diff --git a/packages/ui/src/components/background-process-output-dialog.tsx b/packages/ui/src/components/background-process-output-dialog.tsx
index be7cfd6b..d3895621 100644
--- a/packages/ui/src/components/background-process-output-dialog.tsx
+++ b/packages/ui/src/components/background-process-output-dialog.tsx
@@ -2,6 +2,8 @@ import { Dialog } from "@kobalte/core/dialog"
 import { Show, createEffect, createSignal, onCleanup } from "solid-js"
 import type { BackgroundProcess } from "../../../server/src/api-types"
 import { buildBackgroundProcessStreamUrl, serverApi } from "../lib/api-client"
+import { ansiChunkToHtml, ansiToHtml, computeAnsiSgrState, createAnsiSgrState, hasAnsi, isAnsiSgrStateEmpty } from "../lib/ansi"
+import { escapeHtml } from "../lib/markdown"
 
 interface BackgroundProcessOutputDialogProps {
   open: boolean
@@ -12,6 +14,8 @@ interface BackgroundProcessOutputDialogProps {
 
 export function BackgroundProcessOutputDialog(props: BackgroundProcessOutputDialogProps) {
   const [output, setOutput] = createSignal("")
+  const [outputHtml, setOutputHtml] = createSignal("")
+  const [ansiEnabled, setAnsiEnabled] = createSignal(false)
   const [truncated, setTruncated] = createSignal(false)
   const [loading, setLoading] = createSignal(false)
 
@@ -24,17 +28,48 @@ export function BackgroundProcessOutputDialog(props: BackgroundProcessOutputDial
     let eventSource: EventSource | null = null
     let active = true
 
+    let rawOutput = ""
+    let sgrState = createAnsiSgrState()
+
+    const setRawOutput = (next: string) => {
+      rawOutput = next
+      setOutput(next)
+    }
+
+    const appendRawOutput = (chunk: string) => {
+      rawOutput += chunk
+      setOutput(rawOutput)
+    }
+
+    setAnsiEnabled(false)
+    setOutputHtml("")
+    setRawOutput("")
+
     setLoading(true)
     serverApi
       .fetchBackgroundProcessOutput(props.instanceId, process.id, { method: "full", maxBytes: undefined })
       .then((response) => {
         if (!active) return
-        setOutput(response.content)
+
+        setRawOutput(response.content)
         setTruncated(response.truncated)
+
+        const detectedAnsi = hasAnsi(response.content)
+        if (detectedAnsi) {
+          setAnsiEnabled(true)
+          setOutputHtml(ansiToHtml(response.content))
+          sgrState = computeAnsiSgrState(response.content)
+        } else {
+          setAnsiEnabled(false)
+          setOutputHtml("")
+          sgrState = createAnsiSgrState()
+        }
       })
       .catch(() => {
         if (!active) return
-        setOutput("Failed to load output.")
+        setRawOutput("Failed to load output.")
+        setAnsiEnabled(false)
+        setOutputHtml("")
       })
       .finally(() => {
         if (!active) return
@@ -45,8 +80,36 @@ export function BackgroundProcessOutputDialog(props: BackgroundProcessOutputDial
     eventSource.onmessage = (event) => {
       try {
         const payload = JSON.parse(event.data) as { type?: string; content?: string }
-        if (payload?.type === "chunk" && typeof payload.content === "string") {
-          setOutput((prev) => `${prev}${payload.content}`)
+        if (payload?.type !== "chunk" || typeof payload.content !== "string") {
+          return
+        }
+
+        const chunk = payload.content
+        const wasAnsiEnabled = ansiEnabled()
+
+        if (!wasAnsiEnabled) {
+          const before = rawOutput
+          appendRawOutput(chunk)
+
+          if (hasAnsi(chunk)) {
+            setAnsiEnabled(true)
+
+            const initialHtml = escapeHtml(before)
+            const result = ansiChunkToHtml(chunk, createAnsiSgrState())
+            setOutputHtml(initialHtml + result.html)
+            sgrState = result.nextState
+          }
+
+          return
+        }
+
+        appendRawOutput(chunk)
+        const result = ansiChunkToHtml(chunk, sgrState)
+        setOutputHtml((prev) => `${prev}${result.html}`)
+        sgrState = result.nextState
+
+        if (isAnsiSgrStateEmpty(sgrState)) {
+          // keep streaming normally; state can legitimately be empty
         }
       } catch {
         // ignore parse errors
@@ -90,9 +153,19 @@ export function BackgroundProcessOutputDialog(props: BackgroundProcessOutputDial
                 <Show when={truncated()}>
                   <p class="text-xs text-secondary mb-2">Output truncated for display.</p>
                 </Show>
-                <pre class="text-xs whitespace-pre-wrap break-all text-primary bg-surface-secondary border border-base rounded-md p-4 font-mono">
-                  {output()}
-                </pre>
+                <Show
+                  when={ansiEnabled()}
+                  fallback={
+                    <pre class="text-xs whitespace-pre-wrap break-all text-primary bg-surface-secondary border border-base rounded-md p-4 font-mono">
+                      {output()}
+                    </pre>
+                  }
+                >
+                  <pre
+                    class="text-xs whitespace-pre-wrap break-all text-primary bg-surface-secondary border border-base rounded-md p-4 font-mono"
+                    innerHTML={outputHtml()}
+                  />
+                </Show>
               </Show>
             </div>
           </Dialog.Content>
diff --git a/packages/ui/src/lib/ansi.ts b/packages/ui/src/lib/ansi.ts
index b4b52211..c62d853c 100644
--- a/packages/ui/src/lib/ansi.ts
+++ b/packages/ui/src/lib/ansi.ts
@@ -4,11 +4,38 @@ const ESC_CHAR = "\u001b"
 const ANSI_LITERAL_PATTERN = /\\u001b|\\x1b|\\033/
 const ANSI_SGR_PATTERN = /\u001b\[[0-9;]*m/
 const ANSI_NON_SGR_PATTERN = /\u001b\[[0-9;?]*[A-Za-ln-zA-LN-Z]/g
+const ANSI_SGR_CAPTURE_PATTERN = /\u001b\[([0-9;]*)m/g
 
