diff --git a/assets/settings/default.json b/assets/settings/default.json
index ecf8b896c4..d8e713d932 100644
--- a/assets/settings/default.json
+++ b/assets/settings/default.json
@@ -713,6 +713,10 @@
     //
     // Default: false
     "sort_by_path": false,
+    // Whether to collapse untracked files in the diff panel.
+    //
+    // Default: false
+    "collapse_untracked_diff": false,
     "scrollbar": {
       // When to show the scrollbar in the git panel.
       //
diff --git a/crates/git_ui/src/git_panel_settings.rs b/crates/git_ui/src/git_panel_settings.rs
index a8ae31f859..b6891c7d25 100644
--- a/crates/git_ui/src/git_panel_settings.rs
+++ b/crates/git_ui/src/git_panel_settings.rs
@@ -70,6 +70,11 @@ pub struct GitPanelSettingsContent {
     ///
     /// Default: false
     pub sort_by_path: Option<bool>,
+
+    /// Whether to collapse untracked files in the diff panel.
+    ///
+    /// Default: false
+    pub collapse_untracked_diff: Option<bool>,
 }
 
 #[derive(Deserialize, Debug, Clone, PartialEq)]
@@ -81,6 +86,7 @@ pub struct GitPanelSettings {
     pub scrollbar: ScrollbarSettings,
     pub fallback_branch_name: String,
     pub sort_by_path: bool,
+    pub collapse_untracked_diff: bool,
 }
 
 impl Settings for GitPanelSettings {
diff --git a/crates/git_ui/src/project_diff.rs b/crates/git_ui/src/project_diff.rs
index 88c0ff71d5..c1a34b2314 100644
--- a/crates/git_ui/src/project_diff.rs
+++ b/crates/git_ui/src/project_diff.rs
@@ -177,12 +177,19 @@ impl ProjectDiff {
         );
 
         let mut was_sort_by_path = GitPanelSettings::get_global(cx).sort_by_path;
+        let mut was_collapse_untracked_diff =
+            GitPanelSettings::get_global(cx).collapse_untracked_diff;
         cx.observe_global::<SettingsStore>(move |this, cx| {
             let is_sort_by_path = GitPanelSettings::get_global(cx).sort_by_path;
-            if is_sort_by_path != was_sort_by_path {
+            let is_collapse_untracked_diff =
+                GitPanelSettings::get_global(cx).collapse_untracked_diff;
+            if is_sort_by_path != was_sort_by_path
+                || is_collapse_untracked_diff != was_collapse_untracked_diff
+            {
                 *this.update_needed.borrow_mut() = ();
             }
-            was_sort_by_path = is_sort_by_path
+            was_sort_by_path = is_sort_by_path;
+            was_collapse_untracked_diff = is_collapse_untracked_diff;
         })
         .detach();
 
@@ -461,7 +468,11 @@ impl ProjectDiff {
                     selections.select_ranges([0..0])
                 });
             }
-            if is_excerpt_newly_added && diff_buffer.file_status.is_deleted() {
+            if is_excerpt_newly_added
+                && (diff_buffer.file_status.is_deleted()
+                    || (diff_buffer.file_status.is_untracked()
+                        && GitPanelSettings::get_global(cx).collapse_untracked_diff))
+            {
                 editor.fold_buffer(snapshot.text.remote_id(), cx)
             }
         });