diff --git a/.gitignore b/.gitignore
index df90169c4d544..93112312b4f80 100644
--- a/.gitignore
+++ b/.gitignore
@@ -6,6 +6,8 @@
 .coverage.*
 htmlcov
 
+.cache
+.filesystem
 /infra/
 localstack/infra/
 
diff --git a/Dockerfile b/Dockerfile
index 557d60781a952..ccf3695d0a689 100644
--- a/Dockerfile
+++ b/Dockerfile
@@ -90,6 +90,16 @@ ADD https://raw.githubusercontent.com/carlossg/docker-maven/master/openjdk-11/se
 RUN mkdir -p /opt/code/localstack
 WORKDIR /opt/code/localstack/
 
+# create filesystem hierarchy
+RUN mkdir -p /var/lib/localstack && \
+    mkdir -p /usr/lib/localstack
+# backwards compatibility with LEGACY_DIRECTORIES (TODO: deprecate and remove)
+RUN mkdir -p /opt/code/localstack/localstack && \
+    ln -s /usr/lib/localstack /opt/code/localstack/localstack/infra && \
+    mkdir /tmp/localstack && \
+    chmod -R 777 /tmp/localstack && \
+    chmod -R 777 /usr/lib/localstack
+
 # install basic (global) tools to final image
 RUN pip install --no-cache-dir --upgrade supervisor virtualenv
 
@@ -130,12 +140,9 @@ RUN (cd /tmp && git clone https://github.com/timescale/timescaledb.git) && \
 
 # init environment and cache some dependencies
 ARG DYNAMODB_ZIP_URL=https://s3-us-west-2.amazonaws.com/dynamodb-local/dynamodb_local_latest.zip
-RUN mkdir -p /opt/code/localstack/localstack/infra/dynamodb && \
+RUN mkdir -p /usr/lib/localstack/dynamodb && \
       curl -L -o /tmp/localstack.ddb.zip ${DYNAMODB_ZIP_URL} && \
-      (cd localstack/infra/dynamodb && unzip -q /tmp/localstack.ddb.zip && rm /tmp/localstack.ddb.zip) && \
-    mkdir -p /opt/code/localstack/localstack/infra/elasticmq && \
-    curl -L -o /opt/code/localstack/localstack/infra/elasticmq/elasticmq-server.jar \
-        https://s3-eu-west-1.amazonaws.com/softwaremill-public/elasticmq-server-1.1.0.jar
+      (cd /usr/lib/localstack/dynamodb && unzip -q /tmp/localstack.ddb.zip && rm /tmp/localstack.ddb.zip)
 
 # upgrade python build tools
 RUN (virtualenv .venv && source .venv/bin/activate && pip3 install --upgrade pip wheel setuptools)
@@ -158,8 +165,7 @@ RUN (virtualenv .venv && source .venv/bin/activate && pip3 uninstall -y localsta
 
 # base-light: Stage which does not add additional dependencies (like elasticsearch)
 FROM base as base-light
-RUN mkdir -p /opt/code/localstack/localstack/infra && \
-    touch localstack/infra/.light-version
+RUN touch /usr/lib/localstack/.light-version
 
 
 
@@ -170,13 +176,12 @@ FROM base as base-full
 # https://github.com/pires/docker-elasticsearch/issues/56
 ENV ES_TMPDIR /tmp
 
-ENV ES_BASE_DIR=localstack/infra/elasticsearch
+ENV ES_BASE_DIR=/usr/lib/localstack/elasticsearch
 ENV ES_JAVA_HOME /usr/lib/jvm/java-11
 RUN TARGETARCH_SYNONYM=$([[ "$TARGETARCH" == "amd64" ]] && echo "x86_64" || echo "aarch64"); \
-    mkdir -p /opt/code/localstack/localstack/infra && \
     curl -L -o /tmp/localstack.es.tar.gz \
         https://artifacts.elastic.co/downloads/elasticsearch/elasticsearch-7.10.0-linux-${TARGETARCH_SYNONYM}.tar.gz && \
-    (cd localstack/infra/ && tar -xf /tmp/localstack.es.tar.gz && \
+    (cd /usr/lib/localstack && tar -xf /tmp/localstack.es.tar.gz && \
         mv elasticsearch* elasticsearch && rm /tmp/localstack.es.tar.gz) && \
     (cd $ES_BASE_DIR && \
         bin/elasticsearch-plugin install analysis-icu && \
@@ -213,24 +218,24 @@ COPY --from=builder /opt/code/localstack/ /opt/code/localstack/
 COPY --from=builder /usr/share/postgresql/11/extension /usr/share/postgresql/11/extension
 COPY --from=builder /usr/lib/postgresql/11/lib /usr/lib/postgresql/11/lib
 
-RUN mkdir -p /tmp/localstack && \
-    if [ -e /usr/bin/aws ]; then mv /usr/bin/aws /usr/bin/aws.bk; fi; ln -s /opt/code/localstack/.venv/bin/aws /usr/bin/aws
+RUN if [ -e /usr/bin/aws ]; then mv /usr/bin/aws /usr/bin/aws.bk; fi; ln -s /opt/code/localstack/.venv/bin/aws /usr/bin/aws
 
 # fix some permissions and create local user
 RUN mkdir -p /.npm && \
     chmod 777 . && \
     chmod 755 /root && \
     chmod -R 777 /.npm && \
-    chmod -R 777 /tmp/localstack && \
+    chmod -R 777 /var/lib/localstack && \
     useradd -ms /bin/bash localstack && \
     ln -s `pwd` /tmp/localstack_install_dir
 
 # Install the latest version of awslocal globally
 RUN pip3 install --upgrade awscli awscli-local requests
 
-# Add the code in the last step
-# Also adds the results of `make init` to the container.
+# Adds the results of `make init` to the container.
 # `make init` _needs_ to be executed before building this docker image (since the execution needs docker itself).
+ADD .filesystem/usr/lib/localstack /usr/lib/localstack
+# Add the code in the last step
 ADD localstack/ localstack/
 
 # Download some more dependencies (make init needs the LocalStack code)
@@ -259,5 +264,8 @@ EXPOSE 4566 4510-4559 5678
 
 HEALTHCHECK --interval=10s --start-period=15s --retries=5 --timeout=5s CMD ./bin/localstack status services --format=json
 
+# default volume directory
+VOLUME /var/lib/localstack
+
 # define command at startup
 ENTRYPOINT ["docker-entrypoint.sh"]
diff --git a/Makefile b/Makefile
index 4a1c4d0533fc0..55d703fc52d10 100644
--- a/Makefile
+++ b/Makefile
@@ -193,7 +193,7 @@ docker-run:        		  ## Run Docker image locally
 
