diff --git a/.changelog/5543.fixed b/.changelog/5543.fixed
new file mode 100644
index 00000000000..ecbb79bd01c
--- /dev/null
+++ b/.changelog/5543.fixed
@@ -0,0 +1 @@
+`opentelemetry-api`: fix `TraceState.update` dropping all entries when adding a new key at the 32-key limit
diff --git a/opentelemetry-api/src/opentelemetry/trace/span.py b/opentelemetry-api/src/opentelemetry/trace/span.py
index 745f4f5ff08..7d3462bebe8 100644
--- a/opentelemetry-api/src/opentelemetry/trace/span.py
+++ b/opentelemetry-api/src/opentelemetry/trace/span.py
@@ -321,13 +321,23 @@ def update(self, key: str, value: str) -> TraceState:
         Returns:
             A new TraceState with the modifications applied.
 
-            If the provided key-value pair is invalid or results in tracestate
-            that violates tracecontext specification, they are discarded and
-            same tracestate will be returned.
+            If the provided pair is invalid, or adding a new key would exceed
+            the maximum of 32 key/value pairs, they are discarded and the same
+            tracestate is returned unchanged. Updating an existing key is always
+            allowed, even at the maximum.
         """
         if not _is_valid_pair(key, value):
             _logger.warning("Invalid key/value pair (%s, %s) found.", key, value)
             return self
+        # Adding a new key at the maximum would push the tracestate over the
+        # limit and cause the constructor to drop every entry. Return unchanged
+        # instead of silently discarding existing state.
+        if (
+            key not in self._dict
+            and len(self._dict) >= _TRACECONTEXT_MAXIMUM_TRACESTATE_KEYS
+        ):
+            _logger.warning("There can't be more 32 key/value pairs.")
+            return self
         prev_state = self._dict.copy()
         prev_state.pop(key, None)
         new_state = [(key, value), *prev_state.items()]
diff --git a/opentelemetry-api/tests/trace/test_tracestate.py b/opentelemetry-api/tests/trace/test_tracestate.py
index 555cef16bde..62e6f5fe29b 100644
--- a/opentelemetry-api/tests/trace/test_tracestate.py
+++ b/opentelemetry-api/tests/trace/test_tracestate.py
@@ -51,6 +51,33 @@ def test_tracestate_update_invalid(self):
         self.assertNotEqual(new_state.get("a"), ",,2,,f")
         self.assertEqual(new_state.get("a"), "1")
 
+    def test_tracestate_update_new_key_added_below_capacity(self):
+        # update() keeps its upsert behavior: a key that is not present is added
+        # as long as there is room below the 32-entry limit.
+        small_state = TraceState([("a", "1")])
+        new_state = small_state.update("b", "2")
+        self.assertEqual(new_state.get("b"), "2")
+        self.assertEqual(new_state.get("a"), "1")
+
+    def test_tracestate_update_at_capacity_new_key_preserved(self):
+        # Guards the previous bug: adding a new key at the 32-entry limit used to
+        # push the list to 33 entries and cause the constructor to wipe them all.
+        # Now the tracestate is returned unchanged, preserving existing entries.
+        pairs = [(f"key{i}", f"value{i}") for i in range(32)]
+        state = TraceState(pairs)
+        new_state = state.update("newkey", "newvalue")
+        self.assertEqual(len(new_state), 32)
+        self.assertIsNone(new_state.get("newkey"))
+        self.assertEqual(new_state.get("key0"), "value0")
+
+    def test_tracestate_update_existing_key_at_capacity(self):
+        # Updating an existing key while at the limit stays within the limit.
+        pairs = [(f"key{i}", f"value{i}") for i in range(32)]
+        state = TraceState(pairs)
+        new_state = state.update("key0", "changed")
+        self.assertEqual(len(new_state), 32)
+        self.assertEqual(new_state.get("key0"), "changed")
+
     def test_tracestate_delete_preserved(self):
         state = TraceState([("a", "1"), ("b", "2"), ("c", "3")])
         new_state = state.delete("b")