV=dev
 APP_DEBUG=true
 SERVER_NAME=:80
diff --git a/docker/.env b/.env.docker.example
similarity index 100%
rename from docker/.env
rename to .env.docker.example
diff --git a/.env.example b/.env.example
new file mode 100644
index 00000000..b68effdf
--- /dev/null
+++ b/.env.example
@@ -0,0 +1,12 @@
+# Application environment: dev, test, prod
+APP_ENV=dev
+
+# Enable debug mode (true/false)
+APP_DEBUG=true
+
+# Docker-specific settings (optional for non-Docker deployments)
+# SERVER_NAME=:80
+# XDEBUG_MODE=develop
+# COMPOSER_CACHE_DIR=/app/runtime/cache/composer
+# APP_C3=false
+# APP_HOST_PATH=/path/to/app
diff --git a/.env.override.example b/.env.override.example
new file mode 100644
index 00000000..296546e8
--- /dev/null
+++ b/.env.override.example
@@ -0,0 +1,3 @@
+# Override settings for local development (optional)
+# Copy this file to .env.dev for custom local settings
+# APP_HOST_PATH=/your/custom/path
diff --git a/.env.prod.example b/.env.prod.example
new file mode 100644
index 00000000..4872f2cd
--- /dev/null
+++ b/.env.prod.example
@@ -0,0 +1,4 @@
+# Production environment configuration for Docker
+APP_ENV=prod
+APP_DEBUG=false
+SERVER_NAME=:80
diff --git a/docker/test/.env b/.env.test.example
similarity index 73%
rename from docker/test/.env
rename to .env.test.example
index 7e1dd8ae..15bbcab3 100644
--- a/docker/test/.env
+++ b/.env.test.example
@@ -1,3 +1,4 @@
+# Test environment configuration for Docker
 APP_ENV=test
 APP_DEBUG=false
 APP_C3=true
diff --git a/.gitignore b/.gitignore
index 806d488f..f9593a2d 100644
--- a/.gitignore
+++ b/.gitignore
@@ -24,3 +24,11 @@ Thumbs.db
 
 # Codeception C3
 c3.php
+
+# Environment configuration
+/.env
+/.env.dev
+/.env.prod
+/.env.test
+/.env.override
+/.env.docker
diff --git a/docker/Dockerfile b/Dockerfile
similarity index 99%
rename from docker/Dockerfile
rename to Dockerfile
index 3c4711d1..42bf31a0 100644
--- a/docker/Dockerfile
+++ b/Dockerfile
@@ -50,7 +50,7 @@ USER ${USER_NAME}
 
 FROM base AS prod-builder
 COPY --from=composer /composer /usr/bin/composer
-COPY .. /app
+COPY . /app
 RUN --mount=type=cache,target=/tmp/cache \
     composer install --no-dev --no-progress --no-interaction --classmap-authoritative && \
     rm composer.lock composer.json
diff --git a/Makefile b/Makefile
index 49d15055..47024b1f 100644
--- a/Makefile
+++ b/Makefile
@@ -7,7 +7,7 @@ else
 PRIMARY_GOAL := $(firstword $(MAKECMDGOALS))
 endif
 
-include docker/.env
+-include .env.docker
 
 # Current user ID and group ID except MacOS where it conflicts with Docker abilities
 ifeq ($(shell uname), Darwin)
@@ -19,8 +19,8 @@ else
 endif
 
 export COMPOSE_PROJECT_NAME=${STACK_NAME}
-DOCKER_COMPOSE_DEV := docker compose -f docker/compose.yml -f docker/dev/compose.yml
-DOCKER_COMPOSE_TEST := docker compose -f docker/compose.yml -f docker/test/compose.yml
+DOCKER_COMPOSE_DEV := docker compose -f compose.yml -f compose.dev.yml
+DOCKER_COMPOSE_TEST := docker compose -f compose.yml -f compose.test.yml
 
 #
 # Development
@@ -112,7 +112,7 @@ endif
 
 ifeq ($(PRIMARY_GOAL),prod-build)
 prod-build: ## PROD | Build an image
-	docker build --file docker/Dockerfile --target prod --pull -t ${IMAGE}:${IMAGE_TAG} .
+	docker build --file Dockerfile --target prod --pull -t ${IMAGE}:${IMAGE_TAG} .
 endif
 
 ifeq ($(PRIMARY_GOAL),prod-push)
@@ -122,7 +122,7 @@ endif
 
 ifeq ($(PRIMARY_GOAL),prod-deploy)
 prod-deploy: ## PROD | Deploy to production
-	docker -H ${PROD_SSH} stack deploy --prune --detach=false --with-registry-auth -c docker/compose.yml -c docker/prod/compose.yml ${STACK_NAME}
+	docker -H ${PROD_SSH} stack deploy --prune --detach=false --with-registry-auth -c compose.yml -c compose.prod.yml ${STACK_NAME}
 endif
 
