diff --git a/packages/next/src/build/entries.ts b/packages/next/src/build/entries.ts
index f7310dc3d24cd..784d1aead8fb2 100644
--- a/packages/next/src/build/entries.ts
+++ b/packages/next/src/build/entries.ts
@@ -812,14 +812,11 @@ export function finalizeEntrypoint({
       }
     }
     case COMPILER_NAMES.edgeServer: {
-      const layer = isApi
-        ? WEBPACK_LAYERS.api
-        : isMiddlewareFilename(name) || isInstrumentation
-          ? WEBPACK_LAYERS.middleware
-          : undefined
-
       return {
-        layer,
+        layer:
+          isMiddlewareFilename(name) || isApi || isInstrumentation
+            ? WEBPACK_LAYERS.middleware
+            : undefined,
         library: { name: ['_ENTRIES', `middleware_[name]`], type: 'assign' },
         runtime: EDGE_RUNTIME_WEBPACK,
         asyncChunks: false,
diff --git a/packages/next/src/build/handle-externals.ts b/packages/next/src/build/handle-externals.ts
index 5b38dd26e0994..9ca94214035f3 100644
--- a/packages/next/src/build/handle-externals.ts
+++ b/packages/next/src/build/handle-externals.ts
@@ -10,7 +10,7 @@ import {
   NODE_ESM_RESOLVE_OPTIONS,
   NODE_RESOLVE_OPTIONS,
 } from './webpack-config'
-import { isWebpackBundledLayer, isWebpackServerOnlyLayer } from './utils'
+import { isWebpackAppLayer, isWebpackServerOnlyLayer } from './utils'
 import { normalizePathSep } from '../shared/lib/page-path/normalize-path-sep'
 const reactPackagesRegex = /^(react|react-dom|react-server-dom-webpack)($|\/)/
 
@@ -174,7 +174,7 @@ export function makeExternalHandler({
       return `commonjs next/dist/lib/import-next-warning`
     }
 
-    const isAppLayer = isWebpackBundledLayer(layer)
+    const isAppLayer = isWebpackAppLayer(layer)
 
     // Relative requires don't need custom resolution, because they
     // are relative to requests we've already resolved here.
diff --git a/packages/next/src/build/utils.ts b/packages/next/src/build/utils.ts
index 7cf951f5db51b..75a7914da2ed1 100644
--- a/packages/next/src/build/utils.ts
+++ b/packages/next/src/build/utils.ts
@@ -2256,15 +2256,6 @@ export function getSupportedBrowsers(
   return MODERN_BROWSERSLIST_TARGET
 }
 
-// Use next/dist/compiled/react packages instead of installed react
-export function isWebpackBuiltinReactLayer(
-  layer: WebpackLayerName | null | undefined
-): boolean {
-  return Boolean(
-    layer && WEBPACK_LAYERS.GROUP.builtinReact.includes(layer as any)
-  )
-}
-
 export function isWebpackServerOnlyLayer(
   layer: WebpackLayerName | null | undefined
 ): boolean {
@@ -2287,8 +2278,8 @@ export function isWebpackDefaultLayer(
   return layer === null || layer === undefined
 }
 
-export function isWebpackBundledLayer(
+export function isWebpackAppLayer(
   layer: WebpackLayerName | null | undefined
 ): boolean {
-  return Boolean(layer && WEBPACK_LAYERS.GROUP.bundled.includes(layer as any))
+  return Boolean(layer && WEBPACK_LAYERS.GROUP.app.includes(layer as any))
 }
diff --git a/packages/next/src/build/webpack-config.ts b/packages/next/src/build/webpack-config.ts
index 4b1b92e4992ec..42ceb0368f877 100644
--- a/packages/next/src/build/webpack-config.ts
+++ b/packages/next/src/build/webpack-config.ts
@@ -9,8 +9,7 @@ import { escapeStringRegexp } from '../shared/lib/escape-regexp'
 import { WEBPACK_LAYERS, WEBPACK_RESOURCE_QUERIES } from '../lib/constants'
 import type { WebpackLayerName } from '../lib/constants'
 import {
-  isWebpackBuiltinReactLayer,
-  isWebpackBundledLayer,
+  isWebpackAppLayer,
   isWebpackClientOnlyLayer,
   isWebpackDefaultLayer,
   isWebpackServerOnlyLayer,
@@ -410,7 +409,8 @@ export default async function getBaseWebpackConfig(
     loggedIgnoredCompilerOptions = true
   }
 
