diff --git a/ui/package.json b/ui/package.json
index 0e144db7f30..9665b0012a9 100644
--- a/ui/package.json
+++ b/ui/package.json
@@ -50,6 +50,8 @@
     "@radix-ui/react-slot": "^1.2.4",
     "@tailwindcss/typography": "^0.5.20",
     "@tanstack/react-query": "^5.90.21",
+    "@xterm/addon-fit": "^0.11.0",
+    "@xterm/xterm": "^6.0.0",
     "class-variance-authority": "^0.7.1",
     "clsx": "^2.1.1",
     "cmdk": "^1.1.1",
diff --git a/ui/src/pages/CompanyEnvironments.test.tsx b/ui/src/pages/CompanyEnvironments.test.tsx
index 52c9459e6ce..b2ae96eee40 100644
--- a/ui/src/pages/CompanyEnvironments.test.tsx
+++ b/ui/src/pages/CompanyEnvironments.test.tsx
@@ -6,6 +6,120 @@ import { afterEach, beforeEach, describe, expect, it, vi } from "vitest";
 import { TooltipProvider } from "@/components/ui/tooltip";
 import { CompanyEnvironments } from "./CompanyEnvironments";
 
+const xtermMocks = vi.hoisted(() => {
+  class MockTerminal {
+    readonly options: Record<string, unknown>;
+    cols: number;
+    rows: number;
+    writes: string[] = [];
+    focused = false;
+    disposed = false;
+    openedElement: HTMLElement | null = null;
+    private readonly dataHandlers: Array<(data: string) => void> = [];
+
+    constructor(options: Record<string, unknown> = {}) {
+      this.options = options;
+      this.cols = typeof options.cols === "number" ? options.cols : 80;
+      this.rows = typeof options.rows === "number" ? options.rows : 24;
+      xtermMocks.terminalInstances.push(this);
+    }
+
+    loadAddon(addon: { activate?: (terminal: MockTerminal) => void }) {
+      addon.activate?.(this);
+    }
+
+    open(element: HTMLElement) {
+      this.openedElement = element;
+      element.dataset.mockXtermOpen = "true";
+    }
+
+    onData(handler: (data: string) => void) {
+      this.dataHandlers.push(handler);
+      return {
+        dispose: () => {
+          const index = this.dataHandlers.indexOf(handler);
+          if (index >= 0) this.dataHandlers.splice(index, 1);
+        },
+      };
+    }
+
+    emitData(data: string) {
+      for (const handler of this.dataHandlers) handler(data);
+    }
+
+    write(data: string) {
+      this.writes.push(data);
+      if (!this.openedElement) return;
+      const chunk = document.createElement("span");
+      // Keep test DOM readable without reimplementing xterm's ANSI parser.
+      chunk.textContent = data.replace(/\x1B\[[0-?]*[ -/]*[@-~]/g, "");
+      this.openedElement.appendChild(chunk);
+    }
+
+    resize(cols: number, rows: number) {
+      this.cols = cols;
+      this.rows = rows;
+    }
+
+    focus() {
+      this.focused = true;
+      this.openedElement?.focus();
+    }
+
+    reset() {
+      this.writes = [];
+      if (this.openedElement) this.openedElement.textContent = "";
+    }
+
+    clear() {
+      if (this.openedElement) this.openedElement.textContent = "";
+    }
+
+    dispose() {
+      this.disposed = true;
+    }
+  }
+
+  class MockFitAddon {
+    fitCalls = 0;
+    terminal: MockTerminal | null = null;
+
+    constructor() {
+      xtermMocks.fitAddonInstances.push(this);
+    }
+
+    activate(terminal: MockTerminal) {
+      this.terminal = terminal;
+    }
+
+    fit() {
+      this.fitCalls += 1;
+      this.terminal?.resize(120, 32);
+    }
+  }
+
+  return {
+    MockTerminal,
+    MockFitAddon,
+    terminalInstances: [] as MockTerminal[],
+    fitAddonInstances: [] as MockFitAddon[],
+    reset() {
+      this.terminalInstances.length = 0;
+      this.fitAddonInstances.length = 0;
+    },
+  };
+});
+
+vi.mock("@xterm/xterm", () => ({
+  Terminal: xtermMocks.MockTerminal,
+}));
+
+vi.mock("@xterm/addon-fit", () => ({
+  FitAddon: xtermMocks.MockFitAddon,
+}));
+
+vi.mock("@xterm/xterm/css/xterm.css", () => ({}));
+
 const mockEnvironmentsApi = vi.hoisted(() => ({
   list: vi.fn(),
   capabilities: vi.fn(),
@@ -246,6 +360,7 @@ describe("CompanyEnvironments — test provider button", () => {
     probeResolvers = new Map();
     originalWebSocket = globalThis.WebSocket;
     FakeWebSocket.instances = [];
+    xtermMocks.reset();
     globalThis.WebSocket = FakeWebSocket as unknown as typeof WebSocket;
     mockInstanceSettingsApi.get.mockResolvedValue({ defaultEnvironmentId: null });
     mockInstanceSettingsApi.getExperimental.mockResolvedValue({ enableEnvironments: true });
@@ -670,27 +785,30 @@ describe("CompanyEnvironments — test provider button", () => {
     expect(FakeWebSocket.instances[0].url).toContain(
       "/api/environment-custom-image-setup-sessions/session-1/terminal/ws?terminalSessionId=terminal-session-1",
     );
-    expect(FakeWebSocket.instances[0].url).toContain("cols=100");
-    expect(FakeWebSocket.instances[0].url).toContain("rows=28");
+    expect(FakeWebSocket.instances[0].url).toContain("cols=120");
+    expect(FakeWebSocket.instances[0].url).toContain("rows=32");
+    expect(xtermMocks.terminalInstances[0].options.cursorBlink).toBe(true);
 
