diff --git a/CHANGELOG.md b/CHANGELOG.md
index 7288975cebf4..ce85e98b7fd2 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -102,6 +102,7 @@ Every module contains its own CHANGELOG.md. Please refer to the module you are i
 * (baseapp) [#20208](https://github.com/cosmos/cosmos-sdk/pull/20208) Skip running validateBasic for rechecking txs.
 * (baseapp) [#20380](https://github.com/cosmos/cosmos-sdk/pull/20380) Enhanced OfferSnapshot documentation.
 * (client) [#20771](https://github.com/cosmos/cosmos-sdk/pull/20771) Remove `ReadDefaultValuesFromDefaultClientConfig` from `client` package. (It was introduced in `v0.50.6` as a quick fix).
+* (grpcserver) [#20945](https://github.com/cosmos/cosmos-sdk/pull/20945) Adds error handling for out-of-gas panics in grpc query handlers.
 
 ### Bug Fixes
 
diff --git a/baseapp/grpcserver.go b/baseapp/grpcserver.go
index b1befabe9e86..c162bebf1ee3 100644
--- a/baseapp/grpcserver.go
+++ b/baseapp/grpcserver.go
@@ -14,6 +14,7 @@ import (
 	"google.golang.org/grpc/status"
 
 	errorsmod "cosmossdk.io/errors"
+	storetypes "cosmossdk.io/store/types"
 
 	sdk "github.com/cosmos/cosmos-sdk/types"
 	sdkerrors "github.com/cosmos/cosmos-sdk/types/errors"
@@ -67,6 +68,18 @@ func (app *BaseApp) RegisterGRPCServer(server gogogrpc.Server) {
 
 		app.logger.Debug("gRPC query received of type: " + fmt.Sprintf("%#v", req))
 
+		// Catch an OutOfGasPanic caused in the query handlers
+		defer func() {
+			if r := recover(); r != nil {
+				switch rType := r.(type) {
+				case storetypes.ErrorOutOfGas:
+					err = errorsmod.Wrapf(sdkerrors.ErrOutOfGas, "Query gas limit exceeded: %v, out of gas in location: %v", sdkCtx.GasMeter().Limit(), rType.Descriptor)
+				default:
+					panic(r)
+				}
+			}
+		}()
+
 		return handler(grpcCtx, req)
 	}
 
