diff --git a/README.md b/README.md
index 26cd9da..b4c113d 100644
--- a/README.md
+++ b/README.md
@@ -1136,7 +1136,7 @@ bun run dist/index.js
 
 - `--transport <stdio|http>` – Transport to use (`stdio` by default). Note that HTTP transport automatically provides both HTTP and SSE endpoints.
 - `--port <number>` – Port to listen on when using `http` transport (default `3000`).
-- `--api-key <key>` – API key for authentication. You can get your API key by creating an account at [context7.com/dashboard](https://context7.com/dashboard).
+- `--api-key <key>` – API key for authentication (or set `CONTEXT7_API_KEY` env var). You can get your API key by creating an account at [context7.com/dashboard](https://context7.com/dashboard).
 
 Example with HTTP transport and port 8080:
 
@@ -1150,6 +1150,45 @@ Another example with stdio transport:
 bun run dist/index.js --transport stdio --api-key YOUR_API_KEY
 ```
 
+### Environment Variables
+
+You can use the `CONTEXT7_API_KEY` environment variable instead of passing the `--api-key` flag. This is useful for:
+- Storing API keys securely in `.env` files
+- Integration with MCP server setups that use dotenv
+- Tools that prefer environment variable configuration
+
+**Note:** The `--api-key` CLI flag takes precedence over the environment variable when both are provided.
+
+**Example with environment variable:**
+
+```bash
+export CONTEXT7_API_KEY=your_api_key_here
+npx -y @upstash/context7-mcp
+```
+
+**Example with .env file:**
+
+```bash
+# .env
+CONTEXT7_API_KEY=your_api_key_here
+```
+
+**Example MCP configuration using environment variable:**
+
+```json
+{
+  "mcpServers": {
+    "context7": {
+      "command": "npx",
+      "args": ["-y", "@upstash/context7-mcp"],
+      "env": {
+        "CONTEXT7_API_KEY": "YOUR_API_KEY"
+      }
+    }
+  }
+}
+```
+
 <details>
 <summary><b>Local Configuration Example</b></summary>
 
diff --git a/src/index.ts b/src/index.ts
index 35c9ac1..edaabb5 100644
--- a/src/index.ts
+++ b/src/index.ts
@@ -23,7 +23,7 @@ const DEFAULT_PORT = 3000;
 const program = new Command()
   .option("--transport <stdio|http>", "transport type", "stdio")
   .option("--port <number>", "port for HTTP transport", DEFAULT_PORT.toString())
-  .option("--api-key <key>", "API key for authentication")
+  .option("--api-key <key>", "API key for authentication (or set CONTEXT7_API_KEY env var)")
   .allowUnknownOption() // let MCP Inspector / other wrappers pass through extra flags
   .parse(process.argv);
 
@@ -415,7 +415,8 @@ async function main() {
     startServer(initialPort);
   } else {
     // Stdio transport - this is already stateless by nature
-    const server = createServerInstance(undefined, cliOptions.apiKey);
+    const apiKey = cliOptions.apiKey || process.env.CONTEXT7_API_KEY;
+    const server = createServerInstance(undefined, apiKey);
     const transport = new StdioServerTransport();
     await server.connect(transport);
     console.error("Context7 Documentation MCP Server running on stdio");