 docker-mount-run:
 	MOTO_DIR=$$(echo $$(pwd)/.venv/lib/python*/site-packages/moto | awk '{print $$NF}'); echo MOTO_DIR $$MOTO_DIR; \
-		DOCKER_FLAGS="$(DOCKER_FLAGS) -v `pwd`/localstack/constants.py:/opt/code/localstack/localstack/constants.py -v `pwd`/localstack/config.py:/opt/code/localstack/localstack/config.py -v `pwd`/localstack/plugins.py:/opt/code/localstack/localstack/plugins.py -v `pwd`/localstack/plugin:/opt/code/localstack/localstack/plugin -v `pwd`/localstack/runtime:/opt/code/localstack/localstack/runtime -v `pwd`/localstack/utils:/opt/code/localstack/localstack/utils -v `pwd`/localstack/services:/opt/code/localstack/localstack/services -v `pwd`/localstack/http:/opt/code/localstack/localstack/http -v `pwd`/localstack/contrib:/opt/code/localstack/localstack/contrib -v `pwd`/localstack/dashboard:/opt/code/localstack/localstack/dashboard -v `pwd`/tests:/opt/code/localstack/tests -v $$MOTO_DIR:/opt/code/localstack/.venv/lib/python3.8/site-packages/moto/" make docker-run
+		DOCKER_FLAGS="$(DOCKER_FLAGS) -v `pwd`/localstack/constants.py:/opt/code/localstack/localstack/constants.py -v `pwd`/localstack/config.py:/opt/code/localstack/localstack/config.py -v `pwd`/localstack/plugins.py:/opt/code/localstack/localstack/plugins.py -v `pwd`/localstack/plugin:/opt/code/localstack/localstack/plugin -v `pwd`/localstack/runtime:/opt/code/localstack/localstack/runtime -v `pwd`/localstack/utils:/opt/code/localstack/localstack/utils -v `pwd`/localstack/services:/opt/code/localstack/localstack/services -v `pwd`/localstack/http:/opt/code/localstack/localstack/http -v `pwd`/localstack/contrib:/opt/code/localstack/localstack/contrib -v `pwd`/localstack/dashboard:/opt/code/localstack/localstack/dashboard -v `pwd`/tests:/opt/code/localstack/tests -v $$MOTO_DIR:/opt/code/localstack/.venv/lib/python3.10/site-packages/moto/" make docker-run
 
 docker-build-lambdas:
 	docker build -t localstack/lambda-js:nodejs14.x -f bin/lambda/Dockerfile.nodejs14x .
@@ -220,13 +220,13 @@ test-docker-mount:		  ## Run automated tests in Docker (mounting local code)
 	# TODO: find a cleaner way to mount/copy the dependencies into the container...
 	VENV_DIR=$$(pwd)/.venv/; \
 		PKG_DIR=$$(echo $$VENV_DIR/lib/python*/site-packages | awk '{print $$NF}'); \
-		PKG_DIR_CON=/opt/code/localstack/.venv/lib/python3.8/site-packages; \
+		PKG_DIR_CON=/opt/code/localstack/.venv/lib/python3.10/site-packages; \
 		echo "#!/usr/bin/env python" > /tmp/pytest.ls.bin; cat $$VENV_DIR/bin/pytest >> /tmp/pytest.ls.bin; chmod +x /tmp/pytest.ls.bin; \
-		DOCKER_FLAGS="-v `pwd`/tests:/opt/code/localstack/tests -v /tmp/pytest.ls.bin:/opt/code/localstack/.venv/bin/pytest -v $$PKG_DIR/py:$$PKG_DIR_CON/py -v $$PKG_DIR/pluggy:$$PKG_DIR_CON/pluggy -v $$PKG_DIR/iniconfig:$$PKG_DIR_CON/iniconfig -v $$PKG_DIR/packaging:$$PKG_DIR_CON/packaging -v $$PKG_DIR/pytest:$$PKG_DIR_CON/pytest -v $$PKG_DIR/_pytest:/opt/code/localstack/.venv/lib/python3.8/site-packages/_pytest" make test-docker-mount-code
+		DOCKER_FLAGS="-v `pwd`/tests:/opt/code/localstack/tests -v /tmp/pytest.ls.bin:/opt/code/localstack/.venv/bin/pytest -v $$PKG_DIR/py:$$PKG_DIR_CON/py -v $$PKG_DIR/pluggy:$$PKG_DIR_CON/pluggy -v $$PKG_DIR/iniconfig:$$PKG_DIR_CON/iniconfig -v $$PKG_DIR/packaging:$$PKG_DIR_CON/packaging -v $$PKG_DIR/pytest:$$PKG_DIR_CON/pytest -v $$PKG_DIR/_pytest:/opt/code/localstack/.venv/lib/python3.10/site-packages/_pytest" make test-docker-mount-code
 
 test-docker-mount-code:
 	PACKAGES_DIR=$$(echo $$(pwd)/.venv/lib/python*/site-packages | awk '{print $$NF}'); \
-		DOCKER_FLAGS="$(DOCKER_FLAGS) --entrypoint= -v `pwd`/localstack/config.py:/opt/code/localstack/localstack/config.py -v `pwd`/localstack/constants.py:/opt/code/localstack/localstack/constants.py -v `pwd`/localstack/utils:/opt/code/localstack/localstack/utils -v `pwd`/localstack/services:/opt/code/localstack/localstack/services -v `pwd`/localstack/aws:/opt/code/localstack/localstack/aws -v `pwd`/Makefile:/opt/code/localstack/Makefile -v $$PACKAGES_DIR/moto:/opt/code/localstack/.venv/lib/python3.8/site-packages/moto/ -e TEST_PATH=\\'$(TEST_PATH)\\' -e LAMBDA_JAVA_OPTS=$(LAMBDA_JAVA_OPTS) $(ENTRYPOINT)" CMD="make test" make docker-run
+		DOCKER_FLAGS="$(DOCKER_FLAGS) --entrypoint= -v `pwd`/localstack/config.py:/opt/code/localstack/localstack/config.py -v `pwd`/localstack/constants.py:/opt/code/localstack/localstack/constants.py -v `pwd`/localstack/utils:/opt/code/localstack/localstack/utils -v `pwd`/localstack/services:/opt/code/localstack/localstack/services -v `pwd`/localstack/aws:/opt/code/localstack/localstack/aws -v `pwd`/Makefile:/opt/code/localstack/Makefile -v $$PACKAGES_DIR/moto:/opt/code/localstack/.venv/lib/python3.10/site-packages/moto/ -e TEST_PATH=\\'$(TEST_PATH)\\' -e LAMBDA_JAVA_OPTS=$(LAMBDA_JAVA_OPTS) $(ENTRYPOINT)" CMD="make test" make docker-run
 
 # Note: the ci-* targets below should only be used in CI builds!
 
@@ -277,7 +277,9 @@ init-precommit:    		  ## install te pre-commit hook into your local git reposit
 	($(VENV_RUN); pre-commit install)
 
 clean:             		  ## Clean up (npm dependencies, downloaded infrastructure code, compiled Java classes)
+	rm -rf .filesystem
 	rm -rf localstack/dashboard/web/node_modules
+	# TODO: remove localstack/infra/ as it's no longer used
 	rm -rf localstack/infra/amazon-kinesis-client
 	rm -rf localstack/infra/elasticsearch
 	rm -rf localstack/infra/elasticmq
diff --git a/bin/docker-entrypoint.sh b/bin/docker-entrypoint.sh
index de250e77fdab9..de7c69085a270 100755
--- a/bin/docker-entrypoint.sh
+++ b/bin/docker-entrypoint.sh
@@ -5,7 +5,7 @@ shopt -s nullglob
 
 if [[ ! $INIT_SCRIPTS_PATH ]]
 then
-  # FIXME: move
+  # FIXME: move to /etc/localstack/init/ready.d
   INIT_SCRIPTS_PATH=/docker-entrypoint-initaws.d
 fi
 if [[ ! $EDGE_PORT ]]
@@ -45,14 +45,21 @@ if [ "$DISABLE_TERM_HANDLER" == "" ]; then
   trap 'kill -31 ${!}; term_handler 31' SIGUSR2
 fi
 