diff --git a/tests/integration/server/grpc/out_of_gas_test.go b/tests/integration/server/grpc/out_of_gas_test.go
new file mode 100644
index 000000000000..f662d2a25ff8
--- /dev/null
+++ b/tests/integration/server/grpc/out_of_gas_test.go
@@ -0,0 +1,98 @@
+package grpc_test
+
+import (
+	"context"
+	"fmt"
+	"testing"
+
+	"github.com/stretchr/testify/suite"
+	"google.golang.org/grpc"
+	"google.golang.org/grpc/metadata"
+
+	_ "cosmossdk.io/x/accounts"
+	_ "cosmossdk.io/x/auth"
+	_ "cosmossdk.io/x/auth/tx/config"
+	_ "cosmossdk.io/x/bank"
+	banktypes "cosmossdk.io/x/bank/types"
+	_ "cosmossdk.io/x/consensus"
+	_ "cosmossdk.io/x/staking"
+
+	"github.com/cosmos/cosmos-sdk/codec"
+	"github.com/cosmos/cosmos-sdk/testutil/configurator"
+	"github.com/cosmos/cosmos-sdk/testutil/network"
+	"github.com/cosmos/cosmos-sdk/testutil/testdata"
+	sdkerrors "github.com/cosmos/cosmos-sdk/types/errors"
+)
+
+type IntegrationTestOutOfGasSuite struct {
+	suite.Suite
+
+	cfg     network.Config
+	network network.NetworkI
+	conn    *grpc.ClientConn
+}
+
+func (s *IntegrationTestOutOfGasSuite) SetupSuite() {
+	var err error
+	s.T().Log("setting up integration test suite")
+
+	s.cfg, err = network.DefaultConfigWithAppConfigWithQueryGasLimit(configurator.NewAppConfig(
+		configurator.AccountsModule(),
+		configurator.AuthModule(),
+		configurator.BankModule(),
+		configurator.GenutilModule(),
+		configurator.StakingModule(),
+		configurator.ConsensusModule(),
+		configurator.TxModule(),
+	), 10)
+	s.NoError(err)
+	s.cfg.NumValidators = 1
+
+	s.network, err = network.New(s.T(), s.T().TempDir(), s.cfg)
+	s.Require().NoError(err)
+
+	_, err = s.network.WaitForHeight(2)
+	s.Require().NoError(err)
+
+	val0 := s.network.GetValidators()[0]
+	s.conn, err = grpc.NewClient(
+		val0.GetAppConfig().GRPC.Address,
+		grpc.WithInsecure(), //nolint:staticcheck // ignore SA1019, we don't need to use a secure connection for tests
+		grpc.WithDefaultCallOptions(grpc.ForceCodec(codec.NewProtoCodec(s.cfg.InterfaceRegistry).GRPCCodec())),
+	)
+	s.Require().NoError(err)
+}
+
+func (s *IntegrationTestOutOfGasSuite) TearDownSuite() {
+	s.T().Log("tearing down integration test suite")
+	s.conn.Close()
+	s.network.Cleanup()
+}
+
+func (s *IntegrationTestOutOfGasSuite) TestGRPCServer_TestService() {
+	// gRPC query to test service should work
+	testClient := testdata.NewQueryClient(s.conn)
+	testRes, err := testClient.Echo(context.Background(), &testdata.EchoRequest{Message: "hello"})
+	s.Require().NoError(err)
+	s.Require().Equal("hello", testRes.Message)
+}
+
+func (s *IntegrationTestOutOfGasSuite) TestGRPCServer_BankBalance_OutOfGas() {
+	val0 := s.network.GetValidators()[0]
+
+	// gRPC query to bank service should work
+	denom := fmt.Sprintf("%stoken", val0.GetMoniker())
+	bankClient := banktypes.NewQueryClient(s.conn)
+	var header metadata.MD
+	_, err := bankClient.Balance(
+		context.Background(),
+		&banktypes.QueryBalanceRequest{Address: val0.GetAddress().String(), Denom: denom},
+		grpc.Header(&header), // Also fetch grpc header
+	)
+
+	s.Require().ErrorContains(err, sdkerrors.ErrOutOfGas.Error())
+}
+
+func TestIntegrationTestOutOfGasSuite(t *testing.T) {
+	suite.Run(t, new(IntegrationTestOutOfGasSuite))
+}
diff --git a/testutil/network/network.go b/testutil/network/network.go
index 0d0e942a9fb2..fb2bbd54ae69 100644
--- a/testutil/network/network.go
+++ b/testutil/network/network.go
@@ -164,6 +164,10 @@ func DefaultConfig(factory TestFixtureFactory) Config {
 }
 
 func DefaultConfigWithAppConfig(appConfig depinject.Config) (Config, error) {
+	return DefaultConfigWithAppConfigWithQueryGasLimit(appConfig, 0)
+}
+
+func DefaultConfigWithAppConfigWithQueryGasLimit(appConfig depinject.Config, queryGasLimit uint64) (Config, error) {
 	var (
 		appBuilder            *runtime.AppBuilder
 		txConfig              client.TxConfig
@@ -221,6 +225,7 @@ func DefaultConfigWithAppConfig(appConfig depinject.Config) (Config, error) {
 			baseapp.SetPruning(pruningtypes.NewPruningOptionsFromString(val.GetAppConfig().Pruning)),
 			baseapp.SetMinGasPrices(val.GetAppConfig().MinGasPrices),
 			baseapp.SetChainID(cfg.ChainID),
+			baseapp.SetQueryGasLimit(queryGasLimit),
 		)
 
 		testdata.RegisterQueryServer(app.GRPCQueryRouter(), testdata.QueryImpl{})