diff --git a/src/Psalm/Internal/Analyzer/Statements/Expression/EncapsulatedStringAnalyzer.php b/src/Psalm/Internal/Analyzer/Statements/Expression/EncapsulatedStringAnalyzer.php
index 6d082088072..c7884921984 100644
--- a/src/Psalm/Internal/Analyzer/Statements/Expression/EncapsulatedStringAnalyzer.php
+++ b/src/Psalm/Internal/Analyzer/Statements/Expression/EncapsulatedStringAnalyzer.php
@@ -24,6 +24,10 @@
 use Psalm\Type\Atomic\TString;
 use Psalm\Type\Union;
 
+use function array_map;
+use function array_merge;
+use function array_unique;
+use function count;
 use function in_array;
 
 /**
@@ -31,6 +35,8 @@
  */
 final class EncapsulatedStringAnalyzer
 {
+    private const MAX_LITERALS = 500;
+
     public static function analyze(
         StatementsAnalyzer $statements_analyzer,
         PhpParser\Node\Scalar\Encapsed $stmt,
@@ -43,7 +49,7 @@ public static function analyze(
 
         $all_literals = true;
 
-        $literal_string = "";
+        $literal_strings = [];
 
         foreach ($stmt->parts as $part) {
             if (ExpressionAnalyzer::analyze($statements_analyzer, $part, $context) === false) {
@@ -51,8 +57,8 @@ public static function analyze(
             }
 
             if ($part instanceof EncapsedStringPart) {
-                if ($literal_string !== null) {
-                    $literal_string .= $part->value;
+                if ($literal_strings !== null) {
+                    $literal_strings = self::combineLiteral($literal_strings, $part->value);
                 }
                 $non_falsy = $non_falsy || $part->value;
                 $non_empty = $non_empty || $part->value !== "";
@@ -118,11 +124,22 @@ public static function analyze(
                     }
                 }
 
-                if ($literal_string !== null) {
-                    if ($casted_part_type->isSingleLiteral()) {
-                        $literal_string .= $casted_part_type->getSingleLiteral()->value;
+                if ($literal_strings !== null) {
+                    if ($casted_part_type->allSpecificLiterals()) {
+                        $new_literal_strings = [];
+                        foreach ($casted_part_type->getLiteralStrings() as $literal_string_atomic) {
+                            $new_literal_strings = array_merge(
+                                $new_literal_strings,
+                                self::combineLiteral($literal_strings, $literal_string_atomic->value),
+                            );
+                        }
+
+                        $literal_strings = array_unique($new_literal_strings);
+                        if (count($literal_strings) > self::MAX_LITERALS) {
+                            $literal_strings = null;
+                        }
                     } else {
-                        $literal_string = null;
+                        $literal_strings = null;
                     }
                 }
 
@@ -156,14 +173,14 @@ public static function analyze(
                 }
             } else {
                 $all_literals = false;
-                $literal_string = null;
+                $literal_strings = null;
             }
         }
 
         if ($non_empty || $non_falsy) {
-            if ($literal_string !== null) {
+            if ($literal_strings !== null) {
                 $stmt_type = new Union(
-                    [Type::getAtomicStringFromLiteral($literal_string)],
+                    array_map([Type::class, 'getAtomicStringFromLiteral'], $literal_strings),
                     ['parent_nodes' => $parent_nodes],
                 );
             } elseif ($all_literals) {
@@ -198,4 +215,28 @@ public static function analyze(
 
         return true;
     }
+
+    /**
+     * @param string[] $literal_strings
+     * @return non-empty-list<string>
+     */
+    private static function combineLiteral(
+        array $literal_strings,
+        string $append
+    ): array {
+        if ($literal_strings === []) {
+            return [$append];
+        }
+
+        if ($append === '') {
+            return $literal_strings;
+        }
+
+        $new_literal_strings = array();
+        foreach ($literal_strings as $literal_string) {
+            $new_literal_strings[] = "{$literal_string}{$append}";
+        }
+
+        return $new_literal_strings;
+    }
 }
diff --git a/tests/BinaryOperationTest.php b/tests/BinaryOperationTest.php
index 9f5b4171373..d9b97785c5a 100644
--- a/tests/BinaryOperationTest.php
+++ b/tests/BinaryOperationTest.php
@@ -977,6 +977,39 @@ function foo(int $s1): string {
                         return "Hello $s1 $s2";
                     }',
             ],
+            'encapsedWithUnionLiteralsKeepsLiteral' => [
+                'code' => '<?php
+                    $foo = rand(0, 1) ? 0 : 2;
+                    $encapsed = "{$foo}";',
+                'assertions' => ['$encapsed===' => "'0'|'2'"],
+            ],
+            'encapsedWithUnionLiteralsKeepsLiteral2' => [
+                'code' => '<?php
+                    /**
+                     * @var "a"|"b" $a
+                     * @var "hello"|"world"|"bye" $b
+                     */
+                    $encapsed = "X{$a}Y{$b}Z";',
+                'assertions' => ['$encapsed===' => "'XaYbyeZ'|'XaYhelloZ'|'XaYworldZ'|'XbYbyeZ'|'XbYhelloZ'|'XbYworldZ'"],
+            ],
+            'encapsedWithIntsKeepsLiteral' => [
+                'code' => '<?php
+                    /**
+                     * @var "a"|"b" $a
+                     * @var 0|1|2 $b
+                     */
+                    $encapsed = "{$a}{$b}";',
+                'assertions' => ['$encapsed===' => "'a0'|'a1'|'a2'|'b0'|'b1'|'b2'"],
+            ],
+            'encapsedWithIntRangeKeepsLiteral' => [
+                'code' => '<?php
+                    /**
+                     * @var "a"|"b" $a
+                     * @var int<0, 2> $b
+                     */
+                    $encapsed = "{$a}{$b}";',
+                'assertions' => ['$encapsed===' => "'a0'|'a1'|'a2'|'b0'|'b1'|'b2'"],
+            ],
             'NumericStringIncrement' => [
                 'code' => '<?php
                     function scope(array $a): int|float {