-  const shouldIncludeExternalDirs = config.experimental.externalDir
+  const shouldIncludeExternalDirs =
+    config.experimental.externalDir || !!config.transpilePackages
   const codeCondition = {
     test: { or: [/\.(tsx|ts|js|cjs|mjs|jsx)$/, /__barrel_optimize__/] },
     ...(shouldIncludeExternalDirs
@@ -543,7 +543,7 @@ export default async function getBaseWebpackConfig(
     // This will cause some performance overhead but
     // acceptable as Babel will not be recommended.
     getSwcLoader({
-      serverComponents: true,
+      serverComponents: false,
       bundleLayer: WEBPACK_LAYERS.middleware,
     }),
     babelLoader,
@@ -592,12 +592,13 @@ export default async function getBaseWebpackConfig(
   // Loader for API routes needs to be differently configured as it shouldn't
   // have RSC transpiler enabled, so syntax checks such as invalid imports won't
   // be performed.
-  const apiRoutesLayerLoaders = useSWCLoader
-    ? getSwcLoader({
-        serverComponents: false,
-        bundleLayer: WEBPACK_LAYERS.api,
-      })
-    : defaultLoaders.babel
+  const apiRoutesLayerLoaders =
+    hasAppDir && useSWCLoader
+      ? getSwcLoader({
+          serverComponents: false,
+          bundleLayer: WEBPACK_LAYERS.api,
+        })
+      : defaultLoaders.babel
 
   const pageExtensions = config.pageExtensions
 
@@ -1303,7 +1304,7 @@ export default async function getBaseWebpackConfig(
                 test: /next[\\/]dist[\\/](esm[\\/])?server[\\/]future[\\/]route-modules[\\/]app-page[\\/]module/,
               },
               {
-                issuerLayer: isWebpackBundledLayer,
+                issuerLayer: isWebpackAppLayer,
                 resolve: {
                   alias: createNextApiEsmAliases(),
                 },
@@ -1325,7 +1326,7 @@ export default async function getBaseWebpackConfig(
         ...(hasAppDir && !isClient
           ? [
               {
-                issuerLayer: isWebpackBuiltinReactLayer,
+                issuerLayer: isWebpackServerOnlyLayer,
                 test: {
                   // Resolve it if it is a source code file, and it has NOT been
                   // opted out of bundling.
@@ -1387,7 +1388,7 @@ export default async function getBaseWebpackConfig(
                 // Alias react for switching between default set and share subset.
                 oneOf: [
                   {
-                    issuerLayer: isWebpackBuiltinReactLayer,
+                    issuerLayer: isWebpackServerOnlyLayer,
                     test: {
                       // Resolve it if it is a source code file, and it has NOT been
                       // opted out of bundling.
@@ -1468,17 +1469,11 @@ export default async function getBaseWebpackConfig(
               test: codeCondition.test,
               issuerLayer: WEBPACK_LAYERS.middleware,
               use: middlewareLayerLoaders,
-              resolve: {
-                conditionNames: reactServerCondition,
-              },
             },
             {
               test: codeCondition.test,
               issuerLayer: WEBPACK_LAYERS.instrument,
               use: instrumentLayerLoaders,
-              resolve: {
-                conditionNames: reactServerCondition,
-              },
             },
             ...(hasAppDir
               ? [
diff --git a/packages/next/src/build/webpack/plugins/middleware-plugin.ts b/packages/next/src/build/webpack/plugins/middleware-plugin.ts
index e6bdccd6da88e..866aff2ae1a32 100644
--- a/packages/next/src/build/webpack/plugins/middleware-plugin.ts
+++ b/packages/next/src/build/webpack/plugins/middleware-plugin.ts
@@ -28,10 +28,7 @@ import type { Telemetry } from '../../../telemetry/storage'
 import { traceGlobals } from '../../../trace/shared'
 import { EVENT_BUILD_FEATURE_USAGE } from '../../../telemetry/events'
 import { normalizeAppPath } from '../../../shared/lib/router/utils/app-paths'
-import {
-  INSTRUMENTATION_HOOK_FILENAME,
-  WEBPACK_LAYERS,
-} from '../../../lib/constants'
+import { INSTRUMENTATION_HOOK_FILENAME } from '../../../lib/constants'
 import type { CustomRoutes } from '../../../lib/load-custom-routes'
 import { isInterceptionRouteRewrite } from '../../../lib/generate-interception-routes-rewrites'
 import { getDynamicCodeEvaluationError } from './wellknown-errors-plugin/parse-dynamic-code-evaluation-error'
@@ -275,8 +272,7 @@ function buildWebpackError({
 }
 
