diff --git a/CHANGELOG.md b/CHANGELOG.md
index 272b74db06..db16851959 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -63,7 +63,8 @@ END_UNRELEASED_TEMPLATE
 
 {#v0-0-0-fixed}
 ### Fixed
-* Nothing fixed.
+* (gazelle) Fixed handling of auto-included `__init__.py` files when generating `py_binary`
+  targets ([#3729](https://github.com/bazel-contrib/rules_python/issues/3729)).
 
 {#v0-0-0-added}
 ### Added
diff --git a/gazelle/python/generate.go b/gazelle/python/generate.go
index 2495c42d20..a13d7182e9 100644
--- a/gazelle/python/generate.go
+++ b/gazelle/python/generate.go
@@ -258,6 +258,15 @@ func (py *Python) GenerateRules(args language.GenerateArgs) language.GenerateRes
 	// Create a validFilesMap of mainModules to validate if python macros have valid srcs.
 	validFilesMap := make(map[string]struct{})
 
+	// Determine whether we have an __init__.py file in this package and whether we'll implicitly include it in srcs.
+	var hasPopulatedInit bool
+	var autoIncludeInit bool
+	if cfg.PerFileGeneration() {
+		var hasInit bool
+		hasInit, hasPopulatedInit = hasLibraryEntrypointFile(args.Dir)
+		autoIncludeInit = cfg.PerFileGenerationIncludeInit() && hasInit && hasPopulatedInit
+	}
+
 	appendPyLibrary := func(srcs *treeset.Set, pyLibraryTargetName string) {
 		allDeps, mainModules, annotations, err := parser.parse(srcs)
 		for name := range mainModules {
@@ -277,6 +286,10 @@ func (py *Python) GenerateRules(args language.GenerateArgs) language.GenerateRes
 				// that we don't also generate a py_library target for it.
 				if cfg.PerFileGeneration() {
 					srcs.Remove(name)
+					// Also remove the __init__.py that was added earlier.
+					if autoIncludeInit {
+						srcs.Remove(pyLibraryEntrypointFilename)
+					}
 				}
 			}
 
@@ -294,15 +307,20 @@ func (py *Python) GenerateRules(args language.GenerateArgs) language.GenerateRes
 				filenames := treeset.NewWith(godsutils.StringComparator, filename)
 				pyiSrcs, _ := getPyiFilenames(filenames, cfg.GeneratePyiSrcs(), args.Dir)
 
-				pyBinary := newTargetBuilder(pyBinaryKind, pyBinaryTargetName, pythonProjectRoot, args.Rel, pyFileNames, cfg.ResolveSiblingImports()).
+				pyBinaryBuilder := newTargetBuilder(pyBinaryKind, pyBinaryTargetName, pythonProjectRoot, args.Rel, pyFileNames, cfg.ResolveSiblingImports()).
 					addVisibility(visibility).
 					addSrc(filename).
 					addPyiSrcs(pyiSrcs).
 					addModuleDependencies(mainModules[filename]).
 					addResolvedDependencies(annotations.includeDeps).
 					generateImportsAttribute().
-					setAnnotations(*annotations).
-					build()
+					setAnnotations(*annotations)
+
+				if autoIncludeInit {
+					pyBinaryBuilder.addSrc(pyLibraryEntrypointFilename)
+				}
+
+				pyBinary := pyBinaryBuilder.build()
 				result.Gen = append(result.Gen, pyBinary)
 				result.Imports = append(result.Imports, pyBinary.PrivateAttr(config.GazelleImportsKey))
 			}
@@ -357,15 +375,15 @@ func (py *Python) GenerateRules(args language.GenerateArgs) language.GenerateRes
 			result.Imports = append(result.Imports, pyLibrary.PrivateAttr(config.GazelleImportsKey))
 		}
 	}
+
 	if cfg.PerFileGeneration() {
-		hasInit, nonEmptyInit := hasLibraryEntrypointFile(args.Dir)
 		pyLibraryFilenames.Each(func(index int, filename interface{}) {
 			pyLibraryTargetName := strings.TrimSuffix(filepath.Base(filename.(string)), ".py")
-			if filename == pyLibraryEntrypointFilename && !nonEmptyInit {
+			if filename == pyLibraryEntrypointFilename && !hasPopulatedInit {
 				return // ignore empty __init__.py.
 			}
 			srcs := treeset.NewWith(godsutils.StringComparator, filename)
-			if cfg.PerFileGenerationIncludeInit() && hasInit && nonEmptyInit {
+			if autoIncludeInit {
 				srcs.Add(pyLibraryEntrypointFilename)
 			}
 			appendPyLibrary(srcs, pyLibraryTargetName)
diff --git a/gazelle/python/testdata/per_file_non_empty_init/BUILD.out b/gazelle/python/testdata/per_file_non_empty_init/BUILD.out
index ee4a417966..38dcaa5ee2 100644
--- a/gazelle/python/testdata/per_file_non_empty_init/BUILD.out
+++ b/gazelle/python/testdata/per_file_non_empty_init/BUILD.out
@@ -1,4 +1,4 @@
-load("@rules_python//python:defs.bzl", "py_library")
+load("@rules_python//python:defs.bzl", "py_binary", "py_library")
 
 # gazelle:python_generation_mode file
 # gazelle:python_generation_mode_per_file_include_init true
@@ -18,3 +18,13 @@ py_library(
     ],
     visibility = ["//:__subpackages__"],
 )
+
+py_binary(
+    name = "foobin",
+    srcs = [
+        "__init__.py",
+        "foobin.py",
+    ],
+    visibility = ["//:__subpackages__"],
+    deps = [":foo"],
+)
diff --git a/gazelle/python/testdata/per_file_non_empty_init/README.md b/gazelle/python/testdata/per_file_non_empty_init/README.md
index 6e6e9e245d..0fad0f3d43 100644
--- a/gazelle/python/testdata/per_file_non_empty_init/README.md
+++ b/gazelle/python/testdata/per_file_non_empty_init/README.md
@@ -1,3 +1,3 @@
 # Per-file generation
 
-This test case generates one `py_library` per file, including `__init__.py`.
+This test case generates one `py_library` or `py_binary` per file, including `__init__.py`.
diff --git a/gazelle/python/testdata/per_file_non_empty_init/foo.py b/gazelle/python/testdata/per_file_non_empty_init/foo.py
index 730755995d..b70cc96b7e 100644
--- a/gazelle/python/testdata/per_file_non_empty_init/foo.py
+++ b/gazelle/python/testdata/per_file_non_empty_init/foo.py
@@ -13,3 +13,4 @@
 # limitations under the License.
 
 # For test purposes only.
+BAR = "baz"
diff --git a/gazelle/python/testdata/per_file_non_empty_init/foobin.py b/gazelle/python/testdata/per_file_non_empty_init/foobin.py
new file mode 100644
index 0000000000..6b493b531e
--- /dev/null
+++ b/gazelle/python/testdata/per_file_non_empty_init/foobin.py
@@ -0,0 +1,4 @@
+from foo import BAR
+
+if __name__ == "__main__":
+    print(BAR)