diff --git a/src/vs/workbench/contrib/chat/browser/agentSessions/agentStatusWidget.ts b/src/vs/workbench/contrib/chat/browser/agentSessions/agentStatusWidget.ts
index 9bdcdd03e029..4c3887db7ba3 100644
--- a/src/vs/workbench/contrib/chat/browser/agentSessions/agentStatusWidget.ts
+++ b/src/vs/workbench/contrib/chat/browser/agentSessions/agentStatusWidget.ts
@@ -17,7 +17,7 @@ import { ICommandService } from '../../../../../platform/commands/common/command
 import { IKeybindingService } from '../../../../../platform/keybinding/common/keybinding.js';
 import { ExitAgentSessionProjectionAction } from './agentSessionProjectionActions.js';
 import { IAgentSessionsService } from './agentSessionsService.js';
-import { IAgentSession, isSessionInProgressStatus } from './agentSessionsModel.js';
+import { AgentSessionStatus, IAgentSession, isSessionInProgressStatus } from './agentSessionsModel.js';
 import { BaseActionViewItem, IBaseActionViewItemOptions } from '../../../../../base/browser/ui/actionbar/actionViewItems.js';
 import { IAction } from '../../../../../base/common/actions.js';
 import { ILabelService } from '../../../../../platform/label/common/label.js';
@@ -55,6 +55,9 @@ export class AgentStatusWidget extends BaseActionViewItem {
 	/** The currently displayed in-progress session (if any) - clicking pill opens this */
 	private _displayedSession: IAgentSession | undefined;
 
+	/** Cached render state to avoid unnecessary DOM rebuilds */
+	private _lastRenderState: string | undefined;
+
 	constructor(
 		action: IAction,
 		options: IBaseActionViewItemOptions | undefined,
@@ -113,6 +116,45 @@ export class AgentStatusWidget extends BaseActionViewItem {
 			return;
 		}
 
+		// Compute current render state to avoid unnecessary DOM rebuilds
+		const mode = this.agentStatusService.mode;
+		const sessionInfo = this.agentStatusService.sessionInfo;
+		const { activeSessions, unreadSessions, attentionNeededSessions } = this._getSessionStats();
+
+		// Get attention session info for state computation
+		const attentionSession = attentionNeededSessions.length > 0
+			? [...attentionNeededSessions].sort((a, b) => {
+				const timeA = a.timing.lastRequestStarted ?? a.timing.created;
+				const timeB = b.timing.lastRequestStarted ?? b.timing.created;
+				return timeB - timeA;
+			})[0]
+			: undefined;
+
+		const attentionText = attentionSession?.description
+			? (typeof attentionSession.description === 'string'
+				? attentionSession.description
+				: renderAsPlaintext(attentionSession.description))
+			: attentionSession?.label;
+
+		const label = this._getLabel();
+
+		// Build state key for comparison
+		const stateKey = JSON.stringify({
+			mode,
+			sessionTitle: sessionInfo?.title,
+			activeCount: activeSessions.length,
+			unreadCount: unreadSessions.length,
+			attentionCount: attentionNeededSessions.length,
+			attentionText,
+			label,
+		});
+
+		// Skip re-render if state hasn't changed
+		if (this._lastRenderState === stateKey) {
+			return;
+		}
+		this._lastRenderState = stateKey;
+
 		// Clear existing content
 		reset(this._container);
 
@@ -128,80 +170,113 @@ export class AgentStatusWidget extends BaseActionViewItem {
 		}
 	}
 
+	// #region Session Statistics
+
+	/**
+	 * Get computed session statistics for rendering.
+	 */
+	private _getSessionStats(): {
+		activeSessions: IAgentSession[];
+		unreadSessions: IAgentSession[];
+		attentionNeededSessions: IAgentSession[];
+		hasActiveSessions: boolean;
+		hasUnreadSessions: boolean;
+		hasAttentionNeeded: boolean;
+	} {
+		const sessions = this.agentSessionsService.model.sessions;
+		const activeSessions = sessions.filter(s => isSessionInProgressStatus(s.status));
+		const unreadSessions = sessions.filter(s => !s.isRead());
+		// Sessions that need user attention (approval/confirmation/input)
+		const attentionNeededSessions = sessions.filter(s => s.status === AgentSessionStatus.NeedsInput);
+
+		return {
+			activeSessions,
+			unreadSessions,
+			attentionNeededSessions,
+			hasActiveSessions: activeSessions.length > 0,
+			hasUnreadSessions: unreadSessions.length > 0,
+			hasAttentionNeeded: attentionNeededSessions.length > 0,
+		};
+	}
+
+	// #endregion
+
+	// #region Mode Renderers
+
 	private _renderChatInputMode(disposables: DisposableStore): void {
 		if (!this._container) {
 			return;
 		}
 
-		// Get agent session statistics
-		const sessions = this.agentSessionsService.model.sessions;
-		const activeSessions = sessions.filter(s => isSessionInProgressStatus(s.status));
-		const unreadSessions = sessions.filter(s => !s.isRead());
-		const hasActiveSessions = activeSessions.length > 0;
-		const hasUnreadSessions = unreadSessions.length > 0;
+		const { activeSessions, unreadSessions, attentionNeededSessions, hasAttentionNeeded } = this._getSessionStats();
 
