diff --git a/lib/compiler.js b/lib/compiler.js
new file mode 100644
index 000000000..e83df169b
--- /dev/null
+++ b/lib/compiler.js
@@ -0,0 +1,50 @@
+// resolve compilers to use.
+
+let cached
+
+exports.resolveCompiler = function (loaderContext) {
+  if (cached) {
+    return cached
+  }
+
+  const ctx = loaderContext.rootContext
+  // check 2.7
+  try {
+    const pkg = loadFromContext('vue/package.json', ctx)
+    const [major, minor] = pkg.version.split('.')
+    if (major === '2' && minor === '7') {
+      return (cached = {
+        compiler: loadFromContext('vue/compiler-sfc', ctx),
+        templateCompiler: undefined
+      })
+    }
+  } catch (e) {}
+
+  return (cached = {
+    compiler: require('@vue/component-compiler-utils'),
+    templateCompiler: loadTemplateCompiler(loaderContext)
+  })
+}
+
+function loadFromContext (path, ctx) {
+  return require(require.resolve(path, {
+    paths: [ctx]
+  }))
+}
+
+function loadTemplateCompiler (loaderContext) {
+  try {
+    return loadFromContext('vue-template-compiler', loaderContext.rootContext)
+  } catch (e) {
+    if (/version mismatch/.test(e.toString())) {
+      loaderContext.emitError(e)
+    } else {
+      loaderContext.emitError(
+        new Error(
+          `[vue-loader] vue-template-compiler must be installed as a peer dependency, ` +
+            `or a compatible compiler implementation must be passed via options.`
+        )
+      )
+    }
+  }
+}
diff --git a/lib/index.js b/lib/index.js
index 7760df47b..853d2738d 100644
--- a/lib/index.js
+++ b/lib/index.js
@@ -5,38 +5,25 @@ const plugin = require('./plugin')
 const selectBlock = require('./select')
 const loaderUtils = require('loader-utils')
 const { attrsToQuery } = require('./codegen/utils')
-const { parse } = require('@vue/component-compiler-utils')
 const genStylesCode = require('./codegen/styleInjection')
 const { genHotReloadCode } = require('./codegen/hotReload')
 const genCustomBlocksCode = require('./codegen/customBlocks')
 const componentNormalizerPath = require.resolve('./runtime/componentNormalizer')
 const { NS } = require('./plugin')
+const { resolveCompiler } = require('./compiler')
 
 let errorEmitted = false
 
-function loadTemplateCompiler (loaderContext) {
-  try {
-    return require('vue-template-compiler')
-  } catch (e) {
-    if (/version mismatch/.test(e.toString())) {
-      loaderContext.emitError(e)
-    } else {
-      loaderContext.emitError(new Error(
-        `[vue-loader] vue-template-compiler must be installed as a peer dependency, ` +
-        `or a compatible compiler implementation must be passed via options.`
-      ))
-    }
-  }
-}
-
 module.exports = function (source) {
   const loaderContext = this
 
   if (!errorEmitted && !loaderContext['thread-loader'] && !loaderContext[NS]) {
-    loaderContext.emitError(new Error(
-      `vue-loader was used without the corresponding plugin. ` +
-      `Make sure to include VueLoaderPlugin in your webpack config.`
-    ))
+    loaderContext.emitError(
+      new Error(
+        `vue-loader was used without the corresponding plugin. ` +
+          `Make sure to include VueLoaderPlugin in your webpack config.`
+      )
+    )
     errorEmitted = true
   }
 
@@ -59,14 +46,17 @@ module.exports = function (source) {
 
   const isServer = target === 'node'
   const isShadow = !!options.shadowMode
-  const isProduction = options.productionMode || minimize || process.env.NODE_ENV === 'production'
+  const isProduction =
+    options.productionMode || minimize || process.env.NODE_ENV === 'production'
   const filename = path.basename(resourcePath)
   const context = rootContext || process.cwd()
   const sourceRoot = path.dirname(path.relative(context, resourcePath))
 
