diff --git a/packages/react/src/ActionList/ActionListContainerContext.tsx b/packages/react/src/ActionList/ActionListContainerContext.tsx
index dee24bd8df7..1127042aa56 100644
--- a/packages/react/src/ActionList/ActionListContainerContext.tsx
+++ b/packages/react/src/ActionList/ActionListContainerContext.tsx
@@ -13,6 +13,7 @@ type ContextProps = {
   // to be more specific here, this is as good as (...args: any[]) => unknown
   // eslint-disable-next-line @typescript-eslint/ban-types
   afterSelect?: Function
+  enableFocusZone?: boolean
 }
 
 export const ActionListContainerContext = React.createContext<ContextProps>({})
diff --git a/packages/react/src/ActionList/List.tsx b/packages/react/src/ActionList/List.tsx
index 980425fd6b1..c6dc26d415a 100644
--- a/packages/react/src/ActionList/List.tsx
+++ b/packages/react/src/ActionList/List.tsx
@@ -9,6 +9,8 @@ import {useSlots} from '../hooks/useSlots'
 import {Heading} from './Heading'
 import {useId} from '../hooks/useId'
 import {ListContext, type ActionListProps} from './shared'
+import {useProvidedRefOrCreate} from '../hooks'
+import {FocusKeys, useFocusZone} from '../hooks/useFocusZone'
 
 const ListBox = styled.ul<SxProp>(sx)
 
@@ -34,10 +36,18 @@ export const List = React.forwardRef<HTMLUListElement, ActionListProps>(
       listRole,
       listLabelledBy,
       selectionVariant: containerSelectionVariant, // TODO: Remove after DropdownMenu2 deprecation
+      enableFocusZone,
     } = React.useContext(ActionListContainerContext)
 
     const ariaLabelledBy = slots.heading ? slots.heading.props.id ?? headingId : listLabelledBy
 
+    const listRef = useProvidedRefOrCreate(forwardedRef as React.RefObject<HTMLUListElement>)
+    useFocusZone({
+      disabled: !enableFocusZone,
+      containerRef: listRef,
+      bindKeys: FocusKeys.ArrowVertical | FocusKeys.HomeAndEnd | FocusKeys.PageUpDown,
+    })
+
     return (
       <ListContext.Provider
         value={{
@@ -54,7 +64,7 @@ export const List = React.forwardRef<HTMLUListElement, ActionListProps>(
           role={role || listRole}
           aria-labelledby={ariaLabelledBy}
           {...props}
-          ref={forwardedRef}
+          ref={listRef}
         >
           {childrenWithoutSlots}
         </ListBox>
diff --git a/packages/react/src/drafts/SelectPanel2/SelectPanel.examples.stories.tsx b/packages/react/src/drafts/SelectPanel2/SelectPanel.examples.stories.tsx
index fff5fa47d0e..8af24311ad5 100644
--- a/packages/react/src/drafts/SelectPanel2/SelectPanel.examples.stories.tsx
+++ b/packages/react/src/drafts/SelectPanel2/SelectPanel.examples.stories.tsx
@@ -1,6 +1,6 @@
 import React from 'react'
 import {SelectPanel} from './SelectPanel'
-import {ActionList, ActionMenu, Avatar, Box, Button, Text, Octicon, Flash} from '../../index'
+import {ActionList, ActionMenu, Avatar, Box, Button, Text, Octicon, Flash, FormControl, TextInput} from '../../index'
 import {Dialog} from '../../drafts'
 import {
   ArrowRightIcon,
@@ -12,6 +12,7 @@ import {
   GitPullRequestIcon,
   GitMergeIcon,
   GitPullRequestDraftIcon,
+  PlusCircleIcon,
 } from '@primer/octicons-react'
 import data from './mock-story-data'
 