-		// Create pill - add 'has-active' class when sessions are in progress
+		// Create pill
 		const pill = $('div.agent-status-pill.chat-input-mode');
-		if (hasActiveSessions) {
-			pill.classList.add('has-active');
-		} else if (hasUnreadSessions) {
-			pill.classList.add('has-unread');
+		if (hasAttentionNeeded) {
+			pill.classList.add('needs-attention');
 		}
 		pill.setAttribute('role', 'button');
 		pill.setAttribute('aria-label', localize('openQuickChat', "Open Quick Chat"));
 		pill.tabIndex = 0;
 		this._container.appendChild(pill);
 
-		// Left side indicator (status)
-		const leftIndicator = $('span.agent-status-indicator');
-		if (hasActiveSessions) {
-			// Running indicator when there are active sessions
-			const runningIcon = $('span.agent-status-icon');
-			reset(runningIcon, renderIcon(Codicon.sessionInProgress));
-			leftIndicator.appendChild(runningIcon);
-			const runningCount = $('span.agent-status-text');
-			runningCount.textContent = String(activeSessions.length);
-			leftIndicator.appendChild(runningCount);
-		} else if (hasUnreadSessions) {
-			// Unread indicator when there are unread sessions
-			const unreadIcon = $('span.agent-status-icon');
-			reset(unreadIcon, renderIcon(Codicon.circleFilled));
-			leftIndicator.appendChild(unreadIcon);
-			const unreadCount = $('span.agent-status-text');
-			unreadCount.textContent = String(unreadSessions.length);
-			leftIndicator.appendChild(unreadCount);
+		// Left icon container (sparkle by default, report+count when attention needed, search on hover)
+		const leftIcon = $('span.agent-status-left-icon');
+		if (hasAttentionNeeded) {
+			// Show report icon + count when sessions need attention
+			const reportIcon = renderIcon(Codicon.report);
+			const countSpan = $('span.agent-status-attention-count');
+			countSpan.textContent = String(attentionNeededSessions.length);
+			reset(leftIcon, reportIcon, countSpan);
+			leftIcon.classList.add('has-attention');
 		} else {
-			// Keyboard shortcut when idle (show quick chat keybinding - matches click action)
-			const kb = this.keybindingService.lookupKeybinding(ACTION_ID)?.getLabel();
-			if (kb) {
-				const kbLabel = $('span.agent-status-keybinding');
-				kbLabel.textContent = kb;
-				leftIndicator.appendChild(kbLabel);
-			}
+			reset(leftIcon, renderIcon(Codicon.searchSparkle));
 		}
-		pill.appendChild(leftIndicator);
+		pill.appendChild(leftIcon);
 
-		// Show label - either progress from most recent active session, or workspace name
+		// Label (workspace name by default, placeholder on hover)
+		// Show attention progress or default label
 		const label = $('span.agent-status-label');
-		const { session: activeSession, progress: progressText } = this._getMostRecentActiveSession(activeSessions);
-		this._displayedSession = activeSession;
+		const { session: attentionSession, progress: progressText } = this._getSessionNeedingAttention(attentionNeededSessions);
+		this._displayedSession = attentionSession;
+
+		const defaultLabel = progressText ?? this._getLabel();
+
 		if (progressText) {
-			// Show progress with fade-in animation
 			label.classList.add('has-progress');
-			label.textContent = progressText;
-		} else {
-			label.textContent = this._getLabel();
 		}
+
+		const hoverLabel = localize('askAnythingPlaceholder', "Ask anything or describe what to build next");
+
+		label.textContent = defaultLabel;
 		pill.appendChild(label);
 
-		// Send icon (right side) - only show when not streaming progress
+		// Send icon (hidden by default, shown on hover - only when not showing attention message)
+		const sendIcon = $('span.agent-status-send');
+		reset(sendIcon, renderIcon(Codicon.send));
+		sendIcon.classList.add('hidden');
+		pill.appendChild(sendIcon);
+
+		// Hover behavior - swap icon and label (only when showing default state).
+		// When progressText is defined (e.g. sessions need attention), keep the attention/progress
+		// message visible and do not replace it with the generic placeholder on hover.
 		if (!progressText) {
-			const sendIcon = $('span.agent-status-send');
-			reset(sendIcon, renderIcon(Codicon.send));
-			pill.appendChild(sendIcon);
+			disposables.add(addDisposableListener(pill, EventType.MOUSE_ENTER, () => {
+				reset(leftIcon, renderIcon(Codicon.searchSparkle));
+				leftIcon.classList.remove('has-attention');
+				label.textContent = hoverLabel;
+				label.classList.remove('has-progress');
+				sendIcon.classList.remove('hidden');
+			}));
+
+			disposables.add(addDisposableListener(pill, EventType.MOUSE_LEAVE, () => {
+				reset(leftIcon, renderIcon(Codicon.searchSparkle));
+				label.textContent = defaultLabel;
+				sendIcon.classList.add('hidden');
+			}));
 		}
 