 const ansiConverter = new AnsiToHtml({
   escapeXML: true,
 })
 
+export interface AnsiSgrState {
+  bold: boolean
+  dim: boolean
+  italic: boolean
+  underline: boolean
+  inverse: boolean
+  hidden: boolean
+  strike: boolean
+  fg: string | null
+  bg: string | null
+}
+
+export function createAnsiSgrState(): AnsiSgrState {
+  return {
+    bold: false,
+    dim: false,
+    italic: false,
+    underline: false,
+    inverse: false,
+    hidden: false,
+    strike: false,
+    fg: null,
+    bg: null,
+  }
+}
+
 export function hasAnsi(text: string): boolean {
   const normalized = normalizeAnsiText(text)
   return ANSI_SGR_PATTERN.test(normalized)
@@ -20,6 +47,45 @@ export function ansiToHtml(text: string): string {
   return ansiConverter.toHtml(sanitized)
 }
 
+export function ansiChunkToHtml(chunk: string, state: AnsiSgrState) {
+  const normalized = normalizeAnsiText(chunk)
+  const sanitized = stripNonSgrAnsi(normalized)
+
+  const prefix = sgrStateToEscapeSequence(state)
+  const html = ansiConverter.toHtml(prefix + sanitized)
+  const nextState = computeAnsiSgrState(sanitized, state)
+
+  return { html, nextState }
+}
+
+export function computeAnsiSgrState(text: string, initialState?: AnsiSgrState): AnsiSgrState {
+  const normalized = normalizeAnsiText(text)
+  const sanitized = stripNonSgrAnsi(normalized)
+  const nextState = cloneSgrState(initialState ?? createAnsiSgrState())
+
+  for (const match of sanitized.matchAll(ANSI_SGR_CAPTURE_PATTERN)) {
+    const params = match[1] ?? ""
+    const codes = params.length === 0 ? [0] : params.split(";").map((part) => Number(part))
+    applySgrCodes(nextState, codes)
+  }
+
+  return nextState
+}
+
+export function isAnsiSgrStateEmpty(state: AnsiSgrState): boolean {
+  return (
+    !state.bold &&
+    !state.dim &&
+    !state.italic &&
+    !state.underline &&
+    !state.inverse &&
+    !state.hidden &&
+    !state.strike &&
+    state.fg === null &&
+    state.bg === null
+  )
+}
+
 function normalizeAnsiText(text: string): string {
   if (!ANSI_LITERAL_PATTERN.test(text)) {
     return text
@@ -34,3 +100,174 @@ function normalizeAnsiText(text: string): string {
 function stripNonSgrAnsi(text: string): string {
   return text.replace(ANSI_NON_SGR_PATTERN, "")
 }
+
+function cloneSgrState(state: AnsiSgrState): AnsiSgrState {
+  return { ...state }
+}
+
+function sgrStateToEscapeSequence(state: AnsiSgrState): string {
+  if (isAnsiSgrStateEmpty(state)) {
+    return ""
+  }
+
+  const codes: number[] = []
+  if (state.bold) codes.push(1)
+  if (state.dim) codes.push(2)
+  if (state.italic) codes.push(3)
+  if (state.underline) codes.push(4)
+  if (state.inverse) codes.push(7)
+  if (state.hidden) codes.push(8)
+  if (state.strike) codes.push(9)
+
+  if (state.fg) {
+    codes.push(...state.fg.split(";").map((part) => Number(part)))
+  }
+
+  if (state.bg) {