 #
diff --git a/README.md b/README.md
index ea34260c..0aad8765 100644
--- a/README.md
+++ b/README.md
@@ -44,8 +44,27 @@ composer create-project yiisoft/app myproject
 cd myproject
 ```
 
+Configure the environment by creating a `.env` file from the example:
+
+```shell
+cp .env.example .env
+```
+
+The `.env` file allows you to configure the application environment and other settings:
+- `APP_ENV`: Application environment (`dev`, `test`, or `prod`)
+- `APP_DEBUG`: Enable debug mode (`true` or `false`)
+
+> **Note:** The `.env` file is excluded from version control. When deployed to production without a `.env` file,
+> the application will default to the `prod` environment.
+
 To run the app:
 
+```shell
+./yii serve
+```
+
+Or with explicit environment override:
+
 ```shell
 APP_ENV=dev ./yii serve
 ```
@@ -62,9 +81,18 @@ Fork the repository, clone it, then:
 
 ```shell
 cd myproject
+cp .env.docker.example .env.docker
 make composer update
 ```
 
+Docker uses environment-specific configuration files from the root directory:
+- `.env.docker` - Docker-specific variables (stack name, ports, image names, etc.)
+- `.env.dev.example` - Development environment (used by default)
+- `.env.prod.example` - Production environment
+- `.env.test.example` - Test environment
+
+You can customize settings by creating override files (e.g., `.env.dev`) which are automatically loaded if present.
+
 To run the app:
 