     await act(async () => {
       FakeWebSocket.instances[0].open();
       FakeWebSocket.instances[0].emitMessage(JSON.stringify({ type: "ready" }));
       FakeWebSocket.instances[0].emitMessage(JSON.stringify({ type: "output", data: "\u001b[?2004hsetup shell\r\n$ " }));
     });
-    const terminal = getOpenDialog()?.querySelector<HTMLTextAreaElement>(
-      "[data-testid='custom-image-terminal-input-session-1']",
+    const terminalScreen = getOpenDialog()?.querySelector<HTMLElement>(
+      "[data-testid='custom-image-terminal-screen-session-1']",
     );
     await waitForAssertion(() => {
-      expect(terminal?.value).toContain("setup shell");
-      expect(terminal?.value).not.toContain("[?2004h");
-      expect(document.activeElement).toBe(terminal);
+      expect(terminalScreen?.dataset.mockXtermOpen).toBe("true");
+      expect(xtermMocks.terminalInstances[0].writes.join("")).toContain("setup shell");
+      expect(xtermMocks.terminalInstances[0].focused).toBe(true);
+      expect(document.activeElement).toBe(terminalScreen);
       expect(getOpenDialog()?.textContent).toContain(command);
     });
+    expect(FakeWebSocket.instances[0].sent).toContain(JSON.stringify({ type: "resize", cols: 120, rows: 32 }));
 
     await act(async () => {
-      terminal?.dispatchEvent(new KeyboardEvent("keydown", { key: "l", bubbles: true }));
-      terminal?.dispatchEvent(new KeyboardEvent("keydown", { key: "Enter", bubbles: true }));
+      xtermMocks.terminalInstances[0].emitData("l");
+      xtermMocks.terminalInstances[0].emitData("\r");
     });
 
