diff --git a/share/sysbuild/CMakeLists.txt b/share/sysbuild/CMakeLists.txt
index d7b9d15f4e7..7bbfe138760 100644
--- a/share/sysbuild/CMakeLists.txt
+++ b/share/sysbuild/CMakeLists.txt
@@ -26,62 +26,12 @@ project(sysbuild LANGUAGES)
 
 get_filename_component(APP_DIR  ${APP_DIR} ABSOLUTE)
 get_filename_component(app_name ${APP_DIR} NAME)
-
-# Include zephyr modules generated sysbuild CMake file.
-foreach(SYSBUILD_CURRENT_MODULE_NAME ${SYSBUILD_MODULE_NAMES})
-  # Note the second, binary_dir parameter requires the added
-  # subdirectory to have its own, local cmake target(s). If not then
-  # this binary_dir is created but stays empty. Object files land in
-  # the main binary dir instead.
-  # https://cmake.org/pipermail/cmake/2019-June/069547.html
-  zephyr_string(SANITIZE TOUPPER MODULE_NAME_UPPER ${SYSBUILD_CURRENT_MODULE_NAME})
-  if(NOT ${SYSBUILD_${MODULE_NAME_UPPER}_CMAKE_DIR} STREQUAL "")
-    set(SYSBUILD_CURRENT_MODULE_DIR ${SYSBUILD_${MODULE_NAME_UPPER}_MODULE_DIR})
-    set(SYSBUILD_CURRENT_CMAKE_DIR ${SYSBUILD_${MODULE_NAME_UPPER}_CMAKE_DIR})
-    add_subdirectory(${SYSBUILD_CURRENT_CMAKE_DIR} ${CMAKE_BINARY_DIR}/modules/${SYSBUILD_CURRENT_MODULE_NAME})
-  endif()
-endforeach()
-# Done processing modules, clear SYSBUILD_CURRENT_MODULE_DIR and SYSBUILD_CURRENT_CMAKE_DIR.
-set(SYSBUILD_CURRENT_MODULE_DIR)
-set(SYSBUILD_CURRENT_CMAKE_DIR)
-
-# This adds the primary application to the build.
-ExternalZephyrProject_Add(
-  APPLICATION ${app_name}
-  SOURCE_DIR ${APP_DIR}
-  APP_TYPE MAIN
-)
 set(DEFAULT_IMAGE "${app_name}")
 
-add_subdirectory(bootloader)
-
-# This allows for board and app specific images to be included.
-include(${BOARD_DIR}/sysbuild.cmake OPTIONAL)
+# This is where all Zephyr applications are added to the multi-image build.
+sysbuild_add_subdirectory(images)
 
-# This allows image specific sysbuild.cmake to be processed.
 get_property(IMAGES GLOBAL PROPERTY sysbuild_images)
-list(LENGTH IMAGES images_length)
-while(NOT "${images_length}" EQUAL "${processed_length}")
-  foreach(image ${IMAGES})
-    if(NOT image IN_LIST images_sysbuild_processed)
-      ExternalProject_Get_property(${image} SOURCE_DIR)
-      include(${SOURCE_DIR}/sysbuild.cmake OPTIONAL)
-      list(APPEND images_sysbuild_processed ${image})
-    endif()
-  endforeach()
-
-  get_property(IMAGES GLOBAL PROPERTY sysbuild_images)
-  list(LENGTH IMAGES images_length)
-  list(LENGTH images_sysbuild_processed processed_length_new)
-
-  # Check for any duplicate entries in image names to prevent an infinite loop
-  if("${processed_length_new}" EQUAL "${processed_length}")
-    # Image length was different than processed length, but no new images are processed.
-    message(FATAL_ERROR "A duplicate image name was provided, image names must be unique.")
-  endif()
-  set(processed_length ${processed_length_new})
-endwhile()
-
 sysbuild_module_call(PRE_CMAKE MODULES ${SYSBUILD_MODULE_NAMES} IMAGES ${IMAGES})
 sysbuild_images_order(IMAGES_CONFIGURATION_ORDER CONFIGURE IMAGES ${IMAGES})
 foreach(image ${IMAGES_CONFIGURATION_ORDER})
diff --git a/share/sysbuild/Kconfig b/share/sysbuild/Kconfig
index 74c46ba2f71..b08db20e5df 100644
--- a/share/sysbuild/Kconfig
+++ b/share/sysbuild/Kconfig
@@ -39,4 +39,4 @@ config WARN_DEPRECATED
 	  Print a warning when the Kconfig tree is parsed if any deprecated
 	  features are enabled.
 
