diff --git a/src/vs/base/browser/markdownRenderer.ts b/src/vs/base/browser/markdownRenderer.ts
index 100ac6b7396..447d5e02c3f 100644
--- a/src/vs/base/browser/markdownRenderer.ts
+++ b/src/vs/base/browser/markdownRenderer.ts
@@ -180,13 +180,11 @@ export function renderMarkdown(markdown: IMarkdownString, options: MarkdownRende
 
 	if (options.actionHandler) {
 		const _activateLink = function (event: StandardMouseEvent | StandardKeyboardEvent): void {
-			let target: HTMLElement | null = event.target;
-			if (target.tagName !== 'A') {
-				target = target.parentElement;
-				if (!target || target.tagName !== 'A') {
-					return;
-				}
+			const target = event.target.closest('a[data-href]');
+			if (!DOM.isHTMLElement(target)) {
+				return;
 			}
+
 			try {
 				let href = target.dataset['href'];
 				if (href) {
diff --git a/src/vs/workbench/contrib/chat/browser/chatMarkdownDecorationsRenderer.ts b/src/vs/workbench/contrib/chat/browser/chatMarkdownDecorationsRenderer.ts
index 37d85b0762d..d3e17a2ade9 100644
--- a/src/vs/workbench/contrib/chat/browser/chatMarkdownDecorationsRenderer.ts
+++ b/src/vs/workbench/contrib/chat/browser/chatMarkdownDecorationsRenderer.ts
@@ -7,19 +7,23 @@ import { applyDragImage } from '../../../../base/browser/dnd.js';
 import * as dom from '../../../../base/browser/dom.js';
 import { Button } from '../../../../base/browser/ui/button/button.js';
 import { getDefaultHoverDelegate } from '../../../../base/browser/ui/hover/hoverDelegateFactory.js';
+import { IconLabel } from '../../../../base/browser/ui/iconLabel/iconLabel.js';
 import { toErrorMessage } from '../../../../base/common/errorMessage.js';
 import { Lazy } from '../../../../base/common/lazy.js';
-import { DisposableStore, IDisposable } from '../../../../base/common/lifecycle.js';
+import { Disposable, DisposableStore, IDisposable } from '../../../../base/common/lifecycle.js';
 import { revive } from '../../../../base/common/marshalling.js';
 import { URI } from '../../../../base/common/uri.js';
 import { Location } from '../../../../editor/common/languages.js';
+import { ILanguageService } from '../../../../editor/common/languages/language.js';
+import { getIconClasses } from '../../../../editor/common/services/getIconClasses.js';
+import { IModelService } from '../../../../editor/common/services/model.js';
 import { ICommandService } from '../../../../platform/commands/common/commands.js';
 import { IHoverService } from '../../../../platform/hover/browser/hover.js';
 import { IInstantiationService, ServicesAccessor } from '../../../../platform/instantiation/common/instantiation.js';
 import { IKeybindingService } from '../../../../platform/keybinding/common/keybinding.js';
 import { ILabelService } from '../../../../platform/label/common/label.js';
 import { ILogService } from '../../../../platform/log/common/log.js';
-import { listActiveSelectionBackground, listActiveSelectionForeground } from '../../../../platform/theme/common/colorRegistry.js';
+import { listActiveSelectionBackground, listActiveSelectionForeground } from '../../../../platform/theme/common/colors/listColors.js';
 import { asCssVariable } from '../../../../platform/theme/common/colorUtils.js';
 import { IThemeService } from '../../../../platform/theme/common/themeService.js';
 import { fillEditorsDragData } from '../../../browser/dnd.js';
@@ -32,6 +36,7 @@ import { IChatVariablesService } from '../common/chatVariables.js';
 import { ILanguageModelToolsService } from '../common/languageModelToolsService.js';
 import { IChatWidgetService } from './chat.js';
 import { ChatAgentHover, getChatAgentHoverOptions } from './chatAgentHover.js';
+import './media/chatInlineFileLinkWidget.css';
 
 /** For rendering slash commands, variables */
 const decorationRefUrl = `http://_vscodedecoration_`;
@@ -78,10 +83,10 @@ interface IDecorationWidgetArgs {
 	title?: string;
 }
 
-export class ChatMarkdownDecorationsRenderer {
+export class ChatMarkdownDecorationsRenderer extends Disposable {
+
 	constructor(
 		@IKeybindingService private readonly keybindingService: IKeybindingService,
-		@ILabelService private readonly labelService: ILabelService,
 		@ILogService private readonly logService: ILogService,
 		@IChatAgentService private readonly chatAgentService: IChatAgentService,
 		@IInstantiationService private readonly instantiationService: IInstantiationService,
@@ -90,9 +95,11 @@ export class ChatMarkdownDecorationsRenderer {
 		@IChatWidgetService private readonly chatWidgetService: IChatWidgetService,
 		@ICommandService private readonly commandService: ICommandService,
 		@IChatVariablesService private readonly chatVariablesService: IChatVariablesService,
+		@ILabelService private readonly labelService: ILabelService,
 		@ILanguageModelToolsService private readonly toolsService: ILanguageModelToolsService,
-		@IThemeService private readonly themeService: IThemeService,
-	) { }
+	) {
+		super();
+	}
 
 	convertParsedRequestToMarkdown(parsedRequest: IParsedChatRequest): string {
 		let result = '';
@@ -247,28 +254,9 @@ export class ChatMarkdownDecorationsRenderer {
 			return;
 		}
 