     expect(FakeWebSocket.instances[0].sent).toContain(JSON.stringify({ type: "input", data: "l" }));
diff --git a/ui/src/pages/CompanyEnvironments.tsx b/ui/src/pages/CompanyEnvironments.tsx
index c0c4f625c78..b96ee6115e3 100644
--- a/ui/src/pages/CompanyEnvironments.tsx
+++ b/ui/src/pages/CompanyEnvironments.tsx
@@ -1,14 +1,14 @@
 import {
   useCallback,
   useEffect,
-  useMemo,
   useRef,
   useState,
-  type ClipboardEvent as ReactClipboardEvent,
-  type KeyboardEvent as ReactKeyboardEvent,
 } from "react";
 import { useMutation, useQuery, useQueryClient } from "@tanstack/react-query";
 import { Check, Play, RefreshCw, RotateCcw, Terminal, Trash2, X } from "lucide-react";
+import { FitAddon } from "@xterm/addon-fit";
+import { Terminal as XTermTerminal } from "@xterm/xterm";
+import "@xterm/xterm/css/xterm.css";
 import {
   type EnvBinding,
   type Environment,
@@ -231,10 +231,7 @@ function setupConnectionFallbackMessage(input: {
 
 const CUSTOM_IMAGE_TERMINAL_COLS = 100;
 const CUSTOM_IMAGE_TERMINAL_ROWS = 28;
-const CUSTOM_IMAGE_TERMINAL_SCROLLBACK_LIMIT = 120_000;
-const TERMINAL_CONTROL_SEQUENCE_PATTERN =
-  // eslint-disable-next-line no-control-regex
-  /(?:\x1B\][\s\S]*?(?:\x07|\x1B\\))|(?:\x1B\[[0-?]*[ -/]*[@-~])|(?:\x1B[PX^_][\s\S]*?\x1B\\)|(?:\x1B[@-Z\\-_])/g;
+const CUSTOM_IMAGE_TERMINAL_SCROLLBACK_ROWS = 5_000;
 
 type CustomImageTerminalConnectionState =
   | "idle"
@@ -250,55 +247,6 @@ function appendTerminalQuery(path: string, params: Record<string, string | numbe
   ).toString()}`;
 }
 
-function appendTerminalOutput(current: string, chunk: string) {
-  const next = `${current}${chunk}`;
-  return next.length > CUSTOM_IMAGE_TERMINAL_SCROLLBACK_LIMIT
-    ? next.slice(-CUSTOM_IMAGE_TERMINAL_SCROLLBACK_LIMIT)
-    : next;
-}
-
-function renderTerminalOutput(raw: string) {
-  const cleaned = raw.replace(TERMINAL_CONTROL_SEQUENCE_PATTERN, "").replace(/\r\n/g, "\n");
-  const buffer: string[] = [];
-  let cursor = 0;
-  let lineStart = 0;
-
-  for (const char of cleaned) {
-    if (char === "\r") {
-      cursor = lineStart;
-      continue;
-    }
-
-    if (char === "\n") {
-      cursor = buffer.length;
-      buffer.push(char);
-      cursor += 1;
-      lineStart = cursor;
-      continue;
-    }
-
-    if (char === "\b" || char === "\x7f") {
-      if (cursor > lineStart) {
-        cursor -= 1;
-      }
-      continue;
-    }
-
-    if (char.charCodeAt(0) < 32 && char !== "\t") {
-      continue;
-    }
-
-    if (cursor >= buffer.length) {
-      buffer.push(char);
-    } else {
-      buffer[cursor] = char;
-    }
-    cursor += 1;
-  }
-
-  return buffer.join("");
-}
-
 function parseTerminalFrame(raw: string): Record<string, unknown> | null {
   try {
     const parsed = JSON.parse(raw) as unknown;
@@ -310,45 +258,6 @@ function parseTerminalFrame(raw: string): Record<string, unknown> | null {
   }
 }
 