 function isInMiddlewareLayer(parser: webpack.javascript.JavascriptParser) {
-  const layer = parser.state.module?.layer
-  return layer === WEBPACK_LAYERS.middleware || layer === WEBPACK_LAYERS.api
+  return parser.state.module?.layer === 'middleware'
 }
 
 function isNodeJsModule(moduleName: string) {
@@ -853,8 +849,7 @@ export async function handleWebpackExternalForEdgeRuntime({
   getResolve: () => any
 }) {
   if (
-    (contextInfo.issuerLayer === WEBPACK_LAYERS.middleware ||
-      contextInfo.issuerLayer === WEBPACK_LAYERS.api) &&
+    contextInfo.issuerLayer === 'middleware' &&
     isNodeJsModule(request) &&
     !supportedEdgePolyfills.has(request)
   ) {
diff --git a/packages/next/src/lib/constants.ts b/packages/next/src/lib/constants.ts
index c098c8da62499..c250a65b4afbb 100644
--- a/packages/next/src/lib/constants.ts
+++ b/packages/next/src/lib/constants.ts
@@ -159,11 +159,6 @@ export type WebpackLayerName =
 const WEBPACK_LAYERS = {
   ...WEBPACK_LAYERS_NAMES,
   GROUP: {
-    builtinReact: [
-      WEBPACK_LAYERS_NAMES.reactServerComponents,
-      WEBPACK_LAYERS_NAMES.actionBrowser,
-      WEBPACK_LAYERS_NAMES.appMetadataRoute,
-    ],
     serverOnly: [
       WEBPACK_LAYERS_NAMES.reactServerComponents,
       WEBPACK_LAYERS_NAMES.actionBrowser,
@@ -179,7 +174,7 @@ const WEBPACK_LAYERS = {
       WEBPACK_LAYERS_NAMES.serverSideRendering,
       WEBPACK_LAYERS_NAMES.appPagesBrowser,
     ],
-    bundled: [
+    app: [
       WEBPACK_LAYERS_NAMES.reactServerComponents,
       WEBPACK_LAYERS_NAMES.actionBrowser,
       WEBPACK_LAYERS_NAMES.appMetadataRoute,
diff --git a/test/e2e/module-layer/middleware.js b/test/e2e/module-layer/middleware.js
index cd3fc531ccbe4..8a4d11761dd78 100644
--- a/test/e2e/module-layer/middleware.js
+++ b/test/e2e/module-layer/middleware.js
@@ -1,20 +1,11 @@
 import 'server-only'
-import * as React from 'react'
+import React from 'react'
 import { NextResponse } from 'next/server'
 // import './lib/mixed-lib'
 