@@ -846,6 +847,219 @@ export const NestedSelection = () => {
   )
 }
 
+export const CreateNewRow = () => {
+  const initialSelectedLabels = data.issue.labelIds // mock initial state: has selected labels
+  const [selectedLabelIds, setSelectedLabelIds] = React.useState<string[]>(initialSelectedLabels)
+
+  /* Selection */
+  const onLabelSelect = (labelId: string) => {
+    if (!selectedLabelIds.includes(labelId)) setSelectedLabelIds([...selectedLabelIds, labelId])
+    else setSelectedLabelIds(selectedLabelIds.filter(id => id !== labelId))
+  }
+  const onClearSelection = () => {
+    setSelectedLabelIds([])
+  }
+
+  const onSubmit = () => {
+    data.issue.labelIds = selectedLabelIds // pretending to persist changes
+  }
+
+  /* Filtering */
+  const [filteredLabels, setFilteredLabels] = React.useState(data.labels)
+  const [query, setQuery] = React.useState('')
+
+  const onSearchInputChange: React.ChangeEventHandler<HTMLInputElement> = event => {
+    const query = event.currentTarget.value
+    setQuery(query)
+
+    if (query === '') setFilteredLabels(data.labels)
+    else {
+      setFilteredLabels(
+        data.labels
+          .map(label => {
+            if (label.name.toLowerCase().startsWith(query)) return {priority: 1, label}
+            else if (label.name.toLowerCase().includes(query)) return {priority: 2, label}
+            else if (label.description?.toLowerCase().includes(query)) return {priority: 3, label}
+            else return {priority: -1, label}
+          })
+          .filter(result => result.priority > 0)
+          .map(result => result.label),
+      )
+    }
+  }
+
+  const sortingFn = (itemA: {id: string}, itemB: {id: string}) => {
+    const initialSelectedIds = data.issue.labelIds
+    if (initialSelectedIds.includes(itemA.id) && initialSelectedIds.includes(itemB.id)) return 1
+    else if (initialSelectedIds.includes(itemA.id)) return -1
+    else if (initialSelectedIds.includes(itemB.id)) return 1
+    else return 1
+  }
+
+  const itemsToShow = query ? filteredLabels : data.labels.sort(sortingFn)
+
+  /* 
+    Controlled state + Create new label Dialog 
+    We only have to do this until https://github.com/primer/react/pull/3840 is merged
+  */
+  const [panelOpen, setPanelOpen] = React.useState(false)
+  const [newLabelDialogOpen, setNewLabelDialogOpen] = React.useState(false)
+
+  const openCreateLabelDialog = () => {
+    setPanelOpen(false)
+    setNewLabelDialogOpen(true)
+  }
+
+  const onNewLabelDialogSave = (id: string) => {
+    setNewLabelDialogOpen(false)
+
+    setQuery('') // clear search input
+    onLabelSelect(id) // select newly created label
+
+    setPanelOpen(true)
+
+    // focus newly created label once it renders
+    window.requestAnimationFrame(() => {
+      const newLabelElement = document.querySelector(`[data-id=${id}]`) as HTMLLIElement
+      newLabelElement.focus()
+    })
+  }
+
+  return (
+    <>
+      <h1>Create new item from panel</h1>
+
+      <SelectPanel
+        title="Select labels"
+        open={panelOpen}
+        onSubmit={onSubmit}
+        onCancel={() => setPanelOpen(false)}
+        onClearSelection={onClearSelection}
+      >
+        <SelectPanel.Button onClick={() => setPanelOpen(true)}>Assign label</SelectPanel.Button>
+
+        <SelectPanel.Header>
+          <SelectPanel.SearchInput value={query} onChange={onSearchInputChange} />
+        </SelectPanel.Header>
+
+        {itemsToShow.length === 0 ? (
+          <SelectPanel.Message variant="empty" title={`No labels found for "${query}"`}>
+            <Text>Select the button below to create this label</Text>
+            <Button onClick={openCreateLabelDialog}>Create &quot;{query}&quot;</Button>
+          </SelectPanel.Message>
+        ) : (
+          <>
+            <ActionList>
+              {itemsToShow.map(label => (
