diff --git a/errors.go b/errors.go
new file mode 100644
index 0000000..d4369ff
--- /dev/null
+++ b/errors.go
@@ -0,0 +1,73 @@
+package extism
+
+import "bytes"
+
+// errPrefix is a sentinel byte sequence used to identify errors originating from host functions.
+// It helps distinguish these errors when serialized to bytes.
+var errPrefix = []byte{0xFF, 0xFE, 0xFD}
+
+// hostFuncError wraps another error and identifies it as a host function error.
+// When a host function is called and that host function wants to return an error,
+// internally extism will wrap that error in this type before serializing the error
+// using the bytes method, and writing the error into WASM memory so that the guest
+// can read the error.
+//
+// The bytes method appends a set of sentinel bytes which the host can later read
+// when calls `error_get` to see if the error that was previously set was set by
+// the host or the guest. If we see the matching sentinel bytes in the prefix of
+// the error bytes, then we know that the error was a host function error, and the
+// host can ignore it.
+//
+// The purpose of this is to allow us to piggyback off the existing `error_get` and
+// `error_set` extism kernel functions. These previously were only used by guests to
+// communicate errors to the host. In order to prevent host plugin function calls from
+// seeing their own host function errors, the plugin can check and see if the error
+// was created via a host function using this type.
+//
+// This is an effort to preserve backwards compatibility with existing PDKs which
+// may not know to call `error_get` to see if there are any host->guest errors. We
+// need the host SDKs to handle the scenario where the host calls `error_set` but
+// the guest never calls `error_get` resulting in the host seeing their own error.
+type hostFuncError struct {
+	inner error // The underlying error being wrapped.
+}
+
+// Error implements the error interface for hostFuncError.
+// It returns the message of the wrapped error or an empty string if there is no inner error.
+func (e *hostFuncError) Error() string {
+	if e.inner == nil {
+		return ""
+	}
+	return e.inner.Error()
+}
+
+// bytes serializes the hostFuncError into a byte slice.
+// If there is no inner error, it returns nil. Otherwise, it prefixes the error message
+// with a sentinel byte sequence to facilitate identification during deserialization.
+func (e *hostFuncError) bytes() []byte {
+	if e.inner == nil {
+		return nil
+	}
+	return append(errPrefix, []byte(e.inner.Error())...)
+}
+
+// isHostFuncError checks if the given byte slice represents a serialized host function error.
+// It verifies the presence of the sentinel prefix to make this determination.
+func isHostFuncError(error []byte) bool {
+	if error == nil {
+		return false
+	}
+	if len(error) < len(errPrefix) {
+		return false // The slice is too short to contain the prefix.
+	}
+	return bytes.Equal(error[:len(errPrefix)], errPrefix)
+}
+
+// newHostFuncError creates a new hostFuncError instance wrapping the provided error.
+// If the input error is nil, it returns nil to avoid creating redundant wrappers.
+func newHostFuncError(err error) *hostFuncError {
+	if err == nil {
+		return nil
+	}
+	return &hostFuncError{inner: err}
+}
diff --git a/errors_test.go b/errors_test.go
new file mode 100644
index 0000000..d57111b
--- /dev/null
+++ b/errors_test.go
@@ -0,0 +1,120 @@
+package extism
+
+import (
+	"bytes"
+	"errors"
+	"testing"
+)
+
+func TestNewHostFuncError(t *testing.T) {
+	tests := []struct {
+		name     string
+		inputErr error
+		wantNil  bool
+	}{
+		{
+			name:     "nil error input",
+			inputErr: nil,
+			wantNil:  true,
+		},
+		{
+			name:     "non-nil error input",
+			inputErr: errors.New("test error"),
+			wantNil:  false,
+		},
+	}
+
+	for _, tt := range tests {
+		t.Run(tt.name, func(t *testing.T) {
+			err := newHostFuncError(tt.inputErr)
+			if (err == nil) != tt.wantNil {
+				t.Errorf("got nil: %v, want nil: %v", err == nil, tt.wantNil)
+			}
+		})
+	}
+}
+
+func TestBytes(t *testing.T) {
+	tests := []struct {
+		name       string
+		inputErr   error
+		wantPrefix []byte
+		wantMsg    string
+		wantNil    bool
+	}{
+		{
+			name:       "nil inner error",
+			inputErr:   nil,
+			wantPrefix: nil,
+			wantMsg:    "",
+			wantNil:    true,
+		},
+		{
+			name:       "non-nil inner error",
+			inputErr:   errors.New("test error"),
+			wantPrefix: errPrefix,
+			wantMsg:    "test error",
+			wantNil:    false,
+		},
+	}
+
+	for _, tt := range tests {
+		t.Run(tt.name, func(t *testing.T) {
+			e := &hostFuncError{inner: tt.inputErr}
+			b := e.bytes()
+
+			if tt.wantNil {
+				if b != nil {
+					t.Errorf("expected nil, got %x", b)
+				}
+				return
+			}
+
+			if len(b) < len(tt.wantPrefix) {
+				t.Fatalf("returned bytes too short, got %x, want prefix %x", b, tt.wantPrefix)
+			}
+
+			if !bytes.HasPrefix(b, tt.wantPrefix) {
+				t.Errorf("expected prefix %x, got %x", tt.wantPrefix, b[:len(tt.wantPrefix)])
+			}
+
+			gotMsg := string(b[len(tt.wantPrefix):])
+			if gotMsg != tt.wantMsg {
+				t.Errorf("expected message %q, got %q", tt.wantMsg, gotMsg)
+			}
+		})
+	}
+}
+
+func TestIsHostFuncError(t *testing.T) {
+	tests := []struct {
+		name     string
+		inputErr []byte
+		want     bool
+	}{
+		{
+			name:     "nil error input",
+			inputErr: nil,
+			want:     false,
+		},
+		{
+			name:     "not a hostFuncError",
+			inputErr: []byte("normal error"),
+			want:     false,
+		},
+		{
+			name:     "valid hostFuncError",
+			inputErr: newHostFuncError(errors.New("host function error")).bytes(),
+			want:     true,
+		},
+	}
+
+	for _, tt := range tests {
+		t.Run(tt.name, func(t *testing.T) {
+			got := isHostFuncError(tt.inputErr)
+			if got != tt.want {
+				t.Errorf("isHostFuncError(%v) = %v, want %v", tt.inputErr, got, tt.want)
+			}
+		})
+	}
+}
diff --git a/extism.go b/extism.go
index 1e8c120..0ec4fdd 100644
--- a/extism.go
+++ b/extism.go
@@ -110,12 +110,9 @@ type Plugin struct {
 	close  []func(ctx context.Context) error
 	extism api.Module
 
