diff --git a/.betterer.results b/.betterer.results
index b67988c0cca..6e44507467f 100644
--- a/.betterer.results
+++ b/.betterer.results
@@ -2725,10 +2725,6 @@ exports[`better eslint`] = {
     "public/app/core/components/RolePicker/RolePickerMenu.tsx:5381": [
       [0, 0, 0, "Unexpected any. Specify a different type.", "0"]
     ],
-    "public/app/core/components/Select/FolderPicker.tsx:5381": [
-      [0, 0, 0, "Unexpected any. Specify a different type.", "0"],
-      [0, 0, 0, "Unexpected any. Specify a different type.", "1"]
-    ],
     "public/app/core/components/Select/MetricSelect.test.tsx:5381": [
       [0, 0, 0, "Unexpected any. Specify a different type.", "0"],
       [0, 0, 0, "Unexpected any. Specify a different type.", "1"]
diff --git a/public/app/core/components/Select/FolderPicker.tsx b/public/app/core/components/Select/FolderPicker.tsx
index 20a584061ad..8f50e381094 100644
--- a/public/app/core/components/Select/FolderPicker.tsx
+++ b/public/app/core/components/Select/FolderPicker.tsx
@@ -1,25 +1,28 @@
+import { css } from '@emotion/css';
 import { t } from '@lingui/macro';
 import { debounce } from 'lodash';
-import React, { PureComponent } from 'react';
+import React, { useState, useEffect, useMemo, useCallback, FormEvent } from 'react';
+import { useAsync } from 'react-use';
 
-import { AppEvents, SelectableValue } from '@grafana/data';
+import { AppEvents, SelectableValue, GrafanaTheme2 } from '@grafana/data';
 import { selectors } from '@grafana/e2e-selectors';
-import { ActionMeta, AsyncSelect, LoadOptionsCallback } from '@grafana/ui';
+import { useStyles2, ActionMeta, AsyncSelect, Input, InputActionMeta } from '@grafana/ui';
+import appEvents from 'app/core/app_events';
 import { contextSrv } from 'app/core/services/context_srv';
 import { createFolder, getFolderById, searchFolders } from 'app/features/manage-dashboards/state/actions';
 import { DashboardSearchHit } from 'app/features/search/types';
-
-import { AccessControlAction, PermissionLevelString } from '../../../types';
-import appEvents from '../../app_events';
+import { AccessControlAction, PermissionLevelString } from 'app/types';
 
 export type FolderPickerFilter = (hits: DashboardSearchHit[]) => DashboardSearchHit[];
 
+export const ADD_NEW_FOLER_OPTION = '+ Add new';
+
 export interface Props {
   onChange: ($folder: { title: string; id: number }) => void;
   enableCreateNew?: boolean;
   rootName?: string;
   enableReset?: boolean;
-  dashboardId?: any;
+  dashboardId?: number | string;
   initialTitle?: string;
   initialFolderId?: number;
   permissionLevel?: Exclude<PermissionLevelString, PermissionLevelString.Admin>;
@@ -28,6 +31,7 @@ export interface Props {
   showRoot?: boolean;
   onClear?: () => void;
   accessControlMetadata?: boolean;
+  customAdd?: boolean;
   /**
    * Skips loading all folders in order to find the folder matching
    * the folder where the dashboard is stored.
@@ -38,139 +42,84 @@ export interface Props {
   /** The id of the search input. Use this to set a matching label with htmlFor */
   inputId?: string;
 }
+export type SelectedFolder = SelectableValue<number>;
+const VALUE_FOR_ADD = -10;
 
-interface State {
-  folder: SelectableValue<number> | null;
-}
+export function FolderPicker(props: Props) {
+  const {
+    dashboardId,
+    allowEmpty,
+    onChange,
+    filter,
+    enableCreateNew,
+    inputId,
+    onClear,
+    enableReset,
+    initialFolderId,
+    initialTitle,
+    permissionLevel,
+    rootName,
+    showRoot,
+    skipInitialLoad,
+    accessControlMetadata,
+    customAdd,
+  } = props;
+  const isClearable = typeof onClear === 'function';
+  const [folder, setFolder] = useState<SelectedFolder | null>(null);
+  const [isCreatingNew, setIsCreatingNew] = useState(false);
+  const styles = useStyles2(getStyles);
+  const [inputValue, setInputValue] = useState('');
 
