diff --git a/subsys/net/lib/dhcpv4/Kconfig b/subsys/net/lib/dhcpv4/Kconfig
index a1e8b6cf39e..bf9b6a9fbdd 100644
--- a/subsys/net/lib/dhcpv4/Kconfig
+++ b/subsys/net/lib/dhcpv4/Kconfig
@@ -110,6 +110,17 @@ config NET_DHCPV4_SERVER_ADDR_LEASE_TIME
 	  The lease time determines when the IPv4 address lease expires if the
 	  client does not renew it.
 
+config NET_DHCPV4_SERVER_ADDR_DECLINE_TIME
+	int "The time IPv4 addresses remains blocked after conflict detection (seconds)"
+	default 86400
+	help
+	  In case IPv4 address becomes blocked (either because of receiving
+	  Decline message or due to ICMP probe detecting conflict), the address
+	  can no longer be assigned. This timeout specifies how long the address
+	  remains in the Declined state.
+	  Note, that the server may try to reuse the oldest declined address in
+	  case it runs out of free addresses to assign.
+
 config NET_DHCPV4_SERVER_ICMP_PROBE_TIMEOUT
 	int "Timeout for ICMP probes sent by the server (miliseconds)"
 	default 1000
diff --git a/subsys/net/lib/dhcpv4/dhcpv4_server.c b/subsys/net/lib/dhcpv4/dhcpv4_server.c
index f8a7e56f64a..4b232323a78 100644
--- a/subsys/net/lib/dhcpv4/dhcpv4_server.c
+++ b/subsys/net/lib/dhcpv4/dhcpv4_server.c
@@ -33,6 +33,7 @@ LOG_MODULE_REGISTER(net_dhcpv4_server, CONFIG_NET_DHCPV4_SERVER_LOG_LEVEL);
 
 #define ADDRESS_RESERVED_TIMEOUT K_SECONDS(5)
 #define ADDRESS_PROBE_TIMEOUT K_MSEC(CONFIG_NET_DHCPV4_SERVER_ICMP_PROBE_TIMEOUT)
+#define ADDRESS_DECLINED_TIMEOUT K_SECONDS(CONFIG_NET_DHCPV4_SERVER_ADDR_DECLINE_TIME)
 
 #if (CONFIG_NET_DHCPV4_SERVER_ICMP_PROBE_TIMEOUT > 0)
 #define DHCPV4_SERVER_ICMP_PROBE 1
@@ -80,7 +81,8 @@ static void dhcpv4_server_timeout_recalc(struct dhcpv4_server_ctx *ctx)
 		struct dhcpv4_addr_slot *slot = &ctx->addr_pool[i];
 
 		if (slot->state == DHCPV4_SERVER_ADDR_RESERVED ||
-		    slot->state == DHCPV4_SERVER_ADDR_ALLOCATED) {
+		    slot->state == DHCPV4_SERVER_ADDR_ALLOCATED ||
+		    slot->state == DHCPV4_SERVER_ADDR_DECLINED) {
 			if (sys_timepoint_cmp(slot->expiry, next) < 0) {
 				next = slot->expiry;
 			}
@@ -738,6 +740,7 @@ static int echo_reply_handler(struct net_icmp_ctx *icmp_ctx,
 		net_sprint_ipv4_addr(&probe_ctx->slot->addr));
 
 	probe_ctx->slot->state = DHCPV4_SERVER_ADDR_DECLINED;
+	probe_ctx->slot->expiry = sys_timepoint_calc(ADDRESS_DECLINED_TIMEOUT);
 
 	/* Try to find next free address */
 	for (int i = 0; i < ARRAY_SIZE(ctx->addr_pool); i++) {
@@ -933,6 +936,27 @@ static void dhcpv4_handle_discover(struct dhcpv4_server_ctx *ctx,
 		}
 	}
 
+	/* In case no free address slot was found, as a last resort, try to
+	 * reuse the oldest declined entry, if present.
+	 */
+	if (selected == NULL) {
+		for (int i = 0; i < ARRAY_SIZE(ctx->addr_pool); i++) {
+			struct dhcpv4_addr_slot *slot = &ctx->addr_pool[i];
+
+			if (slot->state != DHCPV4_SERVER_ADDR_DECLINED) {
+				continue;
+			}
+
+			/* Find first to expire (oldest) entry. */
+			if ((selected == NULL) ||
+			    (sys_timepoint_cmp(slot->expiry,
+					       selected->expiry) < 0)) {
+				selected = slot;
+				probe = true;
+			}
+		}
+	}
+
 	if (selected == NULL) {
 		LOG_ERR("No free address found in address pool");
 	} else {
@@ -1190,7 +1214,8 @@ static void dhcpv4_handle_decline(struct dhcpv4_server_ctx *ctx,
 		    (slot->state == DHCPV4_SERVER_ADDR_RESERVED ||
 		     slot->state == DHCPV4_SERVER_ADDR_ALLOCATED)) {
 			slot->state = DHCPV4_SERVER_ADDR_DECLINED;
-			slot->expiry = sys_timepoint_calc(K_FOREVER);
+			slot->expiry =
+				sys_timepoint_calc(ADDRESS_DECLINED_TIMEOUT);
 			dhcpv4_server_timeout_recalc(ctx);
 			break;
 		}
@@ -1280,6 +1305,11 @@ static void dhcpv4_server_timeout(struct k_work *work)
 				slot->state = DHCPV4_SERVER_ADDR_FREE;
 			}
 		}
+
+		if (slot->state == DHCPV4_SERVER_ADDR_DECLINED &&
+		    sys_timepoint_expired(slot->expiry)) {
+			slot->state = DHCPV4_SERVER_ADDR_FREE;
+		}
 	}
 
 	dhcpv4_server_timeout_recalc(ctx);