-function terminalInputForKey(event: ReactKeyboardEvent<HTMLElement>): string | null {
-  if (event.metaKey || event.altKey) return null;
-
-  if (event.ctrlKey) {
-    const key = event.key.toLowerCase();
-    if (key.length === 1 && key >= "a" && key <= "z") {
-      return String.fromCharCode(key.charCodeAt(0) - 96);
-    }
-    return null;
-  }
-
-  switch (event.key) {
-    case "Enter":
-      return "\r";
-    case "Backspace":
-      return "\x7f";
-    case "Tab":
-      return "\t";
-    case "Escape":
-      return "\x1b";
-    case "ArrowUp":
-      return "\x1b[A";
-    case "ArrowDown":
-      return "\x1b[B";
-    case "ArrowRight":
-      return "\x1b[C";
-    case "ArrowLeft":
-      return "\x1b[D";
-    case "Home":
-      return "\x1b[H";
-    case "End":
-      return "\x1b[F";
-    case "Delete":
-      return "\x1b[3~";
-    default:
-      return event.key.length === 1 ? event.key : null;
-  }
-}
-
 function customImageTerminalStatusCopy(state: CustomImageTerminalConnectionState) {
   switch (state) {
     case "connecting":
@@ -373,11 +282,15 @@ function EnvironmentCustomImageBrowserTerminal({
   sessionId: string;
 }) {
   const [connectionState, setConnectionState] = useState<CustomImageTerminalConnectionState>("idle");
-  const [output, setOutput] = useState("");
   const [errorMessage, setErrorMessage] = useState<string | null>(null);
-  const terminalRef = useRef<HTMLTextAreaElement | null>(null);
+  const terminalElementRef = useRef<HTMLDivElement | null>(null);
+  const xtermRef = useRef<XTermTerminal | null>(null);
+  const fitAddonRef = useRef<FitAddon | null>(null);
+  const terminalInputDisposableRef = useRef<{ dispose: () => void } | null>(null);
+  const resizeObserverRef = useRef<ResizeObserver | null>(null);
   const socketRef = useRef<WebSocket | null>(null);
   const autoConnectAttemptedSessionRef = useRef<string | null>(null);
+  const lastSentResizeRef = useRef<{ cols: number; rows: number } | null>(null);
 
   const closeSocket = useCallback((reason = "operator_closed") => {
     const socket = socketRef.current;
@@ -387,19 +300,118 @@ function EnvironmentCustomImageBrowserTerminal({
     }
   }, []);
 