-export class FolderPicker extends PureComponent<Props, State> {
-  debouncedSearch: any;
+  const getOptions = useCallback(
+    async (query: string) => {
+      const searchHits = await searchFolders(query, permissionLevel, accessControlMetadata);
+      const options: Array<SelectableValue<number>> = mapSearchHitsToOptions(searchHits, filter);
 
-  constructor(props: Props) {
-    super(props);
+      const hasAccess =
+        contextSrv.hasAccess(AccessControlAction.DashboardsWrite, contextSrv.isEditor) ||
+        contextSrv.hasAccess(AccessControlAction.DashboardsCreate, contextSrv.isEditor);
 
-    this.state = {
-      folder: null,
-    };
+      if (hasAccess && rootName?.toLowerCase().startsWith(query.toLowerCase()) && showRoot) {
+        options.unshift({ label: rootName, value: 0 });
+      }
 
-    this.debouncedSearch = debounce(this.loadOptions, 300, {
-      leading: true,
-      trailing: true,
-    });
-  }
-
-  static defaultProps: Partial<Props> = {
-    rootName: 'General',
-    enableReset: false,
-    initialTitle: '',
-    enableCreateNew: false,
-    permissionLevel: PermissionLevelString.Edit,
-    allowEmpty: false,
-    showRoot: true,
-  };
-
-  componentDidMount = async () => {
-    if (this.props.skipInitialLoad) {
-      const folder = await getInitialValues({
-        getFolder: getFolderById,
-        folderId: this.props.initialFolderId,
-        folderName: this.props.initialTitle,
-      });
-      this.setState({ folder });
-      return;
-    }
-
-    await this.loadInitialValue();
-  };
-
-  // when debouncing, we must use the callback form of react-select's loadOptions so we don't
-  // drop results for user input. This must not return a promise/use await.
-  loadOptions = (query: string, callback: LoadOptionsCallback<number>): void => {
-    this.searchFolders(query).then(callback);
-  };
-
-  private searchFolders = async (query: string) => {
-    const {
-      rootName,
+      if (
+        enableReset &&
+        query === '' &&
+        initialTitle !== '' &&
+        !options.find((option) => option.label === initialTitle)
+      ) {
+        Boolean(initialTitle) && options.unshift({ label: initialTitle, value: initialFolderId });
+      }
+      if (enableCreateNew && customAdd) {
+        return [...options, { value: VALUE_FOR_ADD, label: ADD_NEW_FOLER_OPTION, title: query }];
+      } else {
+        return options;
+      }
+    },
+    [
       enableReset,
+      initialFolderId,
       initialTitle,
       permissionLevel,
-      filter,
-      accessControlMetadata,
-      initialFolderId,
+      rootName,
       showRoot,
-    } = this.props;
+      accessControlMetadata,
+      filter,
+      enableCreateNew,
+      customAdd,
+    ]
+  );
 
-    const searchHits = await searchFolders(query, permissionLevel, accessControlMetadata);
-    const options: Array<SelectableValue<number>> = mapSearchHitsToOptions(searchHits, filter);
+  const debouncedSearch = useMemo(() => {
+    return debounce(getOptions, 300, { leading: true });
+  }, [getOptions]);
 