-cat /dev/null > /tmp/localstack_infra.log
-cat /dev/null > /tmp/localstack_infra.err
+LOG_DIR=/var/lib/localstack/logs
+test -d ${LOG_DIR} || mkdir -p ${LOG_DIR}
+
+cat /dev/null > ${LOG_DIR}/localstack_infra.log
+cat /dev/null > ${LOG_DIR}/localstack_infra.err
+
+# for backwards compatibility with LEGACY_DIRECTORIES=1
+test -f /tmp/localstack_infra.log || ln -s ${LOG_DIR}/localstack_infra.log /tmp/localstack_infra.log
+test -f /tmp/localstack_infra.err || ln -s ${LOG_DIR}/localstack_infra.err /tmp/localstack_infra.err
 
 supervisord -c /etc/supervisord.conf &
 suppid="$!"
 
 function run_startup_scripts {
-  until grep -q '^Ready.' /tmp/localstack_infra.log >/dev/null 2>&1 ; do
+  until grep -q '^Ready.' ${LOG_DIR}/localstack_infra.log >/dev/null 2>&1 ; do
     echo "Waiting for all LocalStack services to be ready"
     sleep 7
   done
@@ -73,8 +80,8 @@ run_startup_scripts &
 # Run tail on the localstack log files forever until we are told to terminate
 if [ "$DISABLE_TERM_HANDLER" == "" ]; then
   while true; do
-    tail -qF /tmp/localstack_infra.log /tmp/localstack_infra.err & wait ${!}
+    tail -qF ${LOG_DIR}/localstack_infra.log ${LOG_DIR}/localstack_infra.err & wait ${!}
   done
 else
-  tail -qF /tmp/localstack_infra.log /tmp/localstack_infra.err
+  tail -qF ${LOG_DIR}/localstack_infra.log ${LOG_DIR}/localstack_infra.err
 fi
diff --git a/bin/supervisord.conf b/bin/supervisord.conf
index 5c671b7b43757..1d2c4d5ba2931 100644
--- a/bin/supervisord.conf
+++ b/bin/supervisord.conf
@@ -9,5 +9,5 @@ environment=
     LOCALSTACK_INFRA_PROCESS=1
 autostart=true
 autorestart=true
-stdout_logfile=/tmp/localstack_infra.log
-stderr_logfile=/tmp/localstack_infra.err
+stdout_logfile=/var/lib/localstack/logs/localstack_infra.log
+stderr_logfile=/var/lib/localstack/logs/localstack_infra.err
diff --git a/localstack/cli/lpm.py b/localstack/cli/lpm.py
index 342e10c06bc20..3edad5fd0407e 100644
--- a/localstack/cli/lpm.py
+++ b/localstack/cli/lpm.py
@@ -5,6 +5,7 @@
 from click import ClickException
 from rich.console import Console
 
+from localstack import config
 from localstack.services.install import InstallerManager
 from localstack.utils.bootstrap import setup_logging
 
@@ -59,6 +60,7 @@ def install(package, parallel):
     """
     console.print(f"resolving packages: {package}")
     installers: Dict[str, Callable] = InstallerManager().get_installers()
+    config.dirs.mkdirs()
 
     for pkg in package:
         if pkg not in installers:
diff --git a/localstack/config.py b/localstack/config.py
index aba1919f8ade5..f694f40ec66b4 100644
--- a/localstack/config.py
+++ b/localstack/config.py
@@ -15,12 +15,14 @@
     DEFAULT_LAMBDA_CONTAINER_REGISTRY,
     DEFAULT_PORT_EDGE,
     DEFAULT_SERVICE_PORTS,
+    DEFAULT_VOLUME_DIR,
     ENV_INTERNAL_TEST_RUN,
     FALSE_STRINGS,
-    INSTALL_DIR_INFRA,
     LOCALHOST,
     LOCALHOST_IP,
+    LOCALSTACK_ROOT_FOLDER,
     LOG_LEVELS,
+    MODULE_MAIN_PATH,
     TRACE_LOG_LEVELS,
     TRUE_STRINGS,
 )
@@ -61,15 +63,15 @@ class Directories:
 
     def __init__(
         self,
-        static_libs: str = None,
-        var_libs: str = None,
-        cache: str = None,
-        tmp: str = None,
-        functions: str = None,
-        data: str = None,
-        config: str = None,
-        init: str = None,
-        logs: str = None,
+        static_libs: str,
+        var_libs: str,
+        cache: str,
+        tmp: str,
+        functions: str,
+        data: str,
+        config: str,
+        init: str,
+        logs: str,
     ) -> None:
         super().__init__()
         self.static_libs = static_libs
@@ -83,10 +85,81 @@ def __init__(
         self.logs = logs
 
     @staticmethod
-    def from_config():
+    def defaults() -> "Directories":
+        """Returns Localstack directory paths based on the localstack filesystem hierarchy."""
+        return Directories(
+            static_libs="/usr/lib/localstack",
+            var_libs=f"{DEFAULT_VOLUME_DIR}/lib",
+            cache=f"{DEFAULT_VOLUME_DIR}/cache",
+            tmp=f"{DEFAULT_VOLUME_DIR}/tmp",
+            functions=f"{DEFAULT_VOLUME_DIR}/tmp",  # FIXME: remove - this was misconceived
+            data=f"{DEFAULT_VOLUME_DIR}/state",
+            logs=f"{DEFAULT_VOLUME_DIR}/logs",
+            config="/etc/localstack/conf.d",  # for future use
+            init="/etc/localstack/init",  # for future use
+        )
+
+    @staticmethod
+    def for_container() -> "Directories":
+        """
+        Returns Localstack directory paths as they are defined within the container. Everything shared and writable
+        lives in /var/lib/localstack or /tmp/localstack.
+
+        :returns: Directories object
+        """
+        defaults = Directories.defaults()
+
+        return Directories(
+            static_libs=defaults.static_libs,
+            var_libs=defaults.var_libs,
+            cache=defaults.cache,
+            tmp=defaults.tmp,
+            functions=defaults.functions,
+            data=defaults.data if PERSISTENCE else os.path.join(defaults.tmp, "state"),
+            config=defaults.config,
+            logs=defaults.logs,
+            init="/docker-entrypoint-initaws.d",  # FIXME should be reworked with lifecycle hooks
+        )
+
+    @staticmethod
+    def for_host() -> "Directories":
+        """Return directories used for running localstack in host mode. Note that these are *not* the directories
+        that are mounted into the container when the user starts localstack."""
+        root = os.environ.get("FILESYSTEM_ROOT") or os.path.join(
+            LOCALSTACK_ROOT_FOLDER, ".filesystem"
+        )
+        root = os.path.abspath(root)
+
+        defaults = Directories.for_container()
+
+        tmp = os.path.join(root, defaults.tmp.lstrip("/"))
+        data = os.path.join(root, defaults.data.lstrip("/"))
+
+        return Directories(
+            static_libs=os.path.join(root, defaults.static_libs.lstrip("/")),
+            var_libs=os.path.join(root, defaults.var_libs.lstrip("/")),
+            cache=os.path.join(root, defaults.cache.lstrip("/")),
+            tmp=tmp,
+            functions=os.path.join(root, defaults.functions.lstrip("/")),
+            data=data if PERSISTENCE else os.path.join(tmp, "state"),
+            config=os.path.join(root, defaults.config.lstrip("/")),
+            init=os.path.join(root, defaults.init.lstrip("/")),
+            logs=os.path.join(root, defaults.logs.lstrip("/")),
+        )
+
+    @staticmethod
+    def legacy_from_config():
         """Returns Localstack directory paths from the config/environment variables defined by the config."""
         # Note that the entries should be unique, as further downstream in docker_utils.py we're removing
         # duplicate host paths in the volume mounts via `dict(mount_volumes)`.
+
+        # legacy config variables inlined
+        INSTALL_DIR_INFRA = os.path.join(MODULE_MAIN_PATH, "infra")
+        # ephemeral cache dir that persists across reboots
+        CACHE_DIR = os.environ.get("CACHE_DIR", os.path.join(TMP_FOLDER, "cache")).strip()
+        # libs cache dir that persists across reboots
+        VAR_LIBS_DIR = os.environ.get("VAR_LIBS_DIR", os.path.join(TMP_FOLDER, "var_libs")).strip()
+
         return Directories(
             static_libs=INSTALL_DIR_INFRA,
             var_libs=VAR_LIBS_DIR,
@@ -100,7 +173,7 @@ def from_config():
         )
 