-rsource "bootloader/Kconfig"
+rsource "images/Kconfig"
diff --git a/share/sysbuild/cmake/modules/sysbuild_extensions.cmake b/share/sysbuild/cmake/modules/sysbuild_extensions.cmake
index fd776f8e4ed..a3838415eee 100644
--- a/share/sysbuild/cmake/modules/sysbuild_extensions.cmake
+++ b/share/sysbuild/cmake/modules/sysbuild_extensions.cmake
@@ -145,6 +145,13 @@ function(ExternalZephyrProject_Add)
     )
   endif()
 
+  if(TARGET ${ZBUILD_APPLICATION})
+    message(FATAL_ERROR
+      "ExternalZephyrProject_Add(APPLICATION ${ZBUILD_APPLICATION} ...) "
+      "already exists. Application names must be unique."
+    )
+  endif()
+
   if(DEFINED ZBUILD_APP_TYPE)
     if(NOT ZBUILD_APP_TYPE IN_LIST app_types)
       message(FATAL_ERROR
@@ -155,6 +162,16 @@ function(ExternalZephyrProject_Add)
 
   endif()
 
+  if(NOT DEFINED SYSBUILD_CURRENT_SOURCE_DIR)
+    message(FATAL_ERROR
+      "ExternalZephyrProject_Add(${ARGV0} <val> ...) must not be called outside of"
+      " sysbuild_add_subdirectory(). SYSBUILD_CURRENT_SOURCE_DIR is undefined."
+    )
+  endif()
+  set_property(
+    DIRECTORY "${SYSBUILD_CURRENT_SOURCE_DIR}"
+    APPEND PROPERTY sysbuild_images ${ZBUILD_APPLICATION}
+  )
   set_property(
     GLOBAL
     APPEND PROPERTY sysbuild_images ${ZBUILD_APPLICATION}
@@ -566,6 +583,45 @@ function(set_config_string image setting value)
   set_property(TARGET ${image} APPEND_STRING PROPERTY CONFIG "${setting}=\"${value}\"\n")
 endfunction()
 
