diff --git a/lib/experimental/interactivity-api/directive-processing.php b/lib/experimental/interactivity-api/directive-processing.php
index 1a20925fc5ef89..4ff45ef0cdd994 100644
--- a/lib/experimental/interactivity-api/directive-processing.php
+++ b/lib/experimental/interactivity-api/directive-processing.php
@@ -40,26 +40,23 @@ function gutenberg_process_directives_in_root_blocks( $block_content, $block ) {
 	if ( WP_Directive_Processor::is_marked_as_root_block( $block ) ) {
 		WP_Directive_Processor::unmark_root_block();
 		$processed_content = '';
-		$p                 = WP_HTML_Processor::create_fragment( '' );
 		$parsed_blocks     = parse_blocks( $block_content );
 		foreach ( $parsed_blocks as $parsed_block ) {
 			if ( 'core/interactivity-wrapper' === $parsed_block['blockName'] ) {
-				$processed_content .= gutenberg_process_interactive_block( $parsed_block, $p );
+				$processed_content .= gutenberg_process_interactive_block( $parsed_block );
 			} elseif ( 'core/non-interactivity-wrapper' === $parsed_block['blockName'] ) {
-				$processed_content .= gutenberg_process_non_interactive_block( $parsed_block, $p );
+				$processed_content .= gutenberg_process_non_interactive_block( $parsed_block );
+			} else {
+				$processed_content .= $parsed_block['innerHTML'];
 			}
 		}
-		if ( null === $p->get_last_error() ) {
-			$content = $processed_content;
-		}
-
-		return $content;
+		return $processed_content;
 
 	}
 
 	return $block_content;
 }
-add_filter( 'render_block', 'gutenberg_process_directives_in_root_blocks', 10, 2 );
+add_filter( 'render_block', 'gutenberg_process_directives_in_root_blocks', 20, 2 );
 
 /**
  * Creates a stack of interactive block children.
@@ -167,8 +164,15 @@ function gutenberg_interactivity_evaluate_reference( $path, array $context = arr
 	return $should_negate_value ? ! $current : $current;
 }
 
-
-function gutenberg_process_interactive_block( $interactive_block, $p ) {
+/**
+ * Traverses the HTML of an interactive block,
+ * searching for Interactivity API directives and processing them.
+ *
+ * @param array $interactive_block The interactive block to process.
+ *
+ * @return string The processed HTML.
+ */
+function gutenberg_process_interactive_block( $interactive_block ) {
 	$block_index = 0;
 	$content     = '';
 	$directives  = array(
@@ -184,25 +188,34 @@ function gutenberg_process_interactive_block( $interactive_block, $p ) {
 			// This content belongs to an interactive block and therefore can contain
 			// directives.
 			$tags = new WP_Directive_Processor( $inner_content );
-			$tags->process_rendered_html( $p, 'data-wp-', $directives );
+			$tags->process_rendered_html( $tags, 'data-wp-', $directives );
 			$content .= $tags->get_updated_html();
 		} else {
 			// This is an inner block. It may be an interactive block or a
 			// non-interactive block.
 			$inner_block  = $interactive_block['innerBlocks'][ $block_index ];
 			$block_index += 1;
-
 			if ( 'core/interactivity-wrapper' === $inner_block['blockName'] ) {
-				$content .= gutenberg_process_interactive_block( $inner_block, $p );
+				$content .= gutenberg_process_interactive_block( $inner_block );
 			} elseif ( 'core/non-interactivity-wrapper' === $inner_block['blockName'] ) {
-				$content .= gutenberg_process_non_interactive_block( $inner_block, $p );
+				$content .= gutenberg_process_non_interactive_block( $inner_block );
 			}
 		}
 	}
 	return $content;
 }
 