     @staticmethod
-    def for_container() -> "Directories":
+    def legacy_for_container() -> "Directories":
         """
         Returns Localstack directory paths as they are defined within the container. Everything shared and writable
         lives in /var/lib/localstack or /tmp/localstack.
@@ -110,10 +183,9 @@ def for_container() -> "Directories":
         # only set CONTAINER_VAR_LIBS_FOLDER/CONTAINER_CACHE_FOLDER inside the container to redirect var_libs/cache to
         # another directory to avoid override by host mount
         var_libs = (
-            os.environ.get("CONTAINER_VAR_LIBS_FOLDER", "").strip()
-            or "/var/lib/localstack/var_libs"
+            os.environ.get("CONTAINER_VAR_LIBS_FOLDER", "").strip() or "/tmp/localstack/var_libs"
         )
-        cache = os.environ.get("CONTAINER_CACHE_FOLDER", "").strip() or "/var/lib/localstack/cache"
+        cache = os.environ.get("CONTAINER_CACHE_FOLDER", "").strip() or "/tmp/localstack/cache"
         tmp = (
             os.environ.get("CONTAINER_TMP_FOLDER", "").strip() or "/tmp/localstack"
         )  # TODO: discuss movement to /var/lib/localstack/tmp
@@ -121,14 +193,14 @@ def for_container() -> "Directories":
             DATA_DIR if in_docker() else "/tmp/localstack_data"
         )  # TODO: move to /var/lib/localstack/data
         return Directories(
-            static_libs=INSTALL_DIR_INFRA,
+            static_libs=os.path.join(MODULE_MAIN_PATH, "infra"),
             var_libs=var_libs,
             cache=cache,
             tmp=tmp,
             functions=HOST_TMP_FOLDER,  # TODO: move to /var/lib/localstack/tmp
             data=data_dir,
             config=None,  # config directory is host-only
-            logs="/var/lib/localstack/logs",
+            logs="/tmp/localstack/logs",
             init="/docker-entrypoint-initaws.d",
         )
 
@@ -277,12 +349,21 @@ def in_docker():
 # name of the host under which the LocalStack services are available
 LOCALSTACK_HOSTNAME = os.environ.get("LOCALSTACK_HOSTNAME", "").strip() or LOCALHOST
 
-# directory for persisting data
+# directory for persisting data (TODO: deprecated, simply use PERSISTENCE=1)
 DATA_DIR = os.environ.get("DATA_DIR", "").strip()
 
+# whether localstack should persist service state across localstack runs
+PERSISTENCE = is_env_true("PERSISTENCE")
+
+# whether to clear config.dirs.tmp on startup and shutdown
+CLEAR_TMP_FOLDER = is_env_not_false("CLEAR_TMP_FOLDER")
+
 # folder for temporary files and data
 TMP_FOLDER = os.path.join(tempfile.gettempdir(), "localstack")
 
+# this is exclusively for the CLI to configure the container mount into /var/lib/localstack
+VOLUME_DIR = os.environ.get("LOCALSTACK_VOLUME_DIR", "").strip() or TMP_FOLDER
+
 # fix for Mac OS, to be able to mount /var/folders in Docker
 if TMP_FOLDER.startswith("/var/folders/") and os.path.exists("/private%s" % TMP_FOLDER):
     TMP_FOLDER = "/private%s" % TMP_FOLDER
@@ -290,10 +371,8 @@ def in_docker():
 # temporary folder of the host (required when running in Docker). Fall back to local tmp folder if not set
 HOST_TMP_FOLDER = os.environ.get("HOST_TMP_FOLDER", TMP_FOLDER)
 
-# ephemeral cache dir that persists across reboots
-CACHE_DIR = os.environ.get("CACHE_DIR", os.path.join(TMP_FOLDER, "cache")).strip()
-# libs cache dir that persists across reboots
-VAR_LIBS_DIR = os.environ.get("VAR_LIBS_DIR", os.path.join(TMP_FOLDER, "var_libs")).strip()
+# whether to use the old directory structure and mounting config
+LEGACY_DIRECTORIES = is_env_true("LEGACY_DIRECTORIES")
 
 # whether to enable verbose debug logging
 LS_LOG = eval_log_type("LS_LOG")
@@ -448,7 +527,6 @@ def in_docker():
 except socket.error:
     pass
 
-
 # -----
 # SERVICE-SPECIFIC CONFIGS BELOW
 # -----
@@ -669,6 +747,7 @@ def in_docker():
     "LAMBDA_REMOVE_CONTAINERS",
     "LAMBDA_STAY_OPEN_MODE",
     "LAMBDA_TRUNCATE_STDOUT",
+    "LEGACY_DIRECTORIES",
     "LEGACY_DOCKER_CLIENT",
     "LEGACY_EDGE_PROXY",
     "LOCALSTACK_API_KEY",
@@ -680,6 +759,7 @@ def in_docker():
     "OPENSEARCH_ENDPOINT_STRATEGY",
     "OUTBOUND_HTTP_PROXY",
     "OUTBOUND_HTTPS_PROXY",
+    "PERSISTENCE",
     "PERSISTENCE_SINGLE_FILE",
     "REQUESTS_CA_BUNDLE",
     "S3_SKIP_SIGNATURE_VALIDATION",
@@ -908,18 +988,58 @@ def __iter__(self):
 
 SERVICE_PROVIDER_CONFIG.load_from_environment()
 
-# initialize directories
-if is_in_docker:
-    dirs = Directories.for_container()
-else:
-    dirs = Directories.from_config()
 
-dirs.mkdirs()
+def init_legacy_directories() -> Directories:
+    global PERSISTENCE
+    from localstack import constants
 
