diff --git a/app/javascript/dashboard/components-next/Contacts/ContactLabels/ContactLabels.vue b/app/javascript/dashboard/components-next/Contacts/ContactLabels/ContactLabels.vue
index 818b3beb1..6efe18a25 100644
--- a/app/javascript/dashboard/components-next/Contacts/ContactLabels/ContactLabels.vue
+++ b/app/javascript/dashboard/components-next/Contacts/ContactLabels/ContactLabels.vue
@@ -1,9 +1,11 @@
 <script setup>
-import { computed, watch, onMounted } from 'vue';
+import { computed, watch, onMounted, ref } from 'vue';
 import { useRoute } from 'vue-router';
 import { useI18n } from 'vue-i18n';
 import { useMapGetter, useStore } from 'dashboard/composables/store';
 
+import DropdownMenu from 'dashboard/components-next/dropdown-menu/DropdownMenu.vue';
+
 const props = defineProps({
   contactId: {
     type: [String, Number],
@@ -15,6 +17,8 @@ const store = useStore();
 const { t } = useI18n();
 const route = useRoute();
 
+const showDropdown = ref(false);
+
 const allLabels = useMapGetter('labels/getLabels');
 const contactLabels = useMapGetter('contactLabels/getContactLabels');
 
@@ -25,6 +29,18 @@ const savedLabels = computed(() => {
   );
 });
 
+const labelMenuItems = computed(() => {
+  return allLabels.value.map(label => ({
+    label: label.title,
+    value: label.id,
+    thumbnail: { name: label.title, color: label.color },
+    isSelected: savedLabels.value.some(
+      savedLabel => savedLabel.id === label.id
+    ),
+    action: 'addLabel',
+  }));
+});
+
 const fetchLabels = async contactId => {
   if (!contactId) {
     return;
@@ -32,6 +48,39 @@ const fetchLabels = async contactId => {
   store.dispatch('contactLabels/get', contactId);
 };
 
+const handleLabelAction = async ({ action, value }) => {
+  try {
+    // Get current label titles
+    const currentLabels = savedLabels.value.map(label => label.title);
+
+    // Find the label title for the ID (value)
+    const selectedLabel = allLabels.value.find(label => label.id === value);
+    if (!selectedLabel) return;
+
+    let updatedLabels;
+    if (action === 'addLabel') {
+      // If label is already selected, remove it (toggle behavior)
+      if (currentLabels.includes(selectedLabel.title)) {
+        updatedLabels = currentLabels.filter(
+          labelTitle => labelTitle !== selectedLabel.title
+        );
+      } else {
+        // Add the new label
+        updatedLabels = [...currentLabels, selectedLabel.title];
+      }
+    }
+
+    await store.dispatch('contactLabels/update', {
+      contactId: props.contactId,
+      labels: updatedLabels,
+    });
+
+    showDropdown.value = false;
+  } catch (error) {
+    // error
+  }
+};
+
 watch(
   () => props.contactId,
   (newVal, oldVal) => {
@@ -62,13 +111,32 @@ onMounted(() => {
         {{ label.title }}
       </span>
     </div>
-    <button
-      class="flex items-center gap-1 px-2 py-1 rounded-md outline-dashed h-[26px] outline-1 outline-n-slate-6 hover:bg-n-alpha-2"
-    >
-      <span class="i-lucide-plus" />
-      <span class="text-sm text-n-slate-11">
-        {{ t('CONTACTS_LAYOUT.DETAILS.TAG_BUTTON') }}
-      </span>
-    </button>
+    <div class="relative">
+      <button
+        class="flex items-center gap-1 px-2 py-1 rounded-md outline-dashed h-[26px] outline-1 outline-n-slate-6 hover:bg-n-alpha-2"
+        :class="{ 'bg-n-alpha-2': showDropdown }"
+        @click="showDropdown = !showDropdown"
+      >
+        <span class="i-lucide-plus" />
+        <span class="text-sm text-n-slate-11">
+          {{ t('CONTACTS_LAYOUT.DETAILS.TAG_BUTTON') }}
+        </span>
+      </button>
+      <DropdownMenu
+        v-if="showDropdown"
+        v-on-clickaway="() => (showDropdown = false)"
+        :menu-items="labelMenuItems"
+        show-search
+        class="z-[100] w-48 mt-2 overflow-y-auto ltr:left-0 rtl:right-0 top-full max-h-52"
+        @action="handleLabelAction"
+      >
+        <template #thumbnail="{ item }">
+          <div
+            class="rounded-sm size-2"
+            :style="{ backgroundColor: item.thumbnail.color }"
+          />
+        </template>
+      </DropdownMenu>
+    </div>
   </div>
 </template>
diff --git a/app/javascript/dashboard/components-next/dropdown-menu/DropdownMenu.vue b/app/javascript/dashboard/components-next/dropdown-menu/DropdownMenu.vue
index d9b3c5568..079ff3be9 100644
--- a/app/javascript/dashboard/components-next/dropdown-menu/DropdownMenu.vue
+++ b/app/javascript/dashboard/components-next/dropdown-menu/DropdownMenu.vue
@@ -1,10 +1,11 @@
 <script setup>
-import { defineProps, defineEmits } from 'vue';
+import { defineProps, ref, defineEmits, computed } from 'vue';
+import { useI18n } from 'vue-i18n';
 
 import Icon from 'dashboard/components-next/icon/Icon.vue';
 import Avatar from 'dashboard/components-next/avatar/Avatar.vue';
 