-  const descriptor = parse({
+  const { compiler, templateCompiler } = resolveCompiler(loaderContext)
+
+  const descriptor = compiler.parse({
     source,
-    compiler: options.compiler || loadTemplateCompiler(loaderContext),
+    compiler: options.compiler || templateCompiler,
     filename,
     sourceRoot,
     needMap: sourceMap
@@ -78,6 +68,7 @@ module.exports = function (source) {
   if (incomingQuery.type) {
     return selectBlock(
       descriptor,
+      options,
       loaderContext,
       incomingQuery,
       !!options.appendExtension
@@ -93,19 +84,19 @@ module.exports = function (source) {
 
   const id = hash(
     isProduction
-      ? (shortFilePath + '\n' + source.replace(/\r\n/g, '\n'))
+      ? shortFilePath + '\n' + source.replace(/\r\n/g, '\n')
       : shortFilePath
   )
 
   // feature information
   const hasScoped = descriptor.styles.some(s => s.scoped)
-  const hasFunctional = descriptor.template && descriptor.template.attrs.functional
-  const needsHotReload = (
+  const hasFunctional =
+    descriptor.template && descriptor.template.attrs.functional
+  const needsHotReload =
     !isServer &&
     !isProduction &&
-    (descriptor.script || descriptor.template) &&
+    (descriptor.script || descriptor.scriptSetup || descriptor.template) &&
     options.hotReload !== false
-  )
 
   // template
   let templateImport = `var render, staticRenderFns`
@@ -116,21 +107,20 @@ module.exports = function (source) {
     const scopedQuery = hasScoped ? `&scoped=true` : ``
     const attrsQuery = attrsToQuery(descriptor.template.attrs)
     const query = `?vue&type=template${idQuery}${scopedQuery}${attrsQuery}${inheritQuery}`
-    const request = templateRequest = stringifyRequest(src + query)
+    const request = (templateRequest = stringifyRequest(src + query))
     templateImport = `import { render, staticRenderFns } from ${request}`
   }
 
   // script
   let scriptImport = `var script = {}`
-  if (descriptor.script) {
-    const src = descriptor.script.src || resourcePath
-    const attrsQuery = attrsToQuery(descriptor.script.attrs, 'js')
+  const { script, scriptSetup } = descriptor
+  if (script || scriptSetup) {
+    const src = (script && !scriptSetup && script.src) || resourcePath
+    const attrsQuery = attrsToQuery((scriptSetup || script).attrs, 'js')
     const query = `?vue&type=script${attrsQuery}${inheritQuery}`
     const request = stringifyRequest(src + query)
-    scriptImport = (
-      `import script from ${request}\n` +
-      `export * from ${request}` // support named exports
-    )
+    scriptImport =
+      `import script from ${request}\n` + `export * from ${request}` // support named exports
   }
 
   // styles
@@ -147,7 +137,8 @@ module.exports = function (source) {
     )
   }
 
-  let code = `
+  let code =
+    `
 ${templateImport}
 ${scriptImport}
 ${stylesCode}
@@ -183,7 +174,9 @@ var component = normalizer(
   if (!isProduction) {
     // Expose the file's full path in development, so that it can be opened
     // from the devtools.
-    code += `\ncomponent.options.__file = ${JSON.stringify(rawShortFilePath.replace(/\\/g, '/'))}`
+    code += `\ncomponent.options.__file = ${JSON.stringify(
+      rawShortFilePath.replace(/\\/g, '/')
+    )}`
   } else if (options.exposeFilename) {
     // Libraries can opt-in to expose their components' filenames in production builds.
     // For security reasons, only expose the file's basename in production.
diff --git a/lib/loaders/stylePostLoader.js b/lib/loaders/stylePostLoader.js
index de8d09eba..949fe0a5a 100644
--- a/lib/loaders/stylePostLoader.js
+++ b/lib/loaders/stylePostLoader.js
@@ -1,12 +1,13 @@
 const qs = require('querystring')
-const { compileStyle } = require('@vue/component-compiler-utils')
+const { resolveCompiler } = require('../compiler')
 