 export function middleware(request) {
-  // To avoid webpack ESM exports checking warning
-  const ReactObject = Object(React)
-  if (ReactObject.useState) {
+  if (React.useState) {
     throw new Error('React.useState should not be defined in server layer')
   }
-
-  if (request.nextUrl.pathname === '/react-version') {
-    return Response.json({
-      React: Object.keys(ReactObject),
-    })
-  }
-
   return NextResponse.next()
 }
diff --git a/test/e2e/module-layer/module-layer.test.ts b/test/e2e/module-layer/module-layer.test.ts
index 7d90ea9fef659..bf665e1428df8 100644
--- a/test/e2e/module-layer/module-layer.test.ts
+++ b/test/e2e/module-layer/module-layer.test.ts
@@ -4,10 +4,6 @@ import { getRedboxSource, hasRedbox, retry } from 'next-test-utils'
 describe('module layer', () => {
   const { next, isNextStart, isNextDev, isTurbopack } = nextTestSetup({
     files: __dirname,
-    dependencies: {
-      react: '19.0.0-rc-915b914b3a-20240515',
-      'react-dom': '19.0.0-rc-915b914b3a-20240515',
-    },
   })
 
   function runTests() {
@@ -22,10 +18,8 @@ describe('module layer', () => {
       '/app/route',
       '/app/route-edge',
       // pages/api
-      '/api/default',
-      '/api/default-edge',
-      '/api/server-only',
-      '/api/server-only-edge',
+      '/api/hello',
+      '/api/hello-edge',
       '/api/mixed',
     ]
 
@@ -36,35 +30,6 @@ describe('module layer', () => {
       })
     }
 
-    it('should render installed react-server condition for middleware', async () => {
-      const json = await next.fetch('/react-version').then((res) => res.json())
-      expect(json.React).toContain('version') // basic react-server export
-      expect(json.React).not.toContain('useEffect') // no client api export
-    })
-
-    // This is for backward compatibility, don't change react usage in existing pages/api
-    it('should contain client react exports for pages api', async () => {
-      async function verifyReactExports(route, isEdge) {
-        const json = await next.fetch(route).then((res) => res.json())
-        // contain all react-server and default condition exports
-        expect(json.React).toContain('version')
-        expect(json.React).toContain('useEffect')
-
-        // contain react-dom-server default condition exports
-        expect(json.ReactDomServer).toContain('version')
-        expect(json.ReactDomServer).toContain('renderToString')
-        expect(json.ReactDomServer).toContain('renderToStaticMarkup')
-        expect(json.ReactDomServer).toContain(
-          isEdge ? 'renderToReadableStream' : 'renderToPipeableStream'
-        )
-      }
-
-      await verifyReactExports('/api/default', false)
-      await verifyReactExports('/api/default-edge', true)
-      await verifyReactExports('/api/server-only', false)
-      await verifyReactExports('/api/server-only-edge', true)
-    })
-
     if (isNextStart) {
       it('should log the build info properly', async () => {
         const cliOutput = next.cliOutput
@@ -75,8 +40,7 @@ describe('module layer', () => {
         )
         expect(functionsManifest.functions).toContainKeys([
           '/app/route-edge',
-          '/api/default-edge',
-          '/api/server-only-edge',
+          '/api/hello-edge',
           '/app/client-edge',
           '/app/server-edge',
         ])
@@ -88,10 +52,9 @@ describe('module layer', () => {
         )
         expect(middlewareManifest.middleware).toBeTruthy()
         expect(pagesManifest).toContainKeys([
-          '/api/default-edge',
+          '/api/hello-edge',
           '/pages-ssr',
-          '/api/default',
-          '/api/server-only',
+          '/api/hello',
         ])
       })
     }
@@ -118,15 +81,22 @@ describe('module layer', () => {
             .replace("// import './lib/mixed-lib'", "import './lib/mixed-lib'")
         )
 