-defineProps({
+const props = defineProps({
   menuItems: {
     type: Array,
     required: true,
@@ -16,10 +17,31 @@ defineProps({
     type: Number,
     default: 20,
   },
+  showSearch: {
+    type: Boolean,
+    default: false,
+  },
+  searchPlaceholder: {
+    type: String,
+    default: '',
+  },
 });
 
 const emit = defineEmits(['action']);
 
+const { t } = useI18n();
+
+const searchInput = ref(null);
+const searchQuery = ref('');
+
+const filteredMenuItems = computed(() => {
+  if (!searchQuery.value) return props.menuItems;
+
+  return props.menuItems.filter(item =>
+    item.label.toLowerCase().includes(searchQuery.value.toLowerCase())
+  );
+});
+
 const handleAction = (action, value) => {
   emit('action', { action, value });
 };
@@ -29,8 +51,20 @@ const handleAction = (action, value) => {
   <div
     class="bg-n-alpha-3 backdrop-blur-[100px] border-0 outline outline-1 outline-n-container absolute rounded-xl z-50 py-2 px-2 gap-2 flex flex-col min-w-[136px] shadow-lg"
   >
+    <div v-if="showSearch" class="relative">
+      <span class="absolute i-lucide-search size-3.5 top-2 left-3" />
+      <input
+        ref="searchInput"
+        v-model="searchQuery"
+        type="search"
+        :placeholder="
+          searchPlaceholder || t('DROPDOWN_MENU.SEARCH_PLACEHOLDER')
+        "
+        class="w-full h-8 py-2 pl-10 pr-2 text-sm border-none rounded-xl bg-n-solid-1 text-n-slate-12"
+      />
+    </div>
     <button
-      v-for="item in menuItems"
+      v-for="item in filteredMenuItems"
       :key="item.action"
       class="inline-flex items-center justify-start w-full h-8 min-w-0 gap-2 px-2 py-1.5 transition-all duration-200 ease-in-out border-0 rounded-lg z-60 hover:bg-n-alpha-1 dark:hover:bg-n-alpha-2 disabled:cursor-not-allowed disabled:pointer-events-none disabled:opacity-50"
       :class="{
@@ -41,18 +75,26 @@ const handleAction = (action, value) => {
       :disabled="item.disabled"
       @click="handleAction(item.action, item.value)"
     >
-      <Avatar
-        v-if="item.thumbnail"
-        :name="item.thumbnail.name"
-        :src="item.thumbnail.src"
-        :size="thumbnailSize"
-        rounded-full
-      />
+      <slot name="thumbnail" :item="item">
+        <Avatar
+          v-if="item.thumbnail"
+          :name="item.thumbnail.name"
+          :src="item.thumbnail.src"
+          :size="thumbnailSize"
+          rounded-full
+        />
+      </slot>
       <Icon v-if="item.icon" :icon="item.icon" class="flex-shrink-0" />
       <span v-if="item.emoji" class="flex-shrink-0">{{ item.emoji }}</span>
       <span v-if="item.label" class="min-w-0 text-sm truncate">{{
         item.label
       }}</span>
     </button>
+    <div
+      v-if="filteredMenuItems.length === 0"
+      class="text-sm text-n-slate-11 px-2 py-1.5"
+    >
+      {{ t('DROPDOWN_MENU.EMPTY_STATE') }}
+    </div>
   </div>
 </template>
diff --git a/app/javascript/dashboard/i18n/locale/en/components.json b/app/javascript/dashboard/i18n/locale/en/components.json
index 1ff9e331d..6f867e3d4 100644
--- a/app/javascript/dashboard/i18n/locale/en/components.json
+++ b/app/javascript/dashboard/i18n/locale/en/components.json
@@ -8,6 +8,10 @@
     "EMPTY_STATE": "No results found.",
     "SEARCH_PLACEHOLDER": "Search..."
   },
+  "DROPDOWN_MENU": {
+    "SEARCH_PLACEHOLDER": "Search...",
+    "EMPTY_STATE": "No results found."
+  },
   "DIALOG": {
     "BUTTONS": {
       "CANCEL": "Cancel",