+                <ActionList.Item
+                  key={label.id}
+                  onSelect={() => onLabelSelect(label.id)}
+                  selected={selectedLabelIds.includes(label.id)}
+                  data-id={label.id}
+                >
+                  <ActionList.LeadingVisual>
+                    <Box
+                      sx={{width: 14, height: 14, borderRadius: '100%'}}
+                      style={{backgroundColor: `#${label.color}`}}
+                    />
+                  </ActionList.LeadingVisual>
+                  {label.name}
+                  <ActionList.Description variant="block">{label.description}</ActionList.Description>
+                </ActionList.Item>
+              ))}
+            </ActionList>
+            {query && (
+              <Box sx={{padding: 2, borderTop: '1px solid', borderColor: 'border.default', flexShrink: 0}}>
+                <Button
+                  variant="invisible"
+                  leadingVisual={PlusCircleIcon}
+                  block
+                  alignContent="start"
+                  sx={{'[data-component=text]': {fontWeight: 'normal'}}}
+                  onClick={openCreateLabelDialog}
+                >
+                  Create new label &quot;{query}&quot;...
+                </Button>
+              </Box>
+            )}
+          </>
+        )}
+
+        <SelectPanel.Footer>
+          <SelectPanel.SecondaryAction variant="button">Edit labels</SelectPanel.SecondaryAction>
+        </SelectPanel.Footer>
+      </SelectPanel>
+
+      {newLabelDialogOpen && (
+        <CreateNewLabelDialog
+          initialValue={query}
+          onSave={onNewLabelDialogSave}
+          onCancel={() => {
+            setNewLabelDialogOpen(false)
+            setPanelOpen(true)
+          }}
+        />
+      )}
+    </>
+  )
+}
+
+const CreateNewLabelDialog = ({
+  initialValue,
+  onSave,
+  onCancel,
+}: {
+  initialValue: string
+  onSave: (id: string) => void
+  onCancel: () => void
+}) => {
+  const formSubmitRef = React.useRef<HTMLButtonElement>(null)
+
+  const onSubmit = (event: React.FormEvent<HTMLFormElement>) => {
+    event.preventDefault()
+
+    const formData = new FormData(event.target as HTMLFormElement)
+    const {name, color, description} = Object.fromEntries(formData) as Record<string, string>
+
+    // pretending to persist changes
+    const id = Math.random().toString(26).slice(6)
+    const createdAt = new Date().toISOString()
+    data.labels.unshift({id, name, color, description, createdAt})
+    onSave(id)
+  }
+
+  return (
+    <Dialog
+      title="Create new Label"
+      onClose={onCancel}
+      width="medium"
+      footerButtons={[
+        {buttonType: 'default', content: 'Cancel', onClick: onCancel},
+        {type: 'submit', buttonType: 'primary', content: 'Save', onClick: () => formSubmitRef.current?.click()},
+      ]}
+    >
+      <Flash sx={{marginBottom: 2}} variant="warning">
+        Note this Dialog is not accessible. Do not copy this.
+      </Flash>
+      <form onSubmit={onSubmit}>
+        <FormControl sx={{marginBottom: 2}}>
+          <FormControl.Label>Name</FormControl.Label>
+          <TextInput name="name" block defaultValue={initialValue} autoFocus />
+        </FormControl>
+        <FormControl sx={{marginBottom: 2}}>
+          <FormControl.Label>Color</FormControl.Label>
+          <TextInput name="color" block defaultValue="fae17d" leadingVisual="#" />
+        </FormControl>
+        <FormControl>
+          <FormControl.Label>Description</FormControl.Label>
+          <TextInput name="description" block placeholder="Good first issues" />
+        </FormControl>
+        <button type="submit" hidden ref={formSubmitRef}></button>
+      </form>
+    </Dialog>
+  )
+}
+
 // ----- Suspense implementation details ----
 
