diff --git a/pkg/storage/stores/shipper/indexshipper/tsdb/compactor.go b/pkg/storage/stores/shipper/indexshipper/tsdb/compactor.go
index ebff69810647c..b19b14397d92b 100644
--- a/pkg/storage/stores/shipper/indexshipper/tsdb/compactor.go
+++ b/pkg/storage/stores/shipper/indexshipper/tsdb/compactor.go
@@ -20,6 +20,7 @@ import (
 	"github.com/grafana/loki/v3/pkg/storage/chunk"
 	"github.com/grafana/loki/v3/pkg/storage/config"
 	shipperindex "github.com/grafana/loki/v3/pkg/storage/stores/shipper/indexshipper/index"
+	"github.com/grafana/loki/v3/pkg/storage/stores/shipper/indexshipper/storage"
 	tsdbindex "github.com/grafana/loki/v3/pkg/storage/stores/shipper/indexshipper/tsdb/index"
 )
 
@@ -205,6 +206,42 @@ func (t *tableCompactor) CompactTable() error {
 	return nil
 }
 
+// processSourceIndex processes a single source index file by downloading it,
+// reading its series, and adding them to the builder. The file is closed and removed
+// using defer statements to ensure cleanup happens even if errors occur.
+func processSourceIndex(ctx context.Context, sourceIndex storage.IndexFile, sourceIndexSet compactor.IndexSet, builder *Builder) error {
+	path, err := sourceIndexSet.GetSourceFile(sourceIndex)
+	if err != nil {
+		return err
+	}
+
+	// Ensure the downloaded file is removed when this function returns
+	defer func() {
+		if removeErr := os.Remove(path); removeErr != nil {
+			level.Error(sourceIndexSet.GetLogger()).Log("msg", "error removing source index file", "err", removeErr)
+		}
+	}()
+
+	indexFile, err := OpenShippableTSDB(path)
+	if err != nil {
+		return err
+	}
+
+	// Ensure file is closed when this function returns
+	defer func() {
+		if closeErr := indexFile.Close(); closeErr != nil {
+			level.Error(sourceIndexSet.GetLogger()).Log("msg", "failed to close index file", "err", closeErr)
+		}
+	}()
+
+	err = indexFile.(*TSDBFile).Index.(*TSDBIndex).ForSeries(ctx, "", nil, 0, math.MaxInt64, func(lbls labels.Labels, fp model.Fingerprint, chks []tsdbindex.ChunkMeta) (stop bool) {
+		builder.AddSeries(withoutTenantLabel(lbls.Copy()), fp, chks)
+		return false
+	}, labels.MustNewMatcher(labels.MatchEqual, "", ""))
+
+	return err
+}
+
 // setupBuilder creates a Builder for a single user.
 // It combines the users index from multiTenantIndexes and its existing compacted index(es)
 func setupBuilder(ctx context.Context, indexType int, userID string, sourceIndexSet compactor.IndexSet, multiTenantIndexes []Index) (*Builder, error) {
@@ -224,33 +261,7 @@ func setupBuilder(ctx context.Context, indexType int, userID string, sourceIndex
 