-		const fragment = location.range ? `${location.range.startLineNumber}-${location.range.endLineNumber}` : '';
-		a.setAttribute('data-href', location.uri.with({ fragment }).toString());
-
-		const label = this.labelService.getUriLabel(location.uri, { relative: true });
-		a.replaceChildren(dom.$('code', undefined, label));
-
-		const title = location.range ?
-			`${label}#${location.range.startLineNumber}-${location.range.endLineNumber}` :
-			label;
-		store.add(this.hoverService.setupManagedHover(getDefaultHoverDelegate('element'), a, title));
-
-		// Drag and drop
-		a.draggable = true;
-		store.add(dom.addDisposableListener(a, 'dragstart', e => {
-			this.instantiationService.invokeFunction(accessor => fillEditorsDragData(accessor, [location.uri], e));
-
-			const theme = this.themeService.getColorTheme();
-			applyDragImage(e, label, 'monaco-drag-image', theme.getColor(listActiveSelectionBackground)?.toString(), theme.getColor(listActiveSelectionForeground)?.toString());
-		}));
+		store.add(this.instantiationService.createInstance(InlineFileLinkWidget, a, location));
 	}
 
-
 	private renderResourceWidget(name: string, args: IDecorationWidgetArgs | undefined, store: DisposableStore): HTMLElement {
 		const container = dom.$('span.chat-resource-widget');
 		const alias = dom.$('span', undefined, name);
@@ -294,3 +282,49 @@ export class ChatMarkdownDecorationsRenderer {
 		}
 	}
 }
+
+
+class InlineFileLinkWidget extends Disposable {
+
+	constructor(
+		element: HTMLAnchorElement,
+		location: Location | { uri: URI; range: undefined },
+		@IHoverService hoverService: IHoverService,
+		@IInstantiationService instantiationService: IInstantiationService,
+		@ILabelService labelService: ILabelService,
+		@ILanguageService languageService: ILanguageService,
+		@IModelService modelService: IModelService,
+		@IThemeService themeService: IThemeService,
+	) {
+		super();
+
+		element.classList.add('chat-inline-file-link-widget');
+
+		const fragment = location.range ? `${location.range.startLineNumber}-${location.range.endLineNumber}` : '';
+		element.setAttribute('data-href', location.uri.with({ fragment }).toString());
+
+		const label = labelService.getUriLabel(location.uri, { relative: true });
+		const title = location.range ?
+			`${label}#${location.range.startLineNumber}-${location.range.endLineNumber}` :
+			label;
+
+		element.replaceChildren();
+
+		const resourceLabel = this._register(new IconLabel(element, { supportHighlights: false, supportIcons: true }));
+		resourceLabel.setLabel(label, undefined, {
+			extraClasses: getIconClasses(modelService, languageService, location.uri)
+		});
+
+		// Hover
+		this._register(hoverService.setupManagedHover(getDefaultHoverDelegate('element'), element, title));
+
+		// Drag and drop
+		element.draggable = true;
+		this._register(dom.addDisposableListener(element, 'dragstart', e => {
+			instantiationService.invokeFunction(accessor => fillEditorsDragData(accessor, [location.uri], e));
+
+			const theme = themeService.getColorTheme();
+			applyDragImage(e, label, 'monaco-drag-image', theme.getColor(listActiveSelectionBackground)?.toString(), theme.getColor(listActiveSelectionForeground)?.toString());
+		}));
+	}
+}
diff --git a/src/vs/workbench/contrib/chat/browser/media/chatInlineFileLinkWidget.css b/src/vs/workbench/contrib/chat/browser/media/chatInlineFileLinkWidget.css
new file mode 100644
index 00000000000..d4746e3afe3
--- /dev/null
+++ b/src/vs/workbench/contrib/chat/browser/media/chatInlineFileLinkWidget.css
@@ -0,0 +1,12 @@
+/*---------------------------------------------------------------------------------------------
+ *  Copyright (c) Microsoft Corporation. All rights reserved.
+ *  Licensed under the MIT License. See License.txt in the project root for license information.
+ *--------------------------------------------------------------------------------------------*/
+
+.chat-inline-file-link-widget .monaco-icon-label {
+	display: inline-flex;
+}
+
+.chat-inline-file-link-widget .monaco-icon-label .monaco-highlighted-label {
+	white-space: normal;
+}