+# Usage:
+#   sysbuild_add_subdirectory(<source_dir> [<binary_dir>])
+#
+# This function extends the standard add_subdirectory() command with additional,
+# recursive processing of the sysbuild images added via <source_dir>.
+#
+# After exiting <source_dir>, this function will take every image added so far,
+# and include() its sysbuild.cmake file (if found). If more images get added at
+# this stage, their sysbuild.cmake files will be included as well, and so on.
+# This continues until all expected images have been added, before returning.
+#
+function(sysbuild_add_subdirectory source_dir)
+  if(ARGC GREATER 2)
+    message(FATAL_ERROR
+      "sysbuild_add_subdirectory(...) called with incorrect number of arguments"
+      " (expected at most 2, got ${ARGC})"
+    )
+  endif()
+  set(binary_dir ${ARGV1})
+
+  # Update SYSBUILD_CURRENT_SOURCE_DIR in this scope, to support nesting
+  # of sysbuild_add_subdirectory() and even regular add_subdirectory().
+  cmake_path(ABSOLUTE_PATH source_dir NORMALIZE OUTPUT_VARIABLE SYSBUILD_CURRENT_SOURCE_DIR)
+  add_subdirectory(${source_dir} ${binary_dir})
+
+  while(TRUE)
+    get_property(added_images DIRECTORY "${SYSBUILD_CURRENT_SOURCE_DIR}" PROPERTY sysbuild_images)
+    if(NOT added_images)
+      break()
+    endif()
+    set_property(DIRECTORY "${SYSBUILD_CURRENT_SOURCE_DIR}" PROPERTY sysbuild_images "")
+
+    foreach(image ${added_images})
+      ExternalProject_Get_property(${image} SOURCE_DIR)
+      include(${SOURCE_DIR}/sysbuild.cmake OPTIONAL)
+    endforeach()
+  endwhile()
+endfunction()
+
 # Usage:
 #   sysbuild_add_dependencies(<CONFIGURE | FLASH> <image> [<image-dependency> ...])
 #
diff --git a/share/sysbuild/images/CMakeLists.txt b/share/sysbuild/images/CMakeLists.txt
new file mode 100644
index 00000000000..2b553181d06
--- /dev/null
+++ b/share/sysbuild/images/CMakeLists.txt
@@ -0,0 +1,36 @@
+# Copyright (c) 2021-2023 Nordic Semiconductor
+#
+# SPDX-License-Identifier: Apache-2.0
+
+# The primary application is the first image to be added to the build, so that
+# it is available while processing the remaining images.
+ExternalZephyrProject_Add(
+  APPLICATION ${DEFAULT_IMAGE}
+  SOURCE_DIR ${APP_DIR}
+  APP_TYPE MAIN
+)
+
+# This allows for MCUboot to be included.
+sysbuild_add_subdirectory(bootloader)
+
+# Include zephyr modules generated sysbuild CMake file.
+foreach(SYSBUILD_CURRENT_MODULE_NAME ${SYSBUILD_MODULE_NAMES})
+  # Note the second, binary_dir parameter requires the added
+  # subdirectory to have its own, local cmake target(s). If not then
+  # this binary_dir is created but stays empty. Object files land in
+  # the main binary dir instead.
+  # https://cmake.org/pipermail/cmake/2019-June/069547.html
+  zephyr_string(SANITIZE TOUPPER MODULE_NAME_UPPER ${SYSBUILD_CURRENT_MODULE_NAME})
+  if(NOT ${SYSBUILD_${MODULE_NAME_UPPER}_CMAKE_DIR} STREQUAL "")
+    set(SYSBUILD_CURRENT_MODULE_DIR ${SYSBUILD_${MODULE_NAME_UPPER}_MODULE_DIR})
+    set(SYSBUILD_CURRENT_CMAKE_DIR ${SYSBUILD_${MODULE_NAME_UPPER}_CMAKE_DIR})
+    sysbuild_add_subdirectory(${SYSBUILD_CURRENT_CMAKE_DIR}
+                              ${CMAKE_BINARY_DIR}/modules/${SYSBUILD_CURRENT_MODULE_NAME})
+  endif()
+endforeach()
+# Done processing modules, clear SYSBUILD_CURRENT_MODULE_DIR and SYSBUILD_CURRENT_CMAKE_DIR.
+set(SYSBUILD_CURRENT_MODULE_DIR)
+set(SYSBUILD_CURRENT_CMAKE_DIR)
+
+# This allows for board specific images to be included.
+sysbuild_add_subdirectory(boards)
diff --git a/share/sysbuild/images/Kconfig b/share/sysbuild/images/Kconfig
new file mode 100644
index 00000000000..616b0a7c23d
--- /dev/null
+++ b/share/sysbuild/images/Kconfig
@@ -0,0 +1,5 @@
+# Copyright (c) 2021-2023 Nordic Semiconductor
+#
+# SPDX-License-Identifier: Apache-2.0
+
+rsource "bootloader/Kconfig"
diff --git a/share/sysbuild/images/boards/CMakeLists.txt b/share/sysbuild/images/boards/CMakeLists.txt
new file mode 100644
index 00000000000..663bfc8d10b
--- /dev/null
+++ b/share/sysbuild/images/boards/CMakeLists.txt
@@ -0,0 +1,5 @@
+# Copyright (c) 2021-2023 Nordic Semiconductor
+#
+# SPDX-License-Identifier: Apache-2.0
+
+include(${BOARD_DIR}/sysbuild.cmake OPTIONAL)
diff --git a/share/sysbuild/bootloader/CMakeLists.txt b/share/sysbuild/images/bootloader/CMakeLists.txt
similarity index 100%
rename from share/sysbuild/bootloader/CMakeLists.txt
rename to share/sysbuild/images/bootloader/CMakeLists.txt
diff --git a/share/sysbuild/bootloader/Kconfig b/share/sysbuild/images/bootloader/Kconfig
similarity index 100%
rename from share/sysbuild/bootloader/Kconfig
rename to share/sysbuild/images/bootloader/Kconfig