 // This is a post loader that handles scoped CSS transforms.
 // Injected right before css-loader by the global pitcher (../pitch.js)
 // for any <style scoped> selection requests initiated from within vue files.
 module.exports = function (source, inMap) {
   const query = qs.parse(this.resourceQuery.slice(1))
-  const { code, map, errors } = compileStyle({
+  const { compiler } = resolveCompiler(this)
+  const { code, map, errors } = compiler.compileStyle({
     source,
     filename: this.resourcePath,
     id: `data-v-${query.id}`,
diff --git a/lib/loaders/templateLoader.js b/lib/loaders/templateLoader.js
index 57bab4e97..4a4f49721 100644
--- a/lib/loaders/templateLoader.js
+++ b/lib/loaders/templateLoader.js
@@ -1,6 +1,6 @@
 const qs = require('querystring')
 const loaderUtils = require('loader-utils')
-const { compileTemplate } = require('@vue/component-compiler-utils')
+const { resolveCompiler } = require('../compiler')
 
 // Loader that compiles raw template into JavaScript functions.
 // This is injected by the global pitcher (../pitch) for template
@@ -15,24 +15,30 @@ module.exports = function (source) {
   const options = loaderUtils.getOptions(loaderContext) || {}
   const { id } = query
   const isServer = loaderContext.target === 'node'
-  const isProduction = options.productionMode || loaderContext.minimize || process.env.NODE_ENV === 'production'
+  const isProduction =
+    options.productionMode ||
+    loaderContext.minimize ||
+    process.env.NODE_ENV === 'production'
   const isFunctional = query.functional
 
-  // allow using custom compiler via options
-  const compiler = options.compiler || require('vue-template-compiler')
+  const compilerOptions = Object.assign(
+    {
+      outputSourceRange: true
+    },
+    options.compilerOptions,
+    {
+      scopeId: query.scoped ? `data-v-${id}` : null,
+      comments: query.comments
+    }
+  )
 
-  const compilerOptions = Object.assign({
-    outputSourceRange: true
-  }, options.compilerOptions, {
-    scopeId: query.scoped ? `data-v-${id}` : null,
-    comments: query.comments
-  })
+  const { compiler, templateCompiler } = resolveCompiler(loaderContext)
 
-  // for vue-component-compiler
+  // for vue/compiler-sfc OR @vue/component-compiler-utils
   const finalOptions = {
     source,
     filename: this.resourcePath,
-    compiler,
+    compiler: options.compiler || templateCompiler,
     compilerOptions,
     // allow customizing behavior of vue-template-es2015-compiler
     transpileOptions: options.transpileOptions,
@@ -43,7 +49,7 @@ module.exports = function (source) {
     prettify: options.prettify
   }
 
-  const compiled = compileTemplate(finalOptions)
+  const compiled = compiler.compileTemplate(finalOptions)
 