-	//Runtime *Runtime
-	//Main    Module
-	module  api.Module
-	Timeout time.Duration
-	Config  map[string]string
-	// NOTE: maybe we can have some nice methods for getting/setting vars
+	module               api.Module
+	Timeout              time.Duration
+	Config               map[string]string
 	Var                  map[string][]byte
 	AllowedHosts         []string
 	AllowedPaths         map[string]string
@@ -435,6 +432,15 @@ func (p *Plugin) GetErrorWithContext(ctx context.Context) string {
 	}
 
 	mem, _ := p.Memory().Read(uint32(errOffs[0]), uint32(errLen[0]))
+
+	// A host function error is an error set by a host function during a guest->host function
+	// call. These errors are intended to be handled only by the guest. If the error makes it
+	// back here, the guest PDK most likely doesn't know to handle it, in which case we should
+	// ignore it here.
+	if isHostFuncError(mem) {
+		return ""
+	}
+
 	return string(mem)
 }
 
diff --git a/extism_test.go b/extism_test.go
index 38b3584..6135b9f 100644
--- a/extism_test.go
+++ b/extism_test.go
@@ -4,6 +4,7 @@ import (
 	"bytes"
 	"context"
 	"encoding/json"
+	"errors"
 	"fmt"
 	observe "github.com/dylibso/observe-sdk/go"
 	"github.com/dylibso/observe-sdk/go/adapter/stdout"
@@ -1038,6 +1039,54 @@ func TestEnableExperimentalFeature(t *testing.T) {
 	}
 }
 