 ```shell
@@ -90,13 +118,24 @@ make help
 The application template has the following structure:
 
 ```
+.dockerignore           Docker ignore file
+.env.example            Example environment configuration for local development
+.env.docker.example     Docker-specific variables (stack name, ports, image names, etc.)
+.env.dev.example        Docker development environment configuration
+.env.prod.example       Docker production environment configuration
+.env.test.example       Docker test environment configuration
+.env.override.example   Example override file for custom local settings
+Dockerfile              Docker image definition
+compose.yml             Base Docker Compose configuration
+compose.dev.yml         Docker Compose configuration for development
+compose.prod.yml        Docker Compose configuration for production
+compose.test.yml        Docker Compose configuration for testing
 assets/                 Asset bundle source files.
 config/                 Configuration files.
     common/             Common configuration and DI definitions.
     console/            Console-specific configuration.
     environments/       Environment-specific configuration (dev/test/prod).
     web/                Web-specific configuration.
-docker/                 Docker-specific files.
 public/                 Files publically accessible from the Internet.
     assets/             Published/compiled assets.
     index.php           Entry script.
diff --git a/docker/dev/compose.yml b/compose.dev.yml
similarity index 62%
rename from docker/dev/compose.yml
rename to compose.dev.yml
index e980164e..de0feb37 100644
--- a/docker/dev/compose.yml
+++ b/compose.dev.yml
@@ -1,21 +1,21 @@
 services:
   app:
     build:
-      dockerfile: docker/Dockerfile
-      context: ..
+      dockerfile: Dockerfile
+      context: .
       target: dev
       args:
         USER_ID: ${UID}
         GROUP_ID: ${GID}
     env_file:
-      - path: ./dev/.env
-      - path: ./dev/override.env
+      - path: .env.dev.example
+      - path: .env.dev
         required: false
     ports:
       - "${DEV_PORT:-80}:80"
     volumes:
-      - ../:/app
-      - ../runtime:/app/runtime
+      - ./:/app
+      - ./runtime:/app/runtime
       - caddy_data:/data
       - caddy_config:/config
     tty: true
diff --git a/docker/prod/compose.yml b/compose.prod.yml
similarity index 92%
rename from docker/prod/compose.yml
rename to compose.prod.yml
index 7c090f2d..e43b5453 100644
--- a/docker/prod/compose.yml
+++ b/compose.prod.yml
@@ -8,8 +8,8 @@ services:
       - caddy_data:/data
       - caddy_config:/config
     env_file:
-      - path: ./prod/.env
-      - path: ./prod/override.env
+      - path: .env.prod.example
+      - path: .env.prod
         required: false
     deploy:
       replicas: 2
diff --git a/docker/test/compose.yml b/compose.test.yml
similarity index 58%
rename from docker/test/compose.yml
rename to compose.test.yml
index e3d42992..4c28e4e7 100644
--- a/docker/test/compose.yml
+++ b/compose.test.yml
@@ -1,19 +1,19 @@
 services:
   app:
     build:
-      dockerfile: docker/Dockerfile
-      context: ..
+      dockerfile: Dockerfile
+      context: .
       target: dev
       args:
         USER_ID: ${UID}
         GROUP_ID: ${GID}
     env_file:
-      - path: ./test/.env
-      - path: ./test/override.env
+      - path: .env.test.example
+      - path: .env.test
         required: false
     volumes:
-      - ../:/app
-      - ../runtime:/app/runtime
+      - ./:/app
+      - ./runtime:/app/runtime
       - caddy_data:/data
       - caddy_config:/config
     tty: true
diff --git a/docker/compose.yml b/compose.yml
similarity index 100%
rename from docker/compose.yml
rename to compose.yml
diff --git a/composer.json b/composer.json
index 719e4a04..920c1775 100644
--- a/composer.json
+++ b/composer.json
@@ -42,6 +42,7 @@
         "psr/http-server-handler": "^1.0.2",
         "psr/log": "^3.0.2",
         "symfony/console": "^7.3.4",
+        "vlucas/phpdotenv": "^5.6",
         "yiisoft/aliases": "^3.1",
         "yiisoft/assets": "^5.1.1",
         "yiisoft/config": "^1.6",
diff --git a/docker/dev/.gitignore b/docker/dev/.gitignore
deleted file mode 100644
index bbaa3679..00000000
--- a/docker/dev/.gitignore
+++ /dev/null
@@ -1 +0,0 @@
-/override.env
diff --git a/docker/dev/override.env.example b/docker/dev/override.env.example
deleted file mode 100644
index 3a285b74..00000000
--- a/docker/dev/override.env.example
+++ /dev/null
@@ -1 +0,0 @@
-APP_HOST_PATH=/projects/yiisoft/app
diff --git a/docker/prod/.env b/docker/prod/.env
deleted file mode 100644
index 78648a87..00000000
--- a/docker/prod/.env
+++ /dev/null
@@ -1,3 +0,0 @@
-APP_ENV=prod
-APP_DEBUG=false
-SERVER_NAME=:80
diff --git a/docker/prod/.gitignore b/docker/prod/.gitignore
deleted file mode 100644
index bbaa3679..00000000
--- a/docker/prod/.gitignore
+++ /dev/null
@@ -1 +0,0 @@
-/override.env
diff --git a/docker/test/.gitignore b/docker/test/.gitignore
deleted file mode 100644
index bbaa3679..00000000
--- a/docker/test/.gitignore
+++ /dev/null
@@ -1 +0,0 @@
-/override.env
diff --git a/src/Environment.php b/src/Environment.php
index fd834d58..da1c1512 100644
--- a/src/Environment.php
+++ b/src/Environment.php
@@ -80,13 +80,13 @@ private static function setEnvironment(): void
     {
         $environment = self::getRawValue('APP_ENV');
 
-        if (!in_array($environment, self::ENVIRONMENTS, true)) {
-            if ($environment === null) {
-                $message = 'APP_ENV environment variable is empty.';
-            } else {
-                $message = sprintf('APP_ENV="%s" environment is invalid.', $environment);
-            }
+        // Default to prod when APP_ENV is not set (production deployment scenario)
+        if ($environment === null) {
+            $environment = self::PROD;
+        }
 
+        if (!in_array($environment, self::ENVIRONMENTS, true)) {
+            $message = sprintf('APP_ENV="%s" environment is invalid.', $environment);
             $message .= sprintf(' Valid values are "%s".', implode('", "', self::ENVIRONMENTS));
 
             throw new RuntimeException($message);
diff --git a/src/autoload.php b/src/autoload.php
index 3ed4f694..f3737f80 100644
--- a/src/autoload.php
+++ b/src/autoload.php
@@ -3,7 +3,18 @@
 declare(strict_types=1);
 
 use App\Environment;
+use Dotenv\Dotenv;
 
 require_once dirname(__DIR__) . '/vendor/autoload.php';
 
+// Load .env file if it exists (for non-Docker environments)
+// Skip loading if APP_ENV is already set (Docker/CI optimization)
+if (!isset($_ENV['APP_ENV']) && getenv('APP_ENV') === false) {
+    $rootDir = dirname(__DIR__);
+    if (file_exists($rootDir . '/.env')) {
+        $dotenv = Dotenv::createImmutable($rootDir);
+        $dotenv->safeLoad();
+    }
+}
+
 Environment::prepare();