diff --git a/CHANGELOG.md b/CHANGELOG.md
index 1a31f1a2d5..421d28888e 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -19,6 +19,7 @@ and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0
   ([#2136](https://github.com/open-telemetry/opentelemetry-python-contrib/pull/2136))
 - `opentelemetry-resource-detector-azure` Suppress instrumentation for `urllib` call
   ([#2178](https://github.com/open-telemetry/opentelemetry-python-contrib/pull/2178))
+- AwsLambdaInstrumentor handles and re-raises function exception ([#2245](https://github.com/open-telemetry/opentelemetry-python-contrib/pull/2245))
 
 ## Version 1.22.0/0.43b0 (2023-12-14)
 
diff --git a/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py b/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py
index 391bc32f60..130622f8c8 100644
--- a/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py
+++ b/instrumentation/opentelemetry-instrumentation-aws-lambda/src/opentelemetry/instrumentation/aws_lambda/__init__.py
@@ -97,6 +97,7 @@ def custom_event_context_extractor(lambda_event):
     get_tracer_provider,
 )
 from opentelemetry.trace.propagation import get_current_span
+from opentelemetry.trace.status import Status, StatusCode
 
 logger = logging.getLogger(__name__)
 
@@ -278,6 +279,7 @@ def _set_api_gateway_v2_proxy_attributes(
     return span
 
 
+# pylint: disable=too-many-statements
 def _instrument(
     wrapped_module_name,
     wrapped_function_name,
@@ -287,6 +289,8 @@ def _instrument(
     disable_aws_context_propagation: bool = False,
     meter_provider: MeterProvider = None,
 ):
+    # pylint: disable=too-many-locals
+    # pylint: disable=too-many-statements
     def _instrumented_lambda_handler_call(  # noqa pylint: disable=too-many-branches
         call_wrapped, instance, args, kwargs
     ):
@@ -350,7 +354,13 @@ def _instrumented_lambda_handler_call(  # noqa pylint: disable=too-many-branches
                     lambda_context.aws_request_id,
                 )
 
-            result = call_wrapped(*args, **kwargs)
+            exception = None
+            try:
+                result = call_wrapped(*args, **kwargs)
+            except Exception as exc:  # pylint: disable=W0703
+                exception = exc
+                span.set_status(Status(StatusCode.ERROR))
+                span.record_exception(exception)
 
             # If the request came from an API Gateway, extract http attributes from the event
             # https://github.com/open-telemetry/opentelemetry-specification/blob/main/specification/trace/semantic_conventions/instrumentation/aws-lambda.md#api-gateway
@@ -398,6 +408,9 @@ def _instrumented_lambda_handler_call(  # noqa pylint: disable=too-many-branches
                 "MeterProvider was missing `force_flush` method. This is necessary in case of a Lambda freeze and would exist in the OTel SDK implementation."
             )
 
+        if exception is not None:
+            raise exception.with_traceback(exception.__traceback__)
+
         return result
 
     wrap_function_wrapper(
diff --git a/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/mocks/lambda_function.py b/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/mocks/lambda_function.py
index 259375c481..a878d0f06a 100644
--- a/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/mocks/lambda_function.py
+++ b/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/mocks/lambda_function.py
@@ -19,3 +19,7 @@ def handler(event, context):
 
 def rest_api_handler(event, context):
     return {"statusCode": 200, "body": "200 ok"}
+
+
+def handler_exc(event, context):
+    raise Exception("500 internal server error")
diff --git a/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py b/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py
index 5e4aaf0312..2fa4aafee5 100644
--- a/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py
+++ b/instrumentation/opentelemetry-instrumentation-aws-lambda/tests/test_aws_lambda_instrumentation_manual.py
@@ -40,7 +40,7 @@
 from opentelemetry.semconv.resource import ResourceAttributes
 from opentelemetry.semconv.trace import SpanAttributes
 from opentelemetry.test.test_base import TestBase
-from opentelemetry.trace import NoOpTracerProvider, SpanKind
+from opentelemetry.trace import NoOpTracerProvider, SpanKind, StatusCode
 from opentelemetry.trace.propagation.tracecontext import (
     TraceContextTextMapPropagator,
 )
@@ -410,6 +410,27 @@ def test_lambda_handles_list_event(self):
 
         assert spans
 
+    def test_lambda_handles_handler_exception(self):
+        exc_env_patch = mock.patch.dict(
+            "os.environ",
+            {_HANDLER: "tests.mocks.lambda_function.handler_exc"},
+        )
+        exc_env_patch.start()
+        AwsLambdaInstrumentor().instrument()
+        # instrumentor re-raises the exception
+        with self.assertRaises(Exception):
+            mock_execute_lambda()
+
+        spans = self.memory_exporter.get_finished_spans()
+        self.assertEqual(len(spans), 1)
+        span = spans[0]
+        self.assertEqual(span.status.status_code, StatusCode.ERROR)
+        self.assertEqual(len(span.events), 1)
+        event = span.events[0]
+        self.assertEqual(event.name, "exception")
+
+        exc_env_patch.stop()
+
     def test_uninstrument(self):
         AwsLambdaInstrumentor().instrument()