-function gutenberg_process_non_interactive_block( $non_interactive_block, $p ) {
+/**
+ * Traverses the HTML of a non-interactive block,
+ * skipping the processing and returning the content.
+ * For the inner blocks, it calls the corresponding function
+ * depending on the wrapper type.
+ *
+ * @param array $non_interactive_block The non-interactive block to process.
+ *
+ * @return string The processed HTML.
+ */
+function gutenberg_process_non_interactive_block( $non_interactive_block ) {
 	$block_index = 0;
 	$content     = '';
 	foreach ( $non_interactive_block['innerContent'] as $inner_content ) {
@@ -217,9 +230,9 @@ function gutenberg_process_non_interactive_block( $non_interactive_block, $p ) {
 			$block_index += 1;
 
 			if ( 'core/interactivity-wrapper' === $inner_block['blockName'] ) {
-				$content .= gutenberg_process_interactive_block( $inner_block, $p );
+				$content .= gutenberg_process_interactive_block( $inner_block );
 			} elseif ( 'core/non-interactivity-wrapper' === $inner_block['blockName'] ) {
-				$content .= gutenberg_process_non_interactive_block( $inner_block, $p );
+				$content .= gutenberg_process_non_interactive_block( $inner_block );
 			}
 		}
 	}
diff --git a/phpunit/experimental/interactivity-api/directive-processing-test.php b/phpunit/experimental/interactivity-api/directive-processing-test.php
index 46ef0284df15d9..8f2446d655a0ac 100644
--- a/phpunit/experimental/interactivity-api/directive-processing-test.php
+++ b/phpunit/experimental/interactivity-api/directive-processing-test.php
@@ -117,6 +117,61 @@ public function test_interactivity_process_directives_in_root_blocks() {
 		gutenberg_process_directives_in_root_blocks( $rendered_content, $parsed_block );
 		$this->assertEmpty( WP_Directive_Processor::$root_block );
 	}
+
+	public function test_directive_processing_of_interactive_block() {
+		register_block_type(
+			'gutenberg/test-context',
+			array(
+				'render_callback' => function () {
+					return '<div data-wp-interactive=\'{"namespace": "gutenberg"}\' data-wp-context=\'{"MyText": "hello" }\'><p data-wp-text=\'context.MyText\'></p></div>';
+				},
+				'supports'        => array(
+					'interactivity' => true,
+				),
+			)
+		);
+		$args = array(
+			'post_content' => '<!-- wp:gutenberg/test-context /-->',
+			'post_excerpt' => '',
+		);
+		$post = $this->factory()->post->create_and_get( $args );
+		setup_postdata( $post );
+
+		$content         = get_the_content( null, false, $post );
+		$rendered_blocks = do_blocks( $content );
+		$expected        = '<div data-wp-interactive=\'{"namespace": "gutenberg"}\' data-wp-context=\'{"MyText": "hello" }\'><p data-wp-text=\'context.MyText\'>hello</p></div>';
+		$this->assertSame( $expected, $rendered_blocks );
+
+		unregister_block_type( 'gutenberg/test-context' );
+		wp_delete_post( $post->ID, true );
+	}
+	public function test_directive_processing_child_blocks() {
+		register_block_type(
+			'gutenberg/test-context',
+			array(
+				'render_callback' => function () {
+					return '<div data-wp-interactive=\'{"namespace": "gutenberg"}\' data-wp-context=\'{"MyText": "hello" }\'><p data-wp-text=\'context.MyText\'></p></div>';
+				},
+				'supports'        => array(
+					'interactivity' => true,
+				),
+			)
+		);
+		$args = array(
+			'post_content' => '<!-- wp:group {"layout":{"type":"constrained"}} --><div class="wp-block-group"><!-- wp:gutenberg/test-context /--></div><!-- /wp:group -->',
+			'post_excerpt' => '',
+		);
+		$post = $this->factory()->post->create_and_get( $args );
+		setup_postdata( $post );
+
+		$content         = get_the_content( null, false, $post );
+		$rendered_blocks = do_blocks( $content );
+		$expected        = '<div class="wp-block-group"><div class="wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained"><div data-wp-interactive=\'{"namespace": "gutenberg"}\' data-wp-context=\'{"MyText": "hello" }\'><p data-wp-text=\'context.MyText\'>hello</p></div></div></div>';
+		$this->assertSame( $expected, $rendered_blocks );
+
+		unregister_block_type( 'gutenberg/test-context' );
+		wp_delete_post( $post->ID, true );
+	}
 }