+  const getTerminalDimensions = useCallback(() => {
+    const terminal = xtermRef.current;
+    return {
+      cols: terminal?.cols || CUSTOM_IMAGE_TERMINAL_COLS,
+      rows: terminal?.rows || CUSTOM_IMAGE_TERMINAL_ROWS,
+    };
+  }, []);
+
+  const sendTerminalResize = useCallback((force = false) => {
+    const socket = socketRef.current;
+    if (!socket || socket.readyState !== WebSocket.OPEN) return;
+
+    const dimensions = getTerminalDimensions();
+    const previous = lastSentResizeRef.current;
+    if (!force && previous?.cols === dimensions.cols && previous.rows === dimensions.rows) return;
+
+    lastSentResizeRef.current = dimensions;
+    socket.send(JSON.stringify({
+      type: "resize",
+      cols: dimensions.cols,
+      rows: dimensions.rows,
+    }));
+  }, [getTerminalDimensions]);
+
+  const fitTerminal = useCallback(() => {
+    const fitAddon = fitAddonRef.current;
+    if (!fitAddon || !xtermRef.current) return;
+    try {
+      fitAddon.fit();
+      sendTerminalResize();
+    } catch {
+      // The fit addon can throw during hidden/dialog layout transitions. The
+      // next ResizeObserver tick or reconnect will retry with stable dimensions.
+    }
+  }, [sendTerminalResize]);
+
+  const sendTerminalInput = useCallback((data: string) => {
+    const socket = socketRef.current;
+    if (!socket || socket.readyState !== WebSocket.OPEN) return;
+    socket.send(JSON.stringify({ type: "input", data }));
+  }, []);
+
+  const resetTerminalScreen = useCallback(() => {
+    const terminal = xtermRef.current;
+    if (!terminal) return;
+    terminal.reset();
+    terminal.clear();
+  }, []);
+
+  useEffect(() => {
+    const element = terminalElementRef.current;
+    if (!element || xtermRef.current) return undefined;
+
+    const terminal = new XTermTerminal({
+      allowTransparency: true,
+      cols: CUSTOM_IMAGE_TERMINAL_COLS,
+      rows: CUSTOM_IMAGE_TERMINAL_ROWS,
+      convertEol: false,
+      cursorBlink: true,
+      cursorStyle: "block",
+      fontFamily: "Menlo, Monaco, Consolas, 'Liberation Mono', monospace",
+      fontSize: 12,
+      lineHeight: 1.35,
+      scrollback: CUSTOM_IMAGE_TERMINAL_SCROLLBACK_ROWS,
+      theme: {
+        background: "#0a0a0a",
+        foreground: "#f5f5f5",
+        cursor: "#f8fafc",
+        selectionBackground: "#2563eb55",
+      },
+    });
+    const fitAddon = new FitAddon();
+    terminal.loadAddon(fitAddon);
+    terminal.open(element);
+
+    xtermRef.current = terminal;
+    fitAddonRef.current = fitAddon;
+    terminalInputDisposableRef.current = terminal.onData(sendTerminalInput);
+
+    if (typeof ResizeObserver !== "undefined") {
+      const resizeObserver = new ResizeObserver(() => fitTerminal());
+      resizeObserver.observe(element);
+      resizeObserverRef.current = resizeObserver;
+    }
+
+    window.setTimeout(fitTerminal, 0);
+
+    return () => {
+      resizeObserverRef.current?.disconnect();
+      resizeObserverRef.current = null;
+      terminalInputDisposableRef.current?.dispose();
+      terminalInputDisposableRef.current = null;
+      fitAddonRef.current = null;
+      xtermRef.current = null;
+      terminal.dispose();
+    };
+  }, [fitTerminal, sendTerminalInput]);
+
   useEffect(() => () => closeSocket("component_unmounted"), [closeSocket]);
 
   useEffect(() => {
     closeSocket("session_changed");
     autoConnectAttemptedSessionRef.current = null;
+    lastSentResizeRef.current = null;
     setConnectionState("idle");
-    setOutput("");
     setErrorMessage(null);
-  }, [closeSocket, sessionId]);
+    resetTerminalScreen();
+  }, [closeSocket, resetTerminalScreen, sessionId]);
 
   useEffect(() => {
     if (connectionState === "connected") {
-      terminalRef.current?.focus();
+      xtermRef.current?.focus();
     }
   }, [connectionState]);
 
@@ -412,18 +424,26 @@ function EnvironmentCustomImageBrowserTerminal({
 
     closeSocket("reconnect");
     setConnectionState("connecting");
-    setOutput("");
+    lastSentResizeRef.current = null;
     setErrorMessage(null);
+    resetTerminalScreen();
 
     try {
+      fitTerminal();
+      const dimensions = getTerminalDimensions();
       const terminalToken = await environmentsApi.createCustomImageTerminalSessionToken(sessionId, {});
       const websocketPath = appendTerminalQuery(terminalToken.websocketPath, {
-        cols: CUSTOM_IMAGE_TERMINAL_COLS,
-        rows: CUSTOM_IMAGE_TERMINAL_ROWS,
+        cols: dimensions.cols,
+        rows: dimensions.rows,
       });
       const socket = new WebSocket(buildSameOriginWebSocketUrl(websocketPath));
       socketRef.current = socket;
 
+      socket.onopen = () => {
+        if (socketRef.current !== socket) return;
+        sendTerminalResize(true);
+      };
+
       socket.onmessage = (message) => {
         if (socketRef.current !== socket) return;
         const raw = typeof message.data === "string" ? message.data : "";
@@ -436,7 +456,7 @@ function EnvironmentCustomImageBrowserTerminal({
         }
 
         if (frame.type === "output" && typeof frame.data === "string") {
-          setOutput((current) => appendTerminalOutput(current, frame.data as string));
+          xtermRef.current?.write(frame.data as string);
           return;
         }
 