+        const existingCliOutputLength = next.cliOutput.length
         await retry(async () => {
           expect(await hasRedbox(browser)).toBe(true)
           const source = await getRedboxSource(browser)
           expect(source).toContain(
-            isTurbopack
-              ? `'client-only' cannot be imported from a Server Component module. It should only be used from a Client Component.`
-              : `You're importing a component that imports client-only. It only works in a Client Component but none of its parents are marked with "use client"`
+            `'client-only' cannot be imported from a Server Component module. It should only be used from a Client Component.`
           )
         })
+
+        if (!isTurbopack) {
+          const newCliOutput = next.cliOutput.slice(existingCliOutputLength)
+          expect(newCliOutput).toContain('./middleware.js')
+          expect(newCliOutput).toContain(
+            `'client-only' cannot be imported from a Server Component module. It should only be used from a Client Component`
+          )
+        }
       })
     })
   }
diff --git a/test/e2e/module-layer/pages/api/default-edge.js b/test/e2e/module-layer/pages/api/default-edge.js
deleted file mode 100644
index f4621f2500cc5..0000000000000
--- a/test/e2e/module-layer/pages/api/default-edge.js
+++ /dev/null
@@ -1,11 +0,0 @@
-import * as ReactDomServer from 'react-dom/server'
-import * as React from 'react'
-
-export default async (_req) => {
-  return Response.json({
-    React: Object.keys(Object(React)),
-    ReactDomServer: Object.keys(Object(ReactDomServer)),
-  })
-}
-
-export const runtime = 'edge'
diff --git a/test/e2e/module-layer/pages/api/default.js b/test/e2e/module-layer/pages/api/default.js
deleted file mode 100644
index 2b13630aa4ac6..0000000000000
--- a/test/e2e/module-layer/pages/api/default.js
+++ /dev/null
@@ -1,9 +0,0 @@
-import * as ReactDomServer from 'react-dom/server'
-import * as React from 'react'
-
-export default async (_req, res) => {
-  return res.json({
-    React: Object.keys(Object(React)),
-    ReactDomServer: Object.keys(Object(ReactDomServer)),
-  })
-}
diff --git a/test/e2e/module-layer/pages/api/hello-edge.js b/test/e2e/module-layer/pages/api/hello-edge.js
new file mode 100644
index 0000000000000..dce0100296d19
--- /dev/null
+++ b/test/e2e/module-layer/pages/api/hello-edge.js
@@ -0,0 +1,7 @@
+import 'server-only'
+
+export default function handler() {
+  return new Response('pages/api/hello-edge.js:')
+}
+
+export const runtime = 'edge'
diff --git a/test/e2e/module-layer/pages/api/hello.js b/test/e2e/module-layer/pages/api/hello.js
new file mode 100644
index 0000000000000..d1fe5339d8e98
--- /dev/null
+++ b/test/e2e/module-layer/pages/api/hello.js
@@ -0,0 +1,5 @@
+import 'server-only'
+
+export default function handler(req, res) {
+  return res.send('pages/api/hello.js')
+}
diff --git a/test/e2e/module-layer/pages/api/server-only-edge.js b/test/e2e/module-layer/pages/api/server-only-edge.js
deleted file mode 100644
index 17e682c015f4f..0000000000000
--- a/test/e2e/module-layer/pages/api/server-only-edge.js
+++ /dev/null
@@ -1,12 +0,0 @@
-import 'server-only'
-import * as ReactDomServer from 'react-dom/server'
-import * as React from 'react'
-
-export default async (_req) => {
-  return Response.json({
-    React: Object.keys(Object(React)),
-    ReactDomServer: Object.keys(Object(ReactDomServer)),
-  })
-}
-
-export const runtime = 'edge'
diff --git a/test/e2e/module-layer/pages/api/server-only.js b/test/e2e/module-layer/pages/api/server-only.js
deleted file mode 100644
index 7f276bdf9c846..0000000000000
--- a/test/e2e/module-layer/pages/api/server-only.js
+++ /dev/null
@@ -1,10 +0,0 @@
-import 'server-only'
-import * as ReactDomServer from 'react-dom/server'
-import * as React from 'react'
-
-export default async (_req, res) => {
-  return res.json({
-    React: Object.keys(Object(React)),
-    ReactDomServer: Object.keys(Object(ReactDomServer)),
-  })
-}