   // tips
   if (compiled.tips && compiled.tips.length) {
@@ -55,16 +61,21 @@ module.exports = function (source) {
   // errors
   if (compiled.errors && compiled.errors.length) {
     // 2.6 compiler outputs errors as objects with range
-    if (compiler.generateCodeFrame && finalOptions.compilerOptions.outputSourceRange) {
+    if (
+      compiler.generateCodeFrame &&
+      finalOptions.compilerOptions.outputSourceRange
+    ) {
       // TODO account for line offset in case template isn't placed at top
       // of the file
       loaderContext.emitError(
         `\n\n  Errors compiling template:\n\n` +
-        compiled.errors.map(({ msg, start, end }) => {
-          const frame = compiler.generateCodeFrame(source, start, end)
-          return `  ${msg}\n\n${pad(frame)}`
-        }).join(`\n\n`) +
-        '\n'
+          compiled.errors
+            .map(({ msg, start, end }) => {
+              const frame = compiler.generateCodeFrame(source, start, end)
+              return `  ${msg}\n\n${pad(frame)}`
+            })
+            .join(`\n\n`) +
+          '\n'
       )
     } else {
       loaderContext.emitError(
diff --git a/lib/resolveScript.js b/lib/resolveScript.js
new file mode 100644
index 000000000..a05deb767
--- /dev/null
+++ b/lib/resolveScript.js
@@ -0,0 +1,49 @@
+const { resolveCompiler } = require('./compiler')
+
+const clientCache = new WeakMap()
+const serverCache = new WeakMap()
+
+exports.resolveScript = function resolveScript (
+  descriptor,
+  options,
+  loaderContext
+) {
+  if (!descriptor.script && !descriptor.scriptSetup) {
+    return null
+  }
+
+  const { compiler } = resolveCompiler(loaderContext)
+  if (!compiler.compileScript) {
+    if (descriptor.scriptSetup) {
+      loaderContext.emitError(
+        'The version of Vue you are using does not support <script setup>. ' +
+          'Please upgrade to 2.7 or above.'
+      )
+    }
+    return descriptor.script
+  }
+
+  const isProd =
+    loaderContext.mode === 'production' || process.env.NODE_ENV === 'production'
+  const isServer = options.optimizeSSR || loaderContext.target === 'node'
+
+  const cacheToUse = isServer ? serverCache : clientCache
+  const cached = cacheToUse.get(descriptor)
+  if (cached) {
+    return cached
+  }
+
+  let resolved = null
+
+  try {
+    resolved = compiler.compileScript(descriptor, {
+      isProd,
+      babelParserPlugins: options.babelParserPlugins
+    })
+  } catch (e) {
+    loaderContext.emitError(e)
+  }
+
+  cacheToUse.set(descriptor, resolved)
+  return resolved
+}
diff --git a/lib/select.js b/lib/select.js
index 2546c9ce7..f33311c05 100644
--- a/lib/select.js
+++ b/lib/select.js
@@ -1,5 +1,8 @@
+const { resolveScript } = require('./resolveScript')
+
 module.exports = function selectBlock (
   descriptor,
+  options,
   loaderContext,
   query,
   appendExtension
@@ -19,14 +22,11 @@ module.exports = function selectBlock (
 
   // script
   if (query.type === `script`) {
+    const script = resolveScript(descriptor, options, loaderContext)
     if (appendExtension) {
-      loaderContext.resourcePath += '.' + (descriptor.script.lang || 'js')
+      loaderContext.resourcePath += '.' + (script.lang || 'js')
     }
-    loaderContext.callback(
-      null,
-      descriptor.script.content,
-      descriptor.script.map
-    )
+    loaderContext.callback(null, script.content, script.map)
     return
   }
 
@@ -36,22 +36,14 @@ module.exports = function selectBlock (
     if (appendExtension) {
       loaderContext.resourcePath += '.' + (style.lang || 'css')
     }
-    loaderContext.callback(
-      null,
-      style.content,
-      style.map
-    )
+    loaderContext.callback(null, style.content, style.map)
     return
   }
 
   // custom
   if (query.type === 'custom' && query.index != null) {
     const block = descriptor.customBlocks[query.index]
-    loaderContext.callback(
-      null,
-      block.content,
-      block.map
-    )
+    loaderContext.callback(null, block.content, block.map)
     return
   }
 }
diff --git a/tsconfig.json b/tsconfig.json
index 0365b9c36..b8a194dbb 100644
--- a/tsconfig.json
+++ b/tsconfig.json
@@ -1,11 +1,14 @@
 {
   "compilerOptions": {
+    "outDir": "dist",
+    "allowJs": true,
     "module": "esnext",
     "moduleResolution": "node",
     "strict": true,
     "target": "es6",
     "baseUrl": "."
   },
+  "include": ["lib"],
   "exclude": [
     "node_modules"
   ]