-    const hasAccess =
-      contextSrv.hasAccess(AccessControlAction.DashboardsWrite, contextSrv.isEditor) ||
-      contextSrv.hasAccess(AccessControlAction.DashboardsCreate, contextSrv.isEditor);
-
-    if (hasAccess && rootName?.toLowerCase().startsWith(query.toLowerCase()) && showRoot) {
-      options.unshift({ label: rootName, value: 0 });
-    }
-
-    if (
-      enableReset &&
-      query === '' &&
-      initialTitle !== '' &&
-      !options.find((option) => option.label === initialTitle)
-    ) {
-      options.unshift({ label: initialTitle, value: initialFolderId });
-    }
-
-    return options;
-  };
-
-  onFolderChange = (newFolder: SelectableValue<number>, actionMeta: ActionMeta) => {
-    if (!newFolder) {
-      newFolder = { value: 0, label: this.props.rootName };
-    }
-
-    if (actionMeta.action === 'clear' && this.props.onClear) {
-      this.props.onClear();
-      return;
-    }
-
-    this.setState(
-      {
-        folder: newFolder,
-      },
-      () => this.props.onChange({ id: newFolder.value!, title: newFolder.label! })
-    );
-  };
-
-  createNewFolder = async (folderName: string) => {
-    const newFolder = await createFolder({ title: folderName });
-    let folder: SelectableValue<number> = { value: -1, label: 'Not created' };
-
-    if (newFolder.id > -1) {
-      appEvents.emit(AppEvents.alertSuccess, ['Folder Created', 'OK']);
-      folder = { value: newFolder.id, label: newFolder.title };
-
-      this.setState(
-        {
-          folder: newFolder,
-        },
-        () => {
-          this.onFolderChange(folder, { action: 'create-option', option: folder });
-        }
-      );
-    } else {
-      appEvents.emit(AppEvents.alertError, ['Folder could not be created']);
-    }
-
-    return folder;
-  };
-
-  private loadInitialValue = async () => {
-    const { initialTitle, rootName, initialFolderId, enableReset, dashboardId } = this.props;
+  const loadInitialValue = async () => {
     const resetFolder: SelectableValue<number> = { label: initialTitle, value: undefined };
     const rootFolder: SelectableValue<number> = { label: rootName, value: 0 };
 
-    const options = await this.searchFolders('');
+    const options = await getOptions('');
 
     let folder: SelectableValue<number> | null = null;
 
@@ -182,7 +131,7 @@ export class FolderPicker extends PureComponent<Props, State> {
       folder = options.find((option) => option.id === initialFolderId) || null;
     }
 
-    if (!folder && !this.props.allowEmpty) {
+    if (!folder && !allowEmpty) {
       if (contextSrv.isEditor) {
         folder = rootFolder;
       } else {
@@ -195,25 +144,137 @@ export class FolderPicker extends PureComponent<Props, State> {
         }
       }
     }
-
-    this.setState(
-      {
-        folder,
-      },
-      () => {
-        // if this is not the same as our initial value notify parent
-        if (folder && folder.value !== initialFolderId) {
-          this.props.onChange({ id: folder.value!, title: folder.label! });
-        }
-      }
-    );
+    !isCreatingNew && setFolder(folder);
   };
 
-  render() {
-    const { folder } = this.state;
-    const { enableCreateNew, inputId, onClear } = this.props;
-    const isClearable = typeof onClear === 'function';
+  useEffect(() => {
+    // if this is not the same as our initial value notify parent
+    if (folder && folder.value !== initialFolderId) {
+      !isCreatingNew && onChange({ id: folder.value!, title: folder.label! });
+    }
+    // eslint-disable-next-line react-hooks/exhaustive-deps
+  }, [folder, initialFolderId]);
 