@@ -467,7 +487,7 @@ function EnvironmentCustomImageBrowserTerminal({
       setConnectionState("error");
       setErrorMessage(error instanceof Error ? error.message : "Terminal session could not be opened.");
     }
-  }, [closeSocket, sessionId]);
+  }, [closeSocket, fitTerminal, getTerminalDimensions, resetTerminalScreen, sendTerminalResize, sessionId]);
 
   useEffect(() => {
     if (!autoConnect || connectionState !== "idle") return;
@@ -479,43 +499,12 @@ function EnvironmentCustomImageBrowserTerminal({
     return () => window.clearTimeout(timeoutId);
   }, [autoConnect, connectTerminal, connectionState, sessionId]);
 
-  const sendTerminalInput = useCallback((data: string) => {
-    const socket = socketRef.current;
-    if (!socket || socket.readyState !== WebSocket.OPEN) return;
-    socket.send(JSON.stringify({ type: "input", data }));
-  }, []);
-
-  const handleTerminalKeyDown = useCallback((event: ReactKeyboardEvent<HTMLTextAreaElement>) => {
-    const input = terminalInputForKey(event);
-    if (!input) return;
-    event.preventDefault();
-    sendTerminalInput(input);
-  }, [sendTerminalInput]);
-
-  const handleTerminalPaste = useCallback((event: ReactClipboardEvent<HTMLTextAreaElement>) => {
-    if (connectionState !== "connected") return;
-    const text = event.clipboardData.getData("text");
-    if (!text) return;
-    event.preventDefault();
-    sendTerminalInput(text.replace(/\r?\n/g, "\r"));
-  }, [connectionState, sendTerminalInput]);
-
   const disconnectTerminal = useCallback(() => {
     closeSocket("operator_closed");
     setConnectionState("closed");
   }, [closeSocket]);
 
   const terminalInteractive = connectionState === "connected";
-  const terminalDisplay = useMemo(
-    () => output ? renderTerminalOutput(output) : customImageTerminalStatusCopy(connectionState),
-    [connectionState, output],
-  );
-
-  useEffect(() => {
-    const terminal = terminalRef.current;
-    if (!terminal) return;
-    terminal.scrollTop = terminal.scrollHeight;
-  }, [terminalDisplay]);
 
   return (
     <div className="mt-3 rounded-md border border-border/70 bg-background" data-testid={`custom-image-terminal-${sessionId}`}>
@@ -543,23 +532,15 @@ function EnvironmentCustomImageBrowserTerminal({
           )}
         </div>
       </div>
-      <div
-        className="bg-neutral-950"
-      >
-        <textarea
-          ref={terminalRef}
-          data-testid={`custom-image-terminal-input-${sessionId}`}
+      <div className="bg-neutral-950 p-2 focus-within:ring-2 focus-within:ring-ring">
+        <div
+          ref={terminalElementRef}
+          data-testid={`custom-image-terminal-screen-${sessionId}`}
           aria-label="Custom image browser terminal"
-          aria-multiline="true"
-          aria-readonly="true"
-          readOnly
-          spellCheck={false}
+          role="application"
           tabIndex={0}
-          value={terminalDisplay}
-          onKeyDown={handleTerminalKeyDown}
-          onPaste={handleTerminalPaste}
-          onClick={() => terminalRef.current?.focus()}
-          className="block min-h-[18rem] max-h-[26rem] w-full resize-none overflow-auto border-0 bg-neutral-950 px-3 py-2 font-mono text-[12px] leading-5 text-neutral-100 outline-none focus:ring-2 focus:ring-ring"
+          onClick={() => xtermRef.current?.focus()}
+          className="h-[18rem] w-full overflow-hidden bg-neutral-950 outline-none sm:h-[22rem] [&_.xterm-screen]:focus:outline-none [&_.xterm-viewport]:!overflow-y-auto"
         />
       </div>
       {errorMessage ? (