 const cache = new Map()
diff --git a/packages/react/src/drafts/SelectPanel2/SelectPanel.tsx b/packages/react/src/drafts/SelectPanel2/SelectPanel.tsx
index 20b1fc67002..cab12410749 100644
--- a/packages/react/src/drafts/SelectPanel2/SelectPanel.tsx
+++ b/packages/react/src/drafts/SelectPanel2/SelectPanel.tsx
@@ -1,13 +1,11 @@
 import React from 'react'
 import {SearchIcon, XCircleFillIcon, XIcon, FilterRemoveIcon, AlertIcon, ArrowLeftIcon} from '@primer/octicons-react'
-import {FocusKeys} from '@primer/behaviors'
 
 import type {ButtonProps, TextInputProps, ActionListProps, LinkProps, CheckboxProps} from '../../index'
 import {Button, IconButton, Heading, Box, Tooltip, TextInput, Spinner, Text, Octicon, Link, Checkbox} from '../../index'
 import {ActionListContainerContext} from '../../ActionList/ActionListContainerContext'
 import {useSlots} from '../../hooks/useSlots'
 import {useProvidedRefOrCreate, useId, useAnchoredPosition} from '../../hooks'
-import {useFocusZone} from '../../hooks/useFocusZone'
 import type {OverlayProps} from '../../Overlay/Overlay'
 import {StyledOverlay, heightMap} from '../../Overlay/Overlay'
 import InputLabel from '../../internal/components/InputLabel'
@@ -100,7 +98,7 @@ const Panel: React.FC<SelectPanelProps> = ({
       Anchor = React.cloneElement(child, {
         // @ts-ignore TODO
         ref: anchorRef,
-        onClick: onAnchorClick,
+        onClick: child.props.onClick || onAnchorClick,
         'aria-haspopup': true,
         'aria-expanded': internalOpen,
       })
@@ -144,15 +142,6 @@ const Panel: React.FC<SelectPanelProps> = ({
   const panelId = useId(id)
   const [slots, childrenInBody] = useSlots(contents, {header: SelectPanelHeader, footer: SelectPanelFooter})
 
-  /* Arrow keys navigation for list items */
-  const {containerRef: listContainerRef} = useFocusZone(
-    {
-      bindKeys: FocusKeys.ArrowVertical | FocusKeys.HomeAndEnd | FocusKeys.PageUpDown,
-      focusableElementFilter: element => element.tagName === 'LI',
-    },
-    [internalOpen],
-  )
-
   // used in SelectPanel.SearchInput
   const moveFocusToList = () => {
     const selector = 'ul[role=listbox] li:not([role=none])'
@@ -279,12 +268,10 @@ const Panel: React.FC<SelectPanelProps> = ({
 
                 <Box
                   as="div"
-                  ref={listContainerRef as React.RefObject<HTMLDivElement>}
                   sx={{
                     flexShrink: 1,
                     flexGrow: 1,
                     overflow: 'hidden',
-
                     display: 'flex',
                     flexDirection: 'column',
                     justifyContent: 'space-between',
@@ -299,6 +286,7 @@ const Panel: React.FC<SelectPanelProps> = ({
                       selectionVariant: selectionVariant === 'instant' ? 'single' : selectionVariant,
                       afterSelect: internalAfterSelect,
                       listLabelledBy: `${panelId}--title`,
+                      enableFocusZone: true, // Arrow keys navigation for list items
                     }}
                   >
                     {childrenInBody}
@@ -604,7 +592,11 @@ const SelectPanelMessage: React.FC<SelectPanelMessageProps> = ({
           <Octicon icon={AlertIcon} sx={{color: variant === 'error' ? 'danger.fg' : 'attention.fg', marginBottom: 2}} />
         ) : null}
         <Text sx={{fontSize: 1, fontWeight: 'semibold'}}>{title}</Text>
-        <Text sx={{fontSize: 1, color: 'fg.muted'}}>{children}</Text>
+        <Text
+          sx={{fontSize: 1, color: 'fg.muted', display: 'flex', flexDirection: 'column', gap: 2, alignItems: 'center'}}
+        >
+          {children}
+        </Text>
       </Box>
     )
   } else {