+// This test creates host functions that set errors. Previously, host functions
+// would have to panic to communicate host function errors, but this unfortunately
+// stopped execution of the guest function. In other words, there was no way to
+// gracefully communicate errors from host->guest when the guest called a host
+// function. This has since been fixed and this test proves that even when guests
+// don't reset the error state, the host can still determine that the current error
+// state was a host->guest error and not a guest->host error and ignores it.
+func TestHostFunctionError(t *testing.T) {
+	manifest := manifest("host_multiple.wasm")
+
+	hostGreenMessage := NewHostFunctionWithStack(
+		"hostGreenMessage",
+		func(ctx context.Context, plugin *CurrentPlugin, stack []uint64) {
+			plugin.SetError(ctx, errors.New("this is an error"))
+		},
+		[]ValueType{ValueTypePTR},
+		[]ValueType{ValueTypePTR},
+	)
+	hostPurpleMessage := NewHostFunctionWithStack(
+		"hostPurpleMessage",
+		func(ctx context.Context, plugin *CurrentPlugin, stack []uint64) {
+			plugin.SetError(ctx, errors.New("this is an error"))
+		},
+		[]ValueType{ValueTypePTR},
+		[]ValueType{ValueTypePTR},
+	)
+
+	ctx := context.Background()
+	p, err := NewCompiledPlugin(ctx, manifest, PluginConfig{
+		EnableWasi: true,
+	}, []HostFunction{
+		hostGreenMessage,
+		hostPurpleMessage,
+	})
+	require.NoError(t, err)
+
+	pluginInst, err := p.Instance(ctx, PluginInstanceConfig{
+		ModuleConfig: wazero.NewModuleConfig().WithSysWalltime(),
+	})
+	require.NoError(t, err)
+
+	_, _, err = pluginInst.Call(
+		"say_green",
+		[]byte("John Doe"),
+	)
+	require.NoError(t, err, "the host function should have returned an error to the guest but it should not have propagated back to the host")
+}
+
 func BenchmarkInitialize(b *testing.B) {
 	ctx := context.Background()
 	cache := wazero.NewCompilationCache()
diff --git a/host.go b/host.go
index a32b456..9c85136 100644
--- a/host.go
+++ b/host.go
@@ -109,6 +109,24 @@ func (p *Plugin) currentPlugin() *CurrentPlugin {
 	return &CurrentPlugin{p}
 }
 
+// SetError allows the host function to set an error that will be
+// gracefully returned by extism guest modules.
+func (p *CurrentPlugin) SetError(ctx context.Context, err error) {
+	if err == nil {
+		return
+	}
+
+	offset, err := p.WriteBytes(newHostFuncError(err).bytes())
+	if err != nil {
+		panic(fmt.Sprintf("failed to write error message to memory: %v", err))
+	}
+
+	_, err = p.plugin.extism.ExportedFunction("error_set").Call(ctx, offset)
+	if err != nil {
+		panic(fmt.Sprintf("failed to set error: %v", err))
+	}
+}
+
 func (p *CurrentPlugin) Log(level LogLevel, message string) {
 	p.plugin.Log(level, message)
 }
@@ -306,7 +324,7 @@ func instantiateEnvModule(ctx context.Context, rt wazero.Runtime) (api.Module, e
 		WithGoModuleFunction(api.GoModuleFunc(store_u64), []ValueType{ValueTypeI64, ValueTypeI64}, []ValueType{}).
 		Export("store_u64")
 
-	hostFunc := func(name string, f interface{}) {
+	hostFunc := func(name string, f any) {
 		builder.NewFunctionBuilder().WithFunc(f).Export(name)
 	}
 
diff --git a/plugin.go b/plugin.go
index c1139ab..99f8673 100644
--- a/plugin.go
+++ b/plugin.go
@@ -2,6 +2,7 @@ package extism
 
 import (
 	"context"
+	"encoding/base64"
 	"errors"
 	"fmt"
 	observe "github.com/dylibso/observe-sdk/go"
@@ -220,7 +221,12 @@ func (p *CompiledPlugin) Instance(ctx context.Context, config PluginInstanceConf
 	if moduleConfig == nil {
 		moduleConfig = wazero.NewModuleConfig()
 	}
-	moduleConfig = moduleConfig.WithName(strconv.Itoa(int(p.instanceCount.Add(1))))
+	moduleConfig = moduleConfig.
+		WithName(strconv.Itoa(int(p.instanceCount.Add(1)))).
+		// We can tell the guest module what the error prefix will be for errors that are set
+		// by host functions. Guests should trim this prefix off of their error messages when
+		// reading them.
+		WithEnv("EXTISM_HOST_FUNC_ERROR_PREFIX", base64.StdEncoding.EncodeToString(errPrefix))
 
 	// NOTE: this is only necessary for guest modules because
 	// host modules have the same access privileges as the host itself