-# TODO: remove deprecation warning with next release
-for path in [dirs.config, os.path.join(dirs.tmp, ".localstack")]:
-    if path and os.path.isfile(path):
-        print(
-            f"warning: the config file .localstack is deprecated and no longer used, "
-            f"please remove it by running rm {path}"
-        )
+    constants.DEFAULT_VOLUME_DIR = "/tmp/localstack"
+
+    if DATA_DIR:
+        PERSISTENCE = True
+
+    if is_in_docker:
+        dirs = Directories.legacy_for_container()
+    else:
+        dirs = Directories.legacy_from_config()
+
+    dirs.mkdirs()
+    return dirs
+
+
+def init_directories() -> Directories:
+    global DATA_DIR, PERSISTENCE
+
+    if DATA_DIR:
+        # deprecation path: DATA_DIR being set means persistence is activated, but we're ignoring the path set in
+        # DATA_DIR
+        os.environ["PERSISTENCE"] = "1"
+        PERSISTENCE = True
+
+    if is_in_docker:
+        dirs = Directories.for_container()
+    else:
+        dirs = Directories.for_host()
+
+    if PERSISTENCE:
+        if DATA_DIR:
+            LOG.warning(
+                "Persistence mode was activated using the DATA_DIR variable. The DATA_DIR is deprecated and "
+                "its value is ignore. The data is instead stored into %s in the LocalStack filesystem.",
+                dirs.data,
+            )
+
+        # deprecation path
+        DATA_DIR = dirs.data
+        os.environ["DATA_DIR"] = dirs.data  # still needed for external tools
+
+    return dirs
+
+
+# initialize directories
+dirs: Directories
+if LEGACY_DIRECTORIES:
+    CLEAR_TMP_FOLDER = False
+    dirs = init_legacy_directories()
+else:
+    dirs = init_directories()
diff --git a/localstack/constants.py b/localstack/constants.py
index e1c3dbab56b6d..434feaf0e1a5a 100644
--- a/localstack/constants.py
+++ b/localstack/constants.py
@@ -50,9 +50,6 @@
 MODULE_MAIN_PATH = os.path.dirname(os.path.realpath(__file__))
 # TODO rename to "ROOT_FOLDER"!
 LOCALSTACK_ROOT_FOLDER = os.path.realpath(os.path.join(MODULE_MAIN_PATH, ".."))
-INSTALL_DIR_INFRA = os.path.join(
-    MODULE_MAIN_PATH, "infra"
-)  # FIXME: deprecated, use config.dirs.infra
 
 # virtualenv folder
 LOCALSTACK_VENV_FOLDER = os.environ.get("VIRTUAL_ENV")
@@ -65,6 +62,9 @@
             os.path.join(LOCALSTACK_ROOT_FOLDER, "..", "..", "..")
         )
 
+# default volume directory containing shared data
+DEFAULT_VOLUME_DIR = "/var/lib/localstack"
+
 # API Gateway path to indicate a user request sent to the gateway
 PATH_USER_REQUEST = "_user_request_"
 
diff --git a/localstack/services/awslambda/lambda_executors.py b/localstack/services/awslambda/lambda_executors.py
index 6a17f57a9ddd0..382d86c6a571a 100644
--- a/localstack/services/awslambda/lambda_executors.py
+++ b/localstack/services/awslambda/lambda_executors.py
@@ -18,8 +18,7 @@
 from typing import Any, Callable, Dict, List, Optional, Tuple, Union
 
 from localstack import config
-from localstack.config import LAMBDA_TRUNCATE_STDOUT, TMP_FOLDER
-from localstack.constants import DEFAULT_LAMBDA_CONTAINER_REGISTRY
+from localstack.constants import DEFAULT_LAMBDA_CONTAINER_REGISTRY, DEFAULT_VOLUME_DIR
 from localstack.runtime.hooks import hook_spec
 from localstack.services.awslambda.lambda_utils import (
     API_PATH_ROOT,
@@ -72,7 +71,7 @@
     DockerContainerStatus,
     PortMappings,
 )
-from localstack.utils.docker_utils import DOCKER_CLIENT
+from localstack.utils.docker_utils import DOCKER_CLIENT, get_default_volume_dir_mount
 from localstack.utils.run import FuncThread
 
 # constants
@@ -1272,7 +1271,6 @@ def execute_in_container(
 
 
 class LambdaExecutorLocal(LambdaExecutor):
-
     # maps functionARN -> functionVersion -> callable used to invoke a Lambda function locally
     FUNCTION_CALLABLES: Dict[str, Dict[str, Callable]] = {}
 
@@ -1577,7 +1575,23 @@ def get_java_opts(cls):
 
     @classmethod
     def get_host_path_for_path_in_docker(cls, path):
-        return re.sub(r"^%s/(.*)$" % config.dirs.tmp, r"%s/\1" % config.dirs.functions, path)
+        if config.LEGACY_DIRECTORIES:
+            return re.sub(r"^%s/(.*)$" % config.dirs.tmp, r"%s/\1" % config.dirs.functions, path)
+
+        if config.is_in_docker:
+            volume = get_default_volume_dir_mount()
+
+            if volume:
+                if volume.type != "bind":
+                    raise ValueError(
+                        f"Mount to {DEFAULT_VOLUME_DIR} needs to be a bind mount for lambda code mounting to work"
+                    )
+
+                return re.sub(r"^%s/(.*)$" % config.dirs.tmp, r"%s/\1" % volume.source, path)
+            else:
+                raise ValueError(f"No volume mounted to {DEFAULT_VOLUME_DIR}")
+
+        return path
 
     @classmethod
     def format_windows_path(cls, path):
@@ -1650,23 +1664,22 @@ def inject_endpoints_into_env(env_vars: Dict[str, str]):
 
 
 class OutputLog:
-
     __slots__ = ["_stdout", "_stderr"]
 
     def __init__(self, stdout, stderr):
         self._stdout = stdout
         self._stderr = stderr
 
-    def stderr_formatted(self, truncated_to: int = LAMBDA_TRUNCATE_STDOUT):
+    def stderr_formatted(self, truncated_to: int = config.LAMBDA_TRUNCATE_STDOUT):
         return truncate(to_str(self._stderr).strip().replace("\n", "\n> "), truncated_to)
 
-    def stdout_formatted(self, truncated_to: int = LAMBDA_TRUNCATE_STDOUT):
+    def stdout_formatted(self, truncated_to: int = config.LAMBDA_TRUNCATE_STDOUT):
         return truncate(to_str(self._stdout).strip(), truncated_to)
 
     def output_file(self):
         try:
             with tempfile.NamedTemporaryFile(
-                dir=TMP_FOLDER, delete=False, suffix=".log", prefix="lambda_"
+                dir=config.dirs.tmp, delete=False, suffix=".log", prefix="lambda_"
             ) as f:
                 LOG.info(f"writing log to file '{f.name}'")
                 f.write(to_bytes(self._stderr))
diff --git a/localstack/services/infra.py b/localstack/services/infra.py
index ec05d0ae32c26..e50a7c6c947a7 100644
--- a/localstack/services/infra.py
+++ b/localstack/services/infra.py
@@ -20,7 +20,7 @@
 from localstack.services import generic_proxy, install, motoserver
 from localstack.services.generic_proxy import ProxyListener, start_proxy_server
 from localstack.services.plugins import SERVICE_PLUGINS, ServiceDisabled, wait_for_infra_shutdown
-from localstack.utils import analytics, config_listener, persistence
+from localstack.utils import analytics, config_listener, files, persistence
 from localstack.utils.analytics import event_publisher
 from localstack.utils.aws.request_context import patch_moto_request_handling
 from localstack.utils.bootstrap import canonicalize_api_names, in_ci, log_duration, setup_logging
@@ -304,6 +304,9 @@ def cleanup_resources():
     cleanup_tmp_files()
     cleanup_threads_and_processes()
 
