diff --git a/letta/otel/resource.py b/letta/otel/resource.py
index 8b2bf806..3932ca18 100644
--- a/letta/otel/resource.py
+++ b/letta/otel/resource.py
@@ -10,6 +10,34 @@ from letta.settings import settings
 _resources = {}
 
 
+def _normalize_environment_tag(env: str) -> str:
+    """
+    Normalize environment value for OTEL deployment.environment tag.
+    Maps internal environment values to abbreviated lowercase tags for Datadog.
+    
+    Examples:
+        PRODUCTION -> prod
+        DEV -> dev
+        CANARY -> canary
+        LOCAL-TEST -> local-test
+    """
+    if not env:
+        return "unknown"
+    
+    env_upper = env.upper()
+    
+    # Map known values to abbreviated forms
+    if env_upper == "PRODUCTION":
+        return "prod"
+    elif env_upper == "DEV" or env_upper == "DEVELOPMENT":
+        return "dev"
+    elif env_upper == "STAGING":
+        return "dev"  # Staging maps to dev
+    else:
+        # For other values (canary, local-test, etc.), use lowercase as-is
+        return env.lower()
+
+
 def get_resource(service_name: str) -> Resource:
     _env = settings.environment
     if (service_name, _env) not in _resources:
@@ -18,6 +46,10 @@ def get_resource(service_name: str) -> Resource:
             "letta.version": letta_version,
             "host.name": socket.gethostname(),
         }
+        # Add deployment environment for Datadog APM filtering (normalized to abbreviated lowercase)
+        if _env:
+            resource_dict["deployment.environment"] = _normalize_environment_tag(_env)
+        # Only add device.id in non-production environments (for debugging)
         if _env != "PRODUCTION":
             resource_dict["device.id"] = uuid.getnode()  # MAC address as unique device identifier,
         _resources[(service_name, _env)] = Resource.create(resource_dict)
diff --git a/letta/server/rest_api/app.py b/letta/server/rest_api/app.py
index 9fd753b3..70864df5 100644
--- a/letta/server/rest_api/app.py
+++ b/letta/server/rest_api/app.py
@@ -244,6 +244,16 @@ def create_application() -> "FastAPI":
             # Note: DD_LOGS_INJECTION, DD_APPSEC_ENABLED, DD_IAST_ENABLED, DD_APPSEC_SCA_ENABLED
             # are set via deployment configs and automatically picked up by ddtrace
 
+            # Initialize Datadog tracer for APM (distributed tracing)
+            import ddtrace
+
+            ddtrace.patch_all()  # Auto-instrument FastAPI, HTTP, DB, etc.
+            logger.info(
+                f"Datadog tracer initialized: env={dd_env}, "
+                f"service={telemetry_settings.datadog_service_name}, "
+                f"agent={telemetry_settings.datadog_agent_host}:{telemetry_settings.datadog_agent_port}"
+            )
+
             if telemetry_settings.datadog_profiling_enabled:
                 from ddtrace.profiling import Profiler
 
@@ -268,7 +278,7 @@ def create_application() -> "FastAPI":
                     f"agent={telemetry_settings.datadog_agent_host}:{telemetry_settings.datadog_agent_port}{git_info}"
                 )
         except Exception as e:
-            logger.error(f"Failed to initialize Datadog profiling: {e}", exc_info=True)
+            logger.error(f"Failed to initialize Datadog tracing/profiling: {e}", exc_info=True)
             if SENTRY_ENABLED:
                 sentry_sdk.capture_exception(e)
             # Don't fail application startup if Datadog initialization fails
diff --git a/letta/settings.py b/letta/settings.py
index 9f929eeb..ce096c8b 100644
--- a/letta/settings.py
+++ b/letta/settings.py
@@ -233,7 +233,10 @@ class Settings(BaseSettings):
     letta_dir: Optional[Path] = Field(Path.home() / ".letta", alias="LETTA_DIR")
     debug: Optional[bool] = False
     cors_origins: Optional[list] = cors_origins
-    environment: Optional[str] = Field(default=None, description="Application environment (PRODUCTION, DEV, etc.)")
+    environment: Optional[str] = Field(
+        default=None,
+        description="Application environment (PRODUCTION, DEV, CANARY, etc. - normalized to lowercase for OTEL tags)",
+    )
 
     # SSE Streaming keepalive settings
     enable_keepalive: bool = Field(True, description="Enable keepalive messages in SSE streams to prevent timeouts")