diff --git a/doc/releases/release-notes-3.3.rst b/doc/releases/release-notes-3.3.rst
index 5e9490732aa..a9a54ca9343 100644
--- a/doc/releases/release-notes-3.3.rst
+++ b/doc/releases/release-notes-3.3.rst
@@ -432,6 +432,11 @@ Libraries / Subsystems
 
   * The ``lwm2m_senml_cbor_*`` files have been regenerated using zcbor 0.6.0.
 
+* Settings
+
+  * Replaced all :c:func:`k_panic` invocations within settings backend
+    initialization with returning / propagating error codes.
+
 HALs
 ****
 
diff --git a/subsys/settings/src/settings_fcb.c b/subsys/settings/src/settings_fcb.c
index ddb33f6d939..cb168fa7464 100644
--- a/subsys/settings/src/settings_fcb.c
+++ b/subsys/settings/src/settings_fcb.c
@@ -415,39 +415,35 @@ int settings_backend_init(void)
 
 	rc = flash_area_get_sectors(settings_fcb_get_flash_area(), &cnt,
 				    settings_fcb_area);
-	if (rc == -ENODEV) {
+	if (rc != 0 && rc != -ENOMEM) {
 		return rc;
-	} else if (rc != 0 && rc != -ENOMEM) {
-		k_panic();
 	}
 
 	config_init_settings_fcb.cf_fcb.f_sector_cnt = cnt;
 
 	rc = settings_fcb_src(&config_init_settings_fcb);
-
 	if (rc != 0) {
 		rc = flash_area_open(settings_fcb_get_flash_area(), &fap);
-
-		if (rc == 0) {
-			rc = flash_area_erase(fap, 0, fap->fa_size);
-			flash_area_close(fap);
+		if (rc != 0) {
+			return rc;
 		}
 
+		rc = flash_area_erase(fap, 0, fap->fa_size);
+		flash_area_close(fap);
+
 		if (rc != 0) {
-			k_panic();
-		} else {
-			rc = settings_fcb_src(&config_init_settings_fcb);
+			return rc;
 		}
-	}
 
-	if (rc != 0) {
-		k_panic();
+		rc = settings_fcb_src(&config_init_settings_fcb);
+		if (rc != 0) {
+			return rc;
+		}
 	}
 
 	rc = settings_fcb_dst(&config_init_settings_fcb);
-
 	if (rc != 0) {
-		k_panic();
+		return rc;
 	}
 
 	settings_mount_fcb_backend(&config_init_settings_fcb);
diff --git a/subsys/settings/src/settings_file.c b/subsys/settings/src/settings_file.c
index 6661fb78e04..e02194f80bd 100644
--- a/subsys/settings/src/settings_file.c
+++ b/subsys/settings/src/settings_file.c
@@ -531,12 +531,12 @@ int settings_backend_init(void)
 
 	rc = settings_file_src(&config_init_settings_file);
 	if (rc) {
-		k_panic();
+		return rc;
 	}
 
 	rc = settings_file_dst(&config_init_settings_file);
 	if (rc) {
-		k_panic();
+		return rc;
 	}
 
 	settings_mount_file_backend(&config_init_settings_file);
diff --git a/subsys/settings/src/settings_init.c b/subsys/settings/src/settings_init.c
index f62895b4bfb..0950207a21f 100644
--- a/subsys/settings/src/settings_init.c
+++ b/subsys/settings/src/settings_init.c
@@ -33,7 +33,7 @@ int settings_subsys_init(void)
 
 	settings_init();
 
-	err = settings_backend_init(); /* func rises kernel panic once error */
+	err = settings_backend_init();
 
 	if (!err) {
 		settings_subsys_initialized = true;
diff --git a/subsys/settings/src/settings_nvs.c b/subsys/settings/src/settings_nvs.c
index 0494f30afec..8e5bfbf3767 100644
--- a/subsys/settings/src/settings_nvs.c
+++ b/subsys/settings/src/settings_nvs.c
@@ -359,10 +359,8 @@ int settings_backend_init(void)
 
 	rc = flash_area_get_sectors(SETTINGS_PARTITION, &sector_cnt,
 				    &hw_flash_sector);
-	if (rc == -ENODEV) {
+	if (rc != 0 && rc != -ENOMEM) {
 		return rc;
-	} else if (rc != 0 && rc != -ENOMEM) {
-		k_panic();
 	}
 
 	nvs_sector_size = CONFIG_SETTINGS_NVS_SECTOR_SIZE_MULT *