+    if config.CLEAR_TMP_FOLDER:
+        files.rm_rf(config.dirs.tmp)
+
 
 def log_startup_message(service):
     LOG.info("Starting mock %s service on %s ...", service, config.edge_ports_info())
@@ -367,6 +370,10 @@ def print_runtime_information(in_docker=False):
 
 
 def start_infra(asynchronous=False, apis=None):
+    if config.CLEAR_TMP_FOLDER:
+        files.rm_rf(config.dirs.tmp)  # clear temp dir on startup
+    config.dirs.mkdirs()
+
     events.infra_starting.set()
 
     try:
@@ -499,7 +506,7 @@ def start_runtime_components():
     thread = start_runtime_components()
     preload_services()
 
-    if config.dirs.data:
+    if config.PERSISTENCE:
         persistence.save_startup_info()
 
     print(READY_MARKER_OUTPUT)
diff --git a/localstack/services/install.py b/localstack/services/install.py
index e708dfec7d28e..a92be0df50177 100644
--- a/localstack/services/install.py
+++ b/localstack/services/install.py
@@ -60,7 +60,7 @@
 INSTALL_DIR_KCL = "%s/amazon-kinesis-client" % dirs.static_libs
 INSTALL_DIR_STEPFUNCTIONS = "%s/stepfunctions" % dirs.static_libs
 INSTALL_DIR_KMS = "%s/kms" % dirs.static_libs
-INSTALL_DIR_ELASTICMQ = "%s/elasticmq" % dirs.static_libs
+INSTALL_DIR_ELASTICMQ = "%s/elasticmq" % dirs.var_libs
 INSTALL_DIR_KINESIS_MOCK = os.path.join(dirs.static_libs, "kinesis-mock")
 INSTALL_PATH_LOCALSTACK_FAT_JAR = "%s/localstack-utils-fat.jar" % dirs.static_libs
 INSTALL_PATH_DDB_JAR = os.path.join(INSTALL_DIR_DDB, "DynamoDBLocal.jar")
@@ -195,7 +195,7 @@ def install_elasticsearch(version=None):
         install_dir_parent = os.path.dirname(install_dir)
         mkdir(install_dir_parent)
         # download and extract archive
-        tmp_archive = os.path.join(config.dirs.tmp, f"localstack.{os.path.basename(es_url)}")
+        tmp_archive = os.path.join(config.dirs.cache, f"localstack.{os.path.basename(es_url)}")
         download_and_extract_with_retry(es_url, tmp_archive, install_dir_parent)
         elasticsearch_dir = glob.glob(os.path.join(install_dir_parent, "elasticsearch*"))
         if not elasticsearch_dir:
@@ -284,7 +284,7 @@ def install_opensearch(version=None):
                 mkdir(install_dir_parent)
                 # download and extract archive
                 tmp_archive = os.path.join(
-                    config.dirs.tmp, f"localstack.{os.path.basename(opensearch_url)}"
+                    config.dirs.cache, f"localstack.{os.path.basename(opensearch_url)}"
                 )
                 download_and_extract_with_retry(opensearch_url, tmp_archive, install_dir_parent)
                 opensearch_dir = glob.glob(os.path.join(install_dir_parent, "opensearch*"))
@@ -319,7 +319,7 @@ def install_elasticmq():
         log_install_msg("ElasticMQ")
         mkdir(INSTALL_DIR_ELASTICMQ)
         # download archive
-        tmp_archive = os.path.join(config.dirs.tmp, "elasticmq-server.jar")
+        tmp_archive = os.path.join(config.dirs.cache, "elasticmq-server.jar")
         if not os.path.exists(tmp_archive):
             download(ELASTICMQ_JAR_URL, tmp_archive)
         shutil.copy(tmp_archive, INSTALL_DIR_ELASTICMQ)
@@ -799,6 +799,8 @@ def install(self, package: str, *args, **kwargs):
 
 def main():
     if len(sys.argv) > 1:
+        config.dirs.mkdirs()
+
         # set test API key so pro install hooks are called
         os.environ["LOCALSTACK_API_KEY"] = os.environ.get("LOCALSTACK_API_KEY") or "test"
         if sys.argv[1] == "libs":
diff --git a/localstack/services/kms/kms_starter.py b/localstack/services/kms/kms_starter.py
index 11c07c9f27d11..a50c165b568b0 100644
--- a/localstack/services/kms/kms_starter.py
+++ b/localstack/services/kms/kms_starter.py
@@ -26,7 +26,7 @@ def start_kms_local(port=None, backend_port=None, asynchronous=None, update_list
         "KMS_ACCOUNT_ID": account_id,
         "ACCOUNT_ID": account_id,
     }
-    if config.dirs.data:
+    if config.PERSISTENCE:
         env_vars["KMS_DATA_PATH"] = config.dirs.data
     result = do_run(kms_binary, asynchronous, env_vars=env_vars)
     wait_for_port_open(backend_port)
diff --git a/localstack/services/opensearch/cluster.py b/localstack/services/opensearch/cluster.py
index 7146176528567..3c3e6a258756b 100644
--- a/localstack/services/opensearch/cluster.py
+++ b/localstack/services/opensearch/cluster.py
@@ -55,7 +55,7 @@ def init_directories(dirs: Directories):
     LOG.debug("initializing cluster directories %s", dirs)
     chmod_r(dirs.install, 0o777)
 
-    if not dirs.data.startswith(config.dirs.data):
+    if not config.dirs.data or not dirs.data.startswith(config.dirs.data):
         # only clear previous data if it's not in DATA_DIR
         rm_rf(dirs.data)
 
diff --git a/localstack/utils/bootstrap.py b/localstack/utils/bootstrap.py
index 35eeeeabe33cf..7de661807a261 100644
--- a/localstack/utils/bootstrap.py
+++ b/localstack/utils/bootstrap.py
@@ -12,6 +12,7 @@
 
 from localstack import config, constants
 from localstack.config import Directories
+from localstack.constants import DEFAULT_VOLUME_DIR
 from localstack.runtime import hooks
 from localstack.utils.container_networking import get_main_container_name
 from localstack.utils.container_utils.container_client import (
@@ -645,6 +646,10 @@ def configure_container(container: LocalstackContainer):
 
 
 def configure_volume_mounts(container: LocalstackContainer):
+    if not config.LEGACY_DIRECTORIES:
+        container.volumes.add(VolumeBind(config.VOLUME_DIR, DEFAULT_VOLUME_DIR))
+        return
+
     source_dirs = config.dirs
     target_dirs = Directories.for_container()
 
@@ -663,9 +668,6 @@ def configure_volume_mounts(container: LocalstackContainer):
         container.volumes.add(VolumeBind(source_dirs.data, target_dirs.data))
         container.env_vars["DATA_DIR"] = target_dirs.data
 
-    if source_dirs.init:
-        container.volumes.add(VolumeBind(source_dirs.init, target_dirs.init))
-
 