+    codes.push(...state.bg.split(";").map((part) => Number(part)))
+  }
+
+  if (codes.length === 0) {
+    return ""
+  }
+
+  return `${ESC_CHAR}[${codes.join(";")}m`
+}
+
+function applySgrCodes(state: AnsiSgrState, codes: number[]) {
+  for (let index = 0; index < codes.length; index++) {
+    const code = codes[index]
+    if (!Number.isFinite(code)) continue
+
+    if (code === 0) {
+      state.bold = false
+      state.dim = false
+      state.italic = false
+      state.underline = false
+      state.inverse = false
+      state.hidden = false
+      state.strike = false
+      state.fg = null
+      state.bg = null
+      continue
+    }
+
+    if (code === 1) {
+      state.bold = true
+      continue
+    }
+
+    if (code === 2) {
+      state.dim = true
+      continue
+    }
+
+    if (code === 22) {
+      state.bold = false
+      state.dim = false
+      continue
+    }
+
+    if (code === 3) {
+      state.italic = true
+      continue
+    }
+
+    if (code === 23) {
+      state.italic = false
+      continue
+    }
+
+    if (code === 4) {
+      state.underline = true
+      continue
+    }
+
+    if (code === 24) {
+      state.underline = false
+      continue
+    }
+
+    if (code === 7) {
+      state.inverse = true
+      continue
+    }
+
+    if (code === 27) {
+      state.inverse = false
+      continue
+    }
+
+    if (code === 8) {
+      state.hidden = true
+      continue
+    }
+
+    if (code === 28) {
+      state.hidden = false
+      continue
+    }
+
+    if (code === 9) {
+      state.strike = true
+      continue
+    }
+
+    if (code === 29) {
+      state.strike = false
+      continue
+    }
+
+    if ((code >= 30 && code <= 37) || (code >= 90 && code <= 97)) {
+      state.fg = String(code)
+      continue
+    }
+
+    if (code === 39) {
+      state.fg = null
+      continue
+    }
+
+    if ((code >= 40 && code <= 47) || (code >= 100 && code <= 107)) {
+      state.bg = String(code)
+      continue
+    }
+
+    if (code === 49) {
+      state.bg = null
+      continue
+    }
+
+    if (code === 38 || code === 48) {
+      const isForeground = code === 38
+      const mode = codes[index + 1]
+      if (!Number.isFinite(mode)) {
+        continue
+      }
+
+      if (mode === 5) {
+        const color = codes[index + 2]
+        if (Number.isFinite(color)) {
+          const value = `${code};5;${color}`
+          if (isForeground) state.fg = value
+          else state.bg = value
+        }
+        index += 2
+        continue
+      }
+
+      if (mode === 2) {
+        const r = codes[index + 2]
+        const g = codes[index + 3]
+        const b = codes[index + 4]
+        if ([r, g, b].every((v) => Number.isFinite(v))) {
+          const value = `${code};2;${r};${g};${b}`
+          if (isForeground) state.fg = value
+          else state.bg = value
+        }
+        index += 4
+        continue
+      }
+    }
+  }
+}