+  // initial values for dropdown
+  useAsync(async () => {
+    if (skipInitialLoad) {
+      const folder = await getInitialValues({
+        getFolder: getFolderById,
+        folderId: initialFolderId,
+        folderName: initialTitle,
+      });
+      setFolder(folder);
+    }
+
+    await loadInitialValue();
+  }, [skipInitialLoad, initialFolderId, initialTitle]);
+
+  useEffect(() => {
+    if (folder && folder.id === VALUE_FOR_ADD) {
+      setIsCreatingNew(true);
+    }
+  }, [folder]);
+
+  const onFolderChange = useCallback(
+    (newFolder: SelectableValue<number>, actionMeta: ActionMeta) => {
+      const value = newFolder.value;
+      if (value === VALUE_FOR_ADD) {
+        setFolder({
+          id: VALUE_FOR_ADD,
+          title: inputValue,
+        });
+      } else {
+        if (!newFolder) {
+          newFolder = { value: 0, label: rootName };
+        }
+
+        if (actionMeta.action === 'clear' && onClear) {
+          onClear();
+          return;
+        }
+
+        setFolder(newFolder);
+        onChange({ id: newFolder.value!, title: newFolder.label! });
+      }
+    },
+    [onChange, onClear, rootName, inputValue]
+  );
+
+  const createNewFolder = useCallback(
+    async (folderName: string) => {
+      const newFolder = await createFolder({ title: folderName });
+      let folder: SelectableValue<number> = { value: -1, label: 'Not created' };
+
+      if (newFolder.id > -1) {
+        appEvents.emit(AppEvents.alertSuccess, ['Folder Created', 'OK']);
+        folder = { value: newFolder.id, label: newFolder.title };
+
+        setFolder(newFolder);
+        onFolderChange(folder, { action: 'create-option', option: folder });
+      } else {
+        appEvents.emit(AppEvents.alertError, ['Folder could not be created']);
+      }
+
+      return folder;
+    },
+    [onFolderChange]
+  );
+
+  const onKeyDown = useCallback(
+    (event: React.KeyboardEvent) => {
+      switch (event.key) {
+        case 'Enter': {
+          createNewFolder(folder?.title!);
+          setIsCreatingNew(false);
+          break;
+        }
+        case 'Escape': {
+          setFolder({ value: 0, label: rootName });
+          setIsCreatingNew(false);
+        }
+      }
+    },
+    [createNewFolder, folder, rootName]
+  );
+
+  const onNewFolderChange = (e: FormEvent<HTMLInputElement>) => {
+    const value = e.currentTarget.value;
+    setFolder({ id: -1, title: value });
+  };
+
+  const onBlur = () => {
+    setFolder({ value: 0, label: rootName });
+    setIsCreatingNew(false);
+  };
+
+  const onInputChange = (value: string, { action }: InputActionMeta) => {
+    if (action === 'input-change') {
+      setInputValue((ant) => value);
+    }
+
+    if (action === 'menu-close') {
+      setInputValue((_) => value);
+    }
+    return;
+  };
+
+  if (isCreatingNew) {
+    return (
+      <>
+        <Input
+          aria-label={'aria-label'}
+          width={30}
+          autoFocus={true}
+          value={folder?.title || ''}
+          onChange={onNewFolderChange}
+          onKeyDown={onKeyDown}
+          placeholder="Press enter to confirm new folder."
+          onBlur={onBlur}
+        />
+        <div className={styles.newFolder}>Press enter to create the new folder.</div>
+      </>
+    );
+  } else {
     return (
       <div data-testid={selectors.components.FolderPicker.containerV2}>
         <AsyncSelect
@@ -222,11 +283,13 @@ export class FolderPicker extends PureComponent<Props, State> {
           loadingMessage={t({ id: 'folder-picker.loading', message: 'Loading folders...' })}
           defaultOptions
           defaultValue={folder}
+          inputValue={inputValue}
+          onInputChange={onInputChange}
           value={folder}
-          allowCustomValue={enableCreateNew}
-          loadOptions={this.debouncedSearch}
-          onChange={this.onFolderChange}
-          onCreateOption={this.createNewFolder}
+          allowCustomValue={enableCreateNew && !customAdd}
+          loadOptions={debouncedSearch}
+          onChange={onFolderChange}
+          onCreateOption={createNewFolder}
           isClearable={isClearable}
         />
       </div>
@@ -238,7 +301,6 @@ function mapSearchHitsToOptions(hits: DashboardSearchHit[], filter?: FolderPicke
   const filteredHits = filter ? filter(hits) : hits;
   return filteredHits.map((hit) => ({ label: hit.title, value: hit.id }));
 }
-
 interface Args {
   getFolder: typeof getFolderById;
   folderId?: number;
@@ -257,3 +319,11 @@ export async function getInitialValues({ folderName, folderId, getFolder }: Args
   const folderDto = await getFolder(folderId);
   return { label: folderDto.title, value: folderId };
 }
+
+const getStyles = (theme: GrafanaTheme2) => ({
+  newFolder: css`
+    color: ${theme.colors.warning.main};
+    font-size: ${theme.typography.bodySmall.fontSize};
+    padding-top: ${theme.spacing(1)};
+  `,
+});
diff --git a/public/app/features/alerting/unified/RuleEditor.test.tsx b/public/app/features/alerting/unified/RuleEditor.test.tsx
index c986a3df1cc..140eeff15d8 100644
--- a/public/app/features/alerting/unified/RuleEditor.test.tsx
+++ b/public/app/features/alerting/unified/RuleEditor.test.tsx
@@ -1,4 +1,4 @@
-import { Matcher, render, waitFor, screen } from '@testing-library/react';
+import { Matcher, render, waitFor, screen, within } from '@testing-library/react';
 import userEvent, { PointerEventsCheckLevel } from '@testing-library/user-event';
 import React from 'react';
 import { Provider } from 'react-redux';
@@ -7,7 +7,9 @@ import { selectOptionInTest } from 'test/helpers/selectOptionInTest';
 import { byLabelText, byRole, byTestId, byText } from 'testing-library-selector';
 