 @log_duration()
 def prepare_host():
diff --git a/localstack/utils/container_utils/container_client.py b/localstack/utils/container_utils/container_client.py
index e7d833b79fd3f..7e4f018c55c64 100644
--- a/localstack/utils/container_utils/container_client.py
+++ b/localstack/utils/container_utils/container_client.py
@@ -11,12 +11,12 @@
 from abc import ABCMeta, abstractmethod
 from enum import Enum, unique
 from pathlib import Path
-from typing import Dict, List, Optional, Tuple, Union
+from typing import Dict, List, NamedTuple, Optional, Tuple, Union
 
 if sys.version_info >= (3, 8):
-    from typing import Protocol, get_args
+    from typing import Literal, Protocol, get_args
 else:
-    from typing_extensions import Protocol, get_args
+    from typing_extensions import Protocol, get_args, Literal
 
 from localstack import config
 from localstack.utils.collections import HashableList
@@ -324,6 +324,22 @@ def __iter__(self):
         return self.mappings.__iter__()
 
 
+VolumeType = Literal["bind", "volume"]
+
+
+class VolumeInfo(NamedTuple):
+    """Container volume information."""
+
+    type: VolumeType
+    source: str
+    destination: str
+    mode: str
+    rw: bool
+    propagation: str
+    name: Optional[str] = None
+    driver: Optional[str] = None
+
+
 @dataclasses.dataclass
 class ContainerConfiguration:
     image_name: str
@@ -510,12 +526,24 @@ def stream_container_logs(self, container_name_or_id: str) -> CancellableStream:
 
     @abstractmethod
     def inspect_container(self, container_name_or_id: str) -> Dict[str, Union[Dict, str]]:
-        """Get detailed attributes of an container.
+        """Get detailed attributes of a container.
 
         :return: Dict containing docker attributes as returned by the daemon
         """
         pass
 
+    def inspect_container_volumes(self, container_name_or_id) -> List[VolumeInfo]:
+        """Return information about the volumes mounted into the given container.
+
+        :param container_name_or_id: the container name or id
+        :return: a list of volumes
+        """
+        volumes = []
+        for doc in self.inspect_container(container_name_or_id)["Mounts"]:
+            volumes.append(VolumeInfo(**{k.lower(): v for k, v in doc.items()}))
+
+        return volumes
+
     @abstractmethod
     def inspect_image(self, image_name: str, pull: bool = True) -> Dict[str, Union[Dict, str]]:
         """Get detailed attributes of an image.
diff --git a/localstack/utils/diagnose.py b/localstack/utils/diagnose.py
index 95e743e074522..600b1a6a259bc 100644
--- a/localstack/utils/diagnose.py
+++ b/localstack/utils/diagnose.py
@@ -5,6 +5,7 @@
 from typing import Dict, List, Union
 
 from localstack import config
+from localstack.constants import DEFAULT_VOLUME_DIR
 from localstack.utils import bootstrap
 from localstack.utils.container_networking import get_main_container_name
 from localstack.utils.container_utils.container_client import NoSuchImage
@@ -68,7 +69,7 @@
     "__spec__",
 }
 ENDPOINT_RESOLVE_LIST = ["localhost.localstack.cloud", "api.localstack.cloud"]
-INSPECT_DIRECTORIES = ["/var/lib/localstack", "/tmp"]
+INSPECT_DIRECTORIES = [DEFAULT_VOLUME_DIR, "/tmp"]
 
 
 def get_localstack_logs() -> Union[str, Dict]:
diff --git a/localstack/utils/docker_utils.py b/localstack/utils/docker_utils.py
index aea3d61cecb58..1a7446ab6bf88 100644
--- a/localstack/utils/docker_utils.py
+++ b/localstack/utils/docker_utils.py
@@ -1,7 +1,11 @@
+import functools
 import logging
+import platform
+from typing import List, Optional
 
 from localstack import config
-from localstack.utils.container_utils.container_client import ContainerClient
+from localstack.constants import DEFAULT_VOLUME_DIR
+from localstack.utils.container_utils.container_client import ContainerClient, VolumeInfo
 
 """Type alias for a simple version of VolumeBind"""
 
@@ -40,4 +44,40 @@ def create_docker_client() -> ContainerClient:
         return SdkDockerClient()
 
 
+def get_current_container_id() -> str:
+    """
+    Returns the ID of the current container, or raises a ValueError if we're not in docker.
+
+    :return: the ID of the current container
+    """
+    if not config.is_in_docker:
+        raise ValueError("not in docker")
+
+    container_id = platform.node()
+    if not container_id:
+        raise OSError("no hostname returned to use as container id")
+
+    return container_id
+
+
+def inspect_current_container_mounts() -> List[VolumeInfo]:
+    return DOCKER_CLIENT.inspect_container_volumes(get_current_container_id())
+
+
+@functools.lru_cache()
+def get_default_volume_dir_mount() -> Optional[VolumeInfo]:
+    """
+    Returns the volume information of LocalStack's DEFAULT_VOLUME_DIR (/var/lib/localstack), if mounted,
+    else it returns None. If we're not currently in docker a VauleError is raised. in a container, a ValueError is
+    raised.
+
+    :return: the volume info of the default volume dir or None
+    """
+    for volume in inspect_current_container_mounts():
+        if volume.destination.rstrip("/") == DEFAULT_VOLUME_DIR:
+            return volume
+
+    return None
+
+
 DOCKER_CLIENT: ContainerClient = create_docker_client()
diff --git a/localstack/utils/kinesis/kclipy_helper.py b/localstack/utils/kinesis/kclipy_helper.py
index 237c8ba6627e1..df469c60637e1 100644
--- a/localstack/utils/kinesis/kclipy_helper.py
+++ b/localstack/utils/kinesis/kclipy_helper.py
@@ -5,6 +5,7 @@
 
 from amazon_kclpy import kcl
 
+from localstack import config
 from localstack.utils.aws import aws_stack
 from localstack.utils.files import save_file
 
@@ -53,17 +54,7 @@ def get_kcl_classpath(properties=None, paths=None):
     # add path of custom java code
     dir_name = os.path.dirname(os.path.realpath(__file__))
     paths.insert(
-        0,
-        os.path.realpath(
-            os.path.join(
-                dir_name,
-                "..",
-                "..",
-                "infra",
-                "amazon-kinesis-client",
-                "aws-java-sdk-sts.jar",
-            )
-        ),
+        0, os.path.join(config.dirs.static_libs, "amazon-kinesis-client", "aws-java-sdk-sts.jar")
     )
     paths.insert(0, os.path.realpath(os.path.join(dir_name, "java")))
     return ":".join([p for p in paths if p != ""])
diff --git a/localstack/utils/persistence.py b/localstack/utils/persistence.py
index 21a0a374f6dc3..efda1508e2dbe 100644
--- a/localstack/utils/persistence.py
+++ b/localstack/utils/persistence.py
@@ -209,7 +209,7 @@ def restore_persisted_data(apis):
 
 
 def is_persistence_enabled():
-    return bool(config.dirs.data)
+    return config.PERSISTENCE and config.dirs.data
 
 
 def is_persistence_restored():
diff --git a/tests/bootstrap/test_cli.py b/tests/bootstrap/test_cli.py
index f4fe8400a5bdf..2b42b48f327fb 100644
--- a/tests/bootstrap/test_cli.py
+++ b/tests/bootstrap/test_cli.py
@@ -110,6 +110,9 @@ def test_custom_docker_flags(self, runner, tmp_path, monkeypatch, container_clie
         assert "42069/tcp" in inspect["HostConfig"]["PortBindings"]
         assert f"{volume}:{volume}" in inspect["HostConfig"]["Binds"]
 
