diff --git a/CHANGELOG.md b/CHANGELOG.md
index 47daa6f..c1649ec 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -65,6 +65,7 @@ and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0
 - Fix Tree-shaking support ([#1247](https://github.com/tailwindlabs/headlessui/pull/1247))
 - Stop propagation on the Popover Button ([#1263](https://github.com/tailwindlabs/headlessui/pull/1263))
 - Fix incorrect closing while interacting with third party libraries in `Dialog` component ([#1268](https://github.com/tailwindlabs/headlessui/pull/1268))
+- Resolve `initialFocusRef` correctly ([#1276](https://github.com/tailwindlabs/headlessui/pull/1276))
 
 ### Added
 
diff --git a/packages/@headlessui-vue/src/components/dialog/dialog.test.ts b/packages/@headlessui-vue/src/components/dialog/dialog.test.ts
index c1b4aef..8c727fd 100644
--- a/packages/@headlessui-vue/src/components/dialog/dialog.test.ts
+++ b/packages/@headlessui-vue/src/components/dialog/dialog.test.ts
@@ -698,6 +698,76 @@ describe('Keyboard interactions', () => {
         assertActiveElement(document.getElementById('a'))
       })
     )
+
+    it(
+      'should be possible to tab around when using the initialFocus ref on a component',
+      suppressConsoleLogs(async () => {
+        let CustomComponent = defineComponent({
+          name: 'CustomComponent',
+          setup() {
+            return () => h('input')
+          },
+        })
+
+        renderTemplate({
+          components: {
+            CustomComponent,
+          },
+          template: `
+            <div>
+              <button id="trigger" @click="toggleOpen">
+                Trigger
+              </button>
+              <Dialog :open="isOpen" @close="setIsOpen" :initialFocus="initialFocusRef">
+                Contents
+                <TabSentinel id="a" />
+                <CustomComponent type="text" id="b" ref="initialFocusRef" />
+              </Dialog>
+            </div>
+          `,
+          setup() {
+            let isOpen = ref(false)
+            let initialFocusRef = ref(null)
+            return {
+              isOpen,
+              initialFocusRef,
+              setIsOpen(value: boolean) {
+                isOpen.value = value
+              },
+              toggleOpen() {
+                isOpen.value = !isOpen.value
+              },
+            }
+          },
+        })
+
+        assertDialog({ state: DialogState.InvisibleUnmounted })
+
+        // Open dialog
+        await click(document.getElementById('trigger'))
+
+        // Verify it is open
+        assertDialog({
+          state: DialogState.Visible,
+          attributes: { id: 'headlessui-dialog-1' },
+        })
+
+        // Verify that the input field is focused
+        assertActiveElement(document.getElementById('b'))
+
+        // Verify that we can tab around
+        await press(Keys.Tab)
+        assertActiveElement(document.getElementById('a'))
+
+        // Verify that we can tab around
+        await press(Keys.Tab)
+        assertActiveElement(document.getElementById('b'))
+
+        // Verify that we can tab around
+        await press(Keys.Tab)
+        assertActiveElement(document.getElementById('a'))
+      })
+    )
   })
 })
 
diff --git a/packages/@headlessui-vue/src/hooks/use-focus-trap.ts b/packages/@headlessui-vue/src/hooks/use-focus-trap.ts
index cc16d88..776f4c4 100644
--- a/packages/@headlessui-vue/src/hooks/use-focus-trap.ts
+++ b/packages/@headlessui-vue/src/hooks/use-focus-trap.ts
@@ -12,6 +12,7 @@ import { Keys } from '../keyboard'
 import { focusElement, focusIn, Focus, FocusResult } from '../utils/focus-management'
 import { getOwnerDocument } from '../utils/owner'
 import { useEventListener } from './use-event-listener'
+import { dom } from '../utils/dom'
 
 export enum Features {
   /** No features enabled for the `useFocusTrap` hook. */
@@ -96,10 +97,12 @@ export function useFocusTrap(
         let containerElement = container.value
         if (!containerElement) return
 
+        let initialFocusElement = dom(options.value.initialFocus)
+
         let activeElement = ownerDocument.value?.activeElement as HTMLElement
 
-        if (options.value.initialFocus?.value) {
-          if (options.value.initialFocus?.value === activeElement) {
+        if (initialFocusElement) {
+          if (initialFocusElement === activeElement) {
             previousActiveElement.value = activeElement
             return // Initial focus ref is already the active element
           }
@@ -109,8 +112,8 @@ export function useFocusTrap(
         }
 
         // Try to focus the initialFocus ref
-        if (options.value.initialFocus?.value) {
-          focusElement(options.value.initialFocus.value)
+        if (initialFocusElement) {
+          focusElement(initialFocusElement)
         } else {
           if (focusIn(containerElement, Focus.First) === FocusResult.Error) {
             console.warn('There are no focusable elements inside the <FocusTrap />')