 import { DataSourceInstanceSettings } from '@grafana/data';
+import { selectors } from '@grafana/e2e-selectors';
 import { locationService, setDataSourceSrv } from '@grafana/runtime';
+import { ADD_NEW_FOLER_OPTION } from 'app/core/components/Select/FolderPicker';
 import { contextSrv } from 'app/core/services/context_srv';
 import { DashboardSearchHit } from 'app/features/search/types';
 import { configureStore } from 'app/store/configureStore';
@@ -79,6 +81,7 @@ const ui = {
     dataSource: byTestId('datasource-picker'),
     folder: byTestId('folder-picker'),
     namespace: byTestId('namespace-picker'),
+    folderContainer: byTestId(selectors.components.FolderPicker.containerV2),
     group: byTestId('group-picker'),
     annotationKey: (idx: number) => byTestId(`annotation-key-${idx}`),
     annotationValue: (idx: number) => byTestId(`annotation-value-${idx}`),
@@ -480,6 +483,13 @@ describe('RuleEditor', () => {
     await userEvent.click(ui.buttons.save.get());
     await waitFor(() => expect(mocks.api.setRulerRuleGroup).toHaveBeenCalled());
 
+    //check that '+ Add new' option is in folders drop down even if we don't have values
+    const folderInput = await ui.inputs.folderContainer.find();
+    mocks.searchFolders.mockResolvedValue([] as DashboardSearchHit[]);
+    await renderRuleEditor(uid);
+    await userEvent.click(within(folderInput).getByRole('combobox'));
+    expect(screen.getByText(ADD_NEW_FOLER_OPTION)).toBeInTheDocument();
+
     expect(mocks.api.setRulerRuleGroup).toHaveBeenCalledWith(
       { dataSourceName: GRAFANA_RULES_SOURCE_NAME, apiVersion: 'legacy' },
       'Folder A',
diff --git a/public/app/features/alerting/unified/components/rule-editor/RuleFolderPicker.tsx b/public/app/features/alerting/unified/components/rule-editor/RuleFolderPicker.tsx
index 991b0a5fcb0..fee87e60f41 100644
--- a/public/app/features/alerting/unified/components/rule-editor/RuleFolderPicker.tsx
+++ b/public/app/features/alerting/unified/components/rule-editor/RuleFolderPicker.tsx
@@ -1,4 +1,4 @@
-import React, { FC } from 'react';
+import React from 'react';
 
 import { FolderPicker, Props as FolderPickerProps } from 'app/core/components/Select/FolderPicker';
 import { PermissionLevelString } from 'app/types';
@@ -12,7 +12,8 @@ export interface RuleFolderPickerProps extends Omit<FolderPickerProps, 'initialT
   value?: Folder;
 }
 
-export const RuleFolderPicker: FC<RuleFolderPickerProps> = ({ value, ...props }) => {
+export function RuleFolderPicker(props: RuleFolderPickerProps) {
+  const { value } = props;
   return (
     <FolderPicker
       showRoot={false}
@@ -22,6 +23,7 @@ export const RuleFolderPicker: FC<RuleFolderPickerProps> = ({ value, ...props })
       accessControlMetadata
       {...props}
       permissionLevel={PermissionLevelString.View}
+      customAdd={true}
     />
   );
-};
+}