+    @pytest.mark.skipif(
+        condition=not config.LEGACY_DIRECTORIES, reason="this test targets LEGACY_DIRECTORIES=1"
+    )
     def test_directories_mounted_correctly(self, runner, tmp_path, monkeypatch, container_client):
         data_dir = tmp_path / "data_dir"
         tmp_folder = tmp_path / "tmp"
@@ -119,7 +122,7 @@ def test_directories_mounted_correctly(self, runner, tmp_path, monkeypatch, cont
         monkeypatch.setattr(config, "DATA_DIR", str(data_dir))
         monkeypatch.setattr(config, "TMP_FOLDER", str(tmp_folder))
         # reload directories from manipulated config
-        monkeypatch.setattr(config, "dirs", config.Directories.from_config())
+        monkeypatch.setattr(config, "dirs", config.Directories.legacy_from_config())
 
         runner.invoke(cli, ["start", "-d"])
         runner.invoke(cli, ["wait", "-t", "60"])
@@ -131,3 +134,21 @@ def test_directories_mounted_correctly(self, runner, tmp_path, monkeypatch, cont
         assert f"{tmp_folder}:{container_dirs.tmp}" in binds
         assert f"{data_dir}:{container_dirs.data}" in binds
         assert f"{DOCKER_SOCK}:{DOCKER_SOCK}" in binds
+
+    @pytest.mark.skipif(
+        condition=config.LEGACY_DIRECTORIES, reason="this test targets LEGACY_DIRECTORIES=0"
+    )
+    def test_volume_dir_mounted_correctly(self, runner, tmp_path, monkeypatch, container_client):
+        volume_dir = tmp_path / "volume"
+
+        # set different directories and make sure they are mounted correctly
+        monkeypatch.setenv("LOCALSTACK_VOLUME_DIR", str(volume_dir))
+        monkeypatch.setattr(config, "VOLUME_DIR", str(volume_dir))
+
+        runner.invoke(cli, ["start", "-d"])
+        runner.invoke(cli, ["wait", "-t", "60"])
+
+        # check that mounts were created correctly
+        inspect = container_client.inspect_container(config.MAIN_CONTAINER_NAME)
+        binds = inspect["HostConfig"]["Binds"]
+        assert f"{volume_dir}:{constants.DEFAULT_VOLUME_DIR}" in binds
diff --git a/tests/integration/awslambda/test_lambda_whitebox.py b/tests/integration/awslambda/test_lambda_whitebox.py
index 5b5f17cd3796b..d7e9a904da8c0 100644
--- a/tests/integration/awslambda/test_lambda_whitebox.py
+++ b/tests/integration/awslambda/test_lambda_whitebox.py
@@ -219,7 +219,7 @@ def test_code_updated_on_redeployment(self):
     )
     def test_prime_and_destroy_containers(self):
         executor = lambda_api.LAMBDA_EXECUTOR
-        func_name = "test_prime_and_destroy_containers"
+        func_name = f"test_prime_and_destroy_containers_{short_uid()}"
         func_arn = lambda_api.func_arn(func_name)
 
         # make sure existing containers are gone
diff --git a/tests/integration/docker_utils/test_docker.py b/tests/integration/docker_utils/test_docker.py
index 0fe56a192278d..aa4bc653936b6 100644
--- a/tests/integration/docker_utils/test_docker.py
+++ b/tests/integration/docker_utils/test_docker.py
@@ -22,7 +22,9 @@
     PortMappings,
     RegistryConnectionError,
     Util,
+    VolumeInfo,
 )
+from localstack.utils.container_utils.docker_cmd_client import CmdDockerClient
 from localstack.utils.net import get_free_tcp_port
 
 ContainerInfo = NamedTuple(
@@ -386,6 +388,79 @@ def test_create_with_volume(self, tmpdir, docker_client: ContainerClient, create
         docker_client.start_container(c.container_id)
         assert tmpdir.join("foo.log").isfile(), "foo.log was not created in mounted dir"
 
+    @pytest.mark.skipif(
+        condition=in_docker(), reason="cannot test volume mounts from host when in docker"
+    )
+    def test_inspect_container_volumes(
+        self, tmpdir, docker_client: ContainerClient, create_container
+    ):
+        mount_volumes = [
+            (tmpdir.realpath() / "foo", "/tmp/mypath/foo"),
+            ("some_named_volume", "/tmp/mypath/volume"),
+        ]
+
+        c = create_container(
+            "alpine",
+            command=["sh", "-c", "while true; do sleep 1; done"],
+            mount_volumes=mount_volumes,
+        )
+        docker_client.start_container(c.container_id)
+
+        vols = docker_client.inspect_container_volumes(c.container_id)
+
+        # FIXME cmd docker client creates different default permission mode flags
+        if isinstance(docker_client, CmdDockerClient):
+            vol1 = VolumeInfo(
+                type="bind",
+                source=f"{tmpdir}/foo",
+                destination="/tmp/mypath/foo",
+                mode="",
+                rw=True,
+                propagation="rprivate",
+                name=None,
+                driver=None,
+            )
+            vol2 = VolumeInfo(
+                type="volume",
+                source="/var/lib/docker/volumes/some_named_volume/_data",
+                destination="/tmp/mypath/volume",
+                mode="z",
+                rw=True,
+                propagation="",
+                name="some_named_volume",
+                driver="local",
+            )
+        else:
+            vol1 = VolumeInfo(
+                type="bind",
+                source=f"{tmpdir}/foo",
+                destination="/tmp/mypath/foo",
+                mode="rw",
+                rw=True,
+                propagation="rprivate",
+                name=None,
+                driver=None,
+            )
+            vol2 = VolumeInfo(
+                type="volume",
+                source="/var/lib/docker/volumes/some_named_volume/_data",
+                destination="/tmp/mypath/volume",
+                mode="rw",
+                rw=True,
+                propagation="",
+                name="some_named_volume",
+                driver="local",
+            )
+
+        assert vol1 in vols
+        assert vol2 in vols
+
+    def test_inspect_container_volumes_with_no_volumes(
+        self, docker_client: ContainerClient, dummy_container
+    ):
+        docker_client.start_container(dummy_container.container_id)
+        assert len(docker_client.inspect_container_volumes(dummy_container.container_id)) == 0
+
     def test_copy_into_container(self, tmpdir, docker_client: ContainerClient, create_container):
         local_path = tmpdir.join("myfile.txt")
         container_path = "/tmp/myfile_differentpath.txt"
diff --git a/tests/unit/test_lambda.py b/tests/unit/test_lambda.py
index 9be16db42343f..0b14ef9e942c3 100644
--- a/tests/unit/test_lambda.py
+++ b/tests/unit/test_lambda.py
@@ -7,8 +7,8 @@
 
 import mock
 
+from localstack import config
 from localstack.aws.accounts import get_aws_account_id
-from localstack.config import TMP_FOLDER
 from localstack.services.awslambda import lambda_api, lambda_executors, lambda_utils
 from localstack.services.awslambda.lambda_executors import OutputLog
 from localstack.services.awslambda.lambda_utils import API_PATH_ROOT
@@ -1067,7 +1067,9 @@ def test_lambda_output(self, temp):
 
         output.output_file()
 
-        temp.assert_called_once_with(dir=TMP_FOLDER, delete=False, suffix=".log", prefix="lambda_")
+        temp.assert_called_once_with(
+            dir=config.dirs.tmp, delete=False, suffix=".log", prefix="lambda_"
+        )
 
 
 class TestLambdaEventInvokeConfig(unittest.TestCase):