diff --git a/src/OpenTelemetry.Instrumentation.EntityFrameworkCore/CHANGELOG.md b/src/OpenTelemetry.Instrumentation.EntityFrameworkCore/CHANGELOG.md
index 08012d0593..ce5810d7ca 100644
--- a/src/OpenTelemetry.Instrumentation.EntityFrameworkCore/CHANGELOG.md
+++ b/src/OpenTelemetry.Instrumentation.EntityFrameworkCore/CHANGELOG.md
@@ -6,6 +6,9 @@
   cases for escaped identifiers. Optimize performance of parsing logic.
   ([#3627](https://github.com/open-telemetry/opentelemetry-dotnet-contrib/pull/3627))
 
+* Improve SQL parsing for sanitization for Unicode string literals.
+  ([#3662](https://github.com/open-telemetry/opentelemetry-dotnet-contrib/pull/3662))
+
 * Sanitize the object name for SQL query text using the LOGIN or USER keywords and
   remove from query summaries.
   ([#3663](https://github.com/open-telemetry/opentelemetry-dotnet-contrib/pull/3663))
diff --git a/src/OpenTelemetry.Instrumentation.SqlClient/CHANGELOG.md b/src/OpenTelemetry.Instrumentation.SqlClient/CHANGELOG.md
index 068333d93d..b1652d5ee5 100644
--- a/src/OpenTelemetry.Instrumentation.SqlClient/CHANGELOG.md
+++ b/src/OpenTelemetry.Instrumentation.SqlClient/CHANGELOG.md
@@ -11,6 +11,9 @@
   cases for escaped identifiers. Optimize performance of parsing logic.
   ([#3627](https://github.com/open-telemetry/opentelemetry-dotnet-contrib/pull/3627))
 
+* Improve SQL parsing for sanitization for Unicode string literals.
+  ([#3662](https://github.com/open-telemetry/opentelemetry-dotnet-contrib/pull/3662))
+
 * Sanitize the object name for SQL query text using the LOGIN or USER keywords and
   remove from query summaries.
   ([#3663](https://github.com/open-telemetry/opentelemetry-dotnet-contrib/pull/3663))
diff --git a/src/Shared/SqlProcessor.cs b/src/Shared/SqlProcessor.cs
index 0f8e668c1f..4f19ebdd91 100644
--- a/src/Shared/SqlProcessor.cs
+++ b/src/Shared/SqlProcessor.cs
@@ -28,6 +28,7 @@ internal static class SqlProcessor
     private const char NewLineChar = '\n';
     private const char CarriageReturnChar = '\r';
     private const char TabChar = '\t';
+    private const char UnicodePrefixChar = 'N';
 
     private static readonly ConcurrentDictionary<string, SqlStatementInfo> Cache = new();
 
@@ -672,6 +673,10 @@ private static bool SanitizeStringLiteral(ReadOnlySpan<char> sql, Span<char> buf
                 return true;
             }
 
+            // Is the string literal of the form `N'foo'` (i.e. a Unicode literal)?
+            // If so, we want to skip the Unicode prefix when sanitizing.
+            bool isUnicode = state.ParsePosition >= 1 && sql[state.ParsePosition - 1] is UnicodePrefixChar;
+
             // Use index arithmetic instead of slicing
             var searchPos = state.ParsePosition + 1;
             while (searchPos < sql.Length)
@@ -686,6 +691,12 @@ private static bool SanitizeStringLiteral(ReadOnlySpan<char> sql, Span<char> buf
                     }
 
                     // Found terminating quote
+                    if (isUnicode)
+                    {
+                        // Skip the Unicode prefix by overwriting the previous position instead
+                        state.SanitizedPosition--;
+                    }
+
                     state.ParsePosition = searchPos + 1;
                     buffer[state.SanitizedPosition++] = SanitizationPlaceholder;
                     return true;
diff --git a/test/OpenTelemetry.Contrib.Shared.Tests/SqlProcessorAdditionalTestCases.json b/test/OpenTelemetry.Contrib.Shared.Tests/SqlProcessorAdditionalTestCases.json
index b227615849..6edba788d8 100644
--- a/test/OpenTelemetry.Contrib.Shared.Tests/SqlProcessorAdditionalTestCases.json
+++ b/test/OpenTelemetry.Contrib.Shared.Tests/SqlProcessorAdditionalTestCases.json
@@ -905,7 +905,7 @@
     },
     "expected": {
       "db.query.text": [
-        "DECLARE @__geräteIds_0 nvarchar(?) = N?;\n\nSELECT [t].[Id]\nFROM [Tests] AS [t]\nWHERE [t].[Id] IN (\n\tSELECT [g].[value]\n\tFROM OPENJSON(@__geräteIds_0) WITH ([value] bigint ?) AS [g]\n)"
+        "DECLARE @__geräteIds_0 nvarchar(?) = ?;\n\nSELECT [t].[Id]\nFROM [Tests] AS [t]\nWHERE [t].[Id] IN (\n\tSELECT [g].[value]\n\tFROM OPENJSON(@__geräteIds_0) WITH ([value] bigint ?) AS [g]\n)"
       ],
       "db.query.summary": "SELECT [Tests]"
     }
@@ -1052,5 +1052,18 @@
       ],
       "db.query.summary": "SELECT [Order-Details] [Customer.Info]"
     }
+  },
+  {
+    "name": "unicode_string",
+    "input": {
+      "db.system.name": "other_sql",
+      "query": "SELECT * FROM USERS WHERE username = N'john.doe'"
+    },
+    "expected": {
+      "db.query.text": [
+        "SELECT * FROM USERS WHERE username = ?"
+      ],
+      "db.query.summary": "SELECT USERS"
+    }
   }
 ]