 	// download all the existing compacted indexes and add them to the builder
 	for _, sourceIndex := range sourceIndexes {
-		path, err := sourceIndexSet.GetSourceFile(sourceIndex)
-		if err != nil {
-			return nil, err
-		}
-
-		defer func() {
-			if err := os.Remove(path); err != nil {
-				level.Error(sourceIndexSet.GetLogger()).Log("msg", "error removing source index file", "err", err)
-			}
-		}()
-
-		indexFile, err := OpenShippableTSDB(path)
-		if err != nil {
-			return nil, err
-		}
-
-		defer func() {
-			if err := indexFile.Close(); err != nil {
-				level.Error(sourceIndexSet.GetLogger()).Log("msg", "failed to close index file", "err", err)
-			}
-		}()
-
-		err = indexFile.(*TSDBFile).Index.(*TSDBIndex).ForSeries(ctx, "", nil, 0, math.MaxInt64, func(lbls labels.Labels, fp model.Fingerprint, chks []tsdbindex.ChunkMeta) (stop bool) {
-			builder.AddSeries(lbls.Copy(), fp, chks)
-			return false
-		}, labels.MustNewMatcher(labels.MatchEqual, "", ""))
-		if err != nil {
+		if err := processSourceIndex(ctx, sourceIndex, sourceIndexSet, builder); err != nil {
 			return nil, err
 		}
 	}
diff --git a/pkg/storage/stores/shipper/indexshipper/tsdb/compactor_test.go b/pkg/storage/stores/shipper/indexshipper/tsdb/compactor_test.go
index 99804831deb81..ded9344c9353a 100644
--- a/pkg/storage/stores/shipper/indexshipper/tsdb/compactor_test.go
+++ b/pkg/storage/stores/shipper/indexshipper/tsdb/compactor_test.go
@@ -997,3 +997,59 @@ func (d dummyChunkData) UncompressedSize() int {
 func (d dummyChunkData) Entries() int {
 	return 1
 }
+
+// TestSetupBuilder_ManyFiles verifies that setupBuilder can handle processing
+// many files without running into resource exhaustion issues.
+func TestSetupBuilder_ManyFiles(t *testing.T) {
+	now := model.Now()
+	periodConfig := config.PeriodConfig{
+		IndexTables: config.IndexPeriodicTableConfig{
+			PeriodicTableConfig: config.PeriodicTableConfig{Period: config.ObjectStorageIndexRequiredPeriod}},
+		Schema: "v12",
+	}
+	indexBkts := IndexBuckets(now, now, []config.TableRange{periodConfig.GetIndexTableNumberRange(config.DayTime{Time: now})})
+	tableName := indexBkts[0]
+
+	tempDir := t.TempDir()
+	objectStoragePath := filepath.Join(tempDir, "objects")
+	tablePathInStorage := filepath.Join(objectStoragePath, tableName.Prefix)
+	tableWorkingDirectory := filepath.Join(tempDir, "working-dir", tableName.Prefix)
+
+	require.NoError(t, util.EnsureDirectory(objectStoragePath))
+	require.NoError(t, util.EnsureDirectory(tablePathInStorage))
+	require.NoError(t, util.EnsureDirectory(tableWorkingDirectory))
+
+	// Create a large number of files
+	numFiles := 100
+	indexFormat, err := periodConfig.TSDBFormat()
+	require.NoError(t, err)
+
+	// Create per-tenant index files in the user's directory
+	userTablePath := filepath.Join(tablePathInStorage, "user1")
+	require.NoError(t, util.EnsureDirectory(userTablePath))
+
+	lbls := mustParseLabels(`{foo="bar"}`)
+	for i := 0; i < numFiles; i++ {
+		streams := []stream{
+			buildStream(lbls, buildChunkMetas(int64(i*1000), int64(i*1000+100)), ""),
+		}
+		setupPerTenantIndex(t, indexFormat, streams, userTablePath, time.Unix(int64(i), 0))
+	}
+
+	objectClient, err := local.NewFSObjectClient(local.FSConfig{Directory: objectStoragePath})
+	require.NoError(t, err)
+
+	idxSet, err := newMockIndexSet("user1", tableName.Prefix, filepath.Join(tableWorkingDirectory, "user1"), objectClient)
+	require.NoError(t, err)
+
+	// This should complete without errors even with many files
+	// because files are closed immediately after processing
+	ctx := context.Background()
+	builder, err := setupBuilder(ctx, indexFormat, "user1", idxSet, []Index{})
+	require.NoError(t, err)
+	require.NotNil(t, builder)
+
+	// Verify builder has the expected data
+	builder.FinalizeChunks()
+	require.Greater(t, len(builder.streams), 0)
+}