-		// Setup hover - show session name when displaying progress, otherwise show keybinding
+		// Setup hover tooltip
 		const hoverDelegate = getDefaultHoverDelegate('mouse');
 		disposables.add(this.hoverService.setupManagedHover(hoverDelegate, pill, () => {
 			if (this._displayedSession) {
@@ -229,8 +304,8 @@ export class AgentStatusWidget extends BaseActionViewItem {
 			}
 		}));
 
-		// Search button (right of pill)
-		this._renderSearchButton(disposables);
+		// Status badge (separate rectangle on right) - always rendered for smooth transitions
+		this._renderStatusBadge(disposables, activeSessions, unreadSessions);
 	}
 
 	private _renderSessionMode(disposables: DisposableStore): void {
@@ -238,68 +313,53 @@ export class AgentStatusWidget extends BaseActionViewItem {
 			return;
 		}
 
+		const { activeSessions, unreadSessions } = this._getSessionStats();
+
 		const pill = $('div.agent-status-pill.session-mode');
 		this._container.appendChild(pill);
 
-		// Session title (left/center)
+		// Search button (left side, inside pill)
+		this._renderSearchButton(disposables, pill);
+
+		// Session title (center)
 		const titleLabel = $('span.agent-status-title');
 		const sessionInfo = this.agentStatusService.sessionInfo;
 		titleLabel.textContent = sessionInfo?.title ?? localize('agentSessionProjection', "Agent Session Projection");
 		pill.appendChild(titleLabel);
 
-		// Escape button (right side) - serves as both keybinding hint and close button
-		const escButton = $('span.agent-status-esc-button');
-		escButton.textContent = 'Esc';
-		escButton.setAttribute('role', 'button');
-		escButton.setAttribute('aria-label', localize('exitAgentSessionProjection', "Exit Agent Session Projection"));
-		escButton.tabIndex = 0;
-		pill.appendChild(escButton);
+		// Escape button (right side)
+		this._renderEscapeButton(disposables, pill);
 
-		// Setup hovers
+		// Setup pill hover
 		const hoverDelegate = getDefaultHoverDelegate('mouse');
-		disposables.add(this.hoverService.setupManagedHover(hoverDelegate, escButton, localize('exitAgentSessionProjectionTooltip', "Exit Agent Session Projection (Escape)")));
 		disposables.add(this.hoverService.setupManagedHover(hoverDelegate, pill, () => {
 			const sessionInfo = this.agentStatusService.sessionInfo;
 			return sessionInfo ? localize('agentSessionProjectionTooltip', "Agent Session Projection: {0}", sessionInfo.title) : localize('agentSessionProjection', "Agent Session Projection");
 		}));
 
-		// Esc button click handler
-		disposables.add(addDisposableListener(escButton, EventType.MOUSE_DOWN, (e) => {
-			e.preventDefault();
-			e.stopPropagation();
-			this.commandService.executeCommand(ExitAgentSessionProjectionAction.ID);
-		}));
-
-		disposables.add(addDisposableListener(escButton, EventType.CLICK, (e) => {
-			e.preventDefault();
-			e.stopPropagation();
-			this.commandService.executeCommand(ExitAgentSessionProjectionAction.ID);
-		}));
-
-		// Esc button keyboard handler
-		disposables.add(addDisposableListener(escButton, EventType.KEY_DOWN, (e) => {
-			if (e.key === 'Enter' || e.key === ' ') {
-				e.preventDefault();
-				e.stopPropagation();
-				this.commandService.executeCommand(ExitAgentSessionProjectionAction.ID);
-			}
-		}));
-
-		// Search button (right of pill)
-		this._renderSearchButton(disposables);
+		// Status badge (separate rectangle on right) - always rendered for smooth transitions
+		this._renderStatusBadge(disposables, activeSessions, unreadSessions);
 	}
 
-	private _renderSearchButton(disposables: DisposableStore): void {
-		if (!this._container) {
+	// #endregion
+
+	// #region Reusable Components
+
+	/**
+	 * Render the search button. If parent is provided, appends to parent; otherwise appends to container.
+	 */
+	private _renderSearchButton(disposables: DisposableStore, parent?: HTMLElement): void {
+		const container = parent ?? this._container;
+		if (!container) {
 			return;
 		}
 
 		const searchButton = $('span.agent-status-search');
-		reset(searchButton, renderIcon(Codicon.search));
+		reset(searchButton, renderIcon(Codicon.searchSparkle));
 		searchButton.setAttribute('role', 'button');
 		searchButton.setAttribute('aria-label', localize('openQuickOpen', "Open Quick Open"));
 		searchButton.tabIndex = 0;
-		this._container.appendChild(searchButton);
+		container.appendChild(searchButton);
 
 		// Setup hover
 		const hoverDelegate = getDefaultHoverDelegate('mouse');
@@ -326,6 +386,110 @@ export class AgentStatusWidget extends BaseActionViewItem {
 		}));
 	}
 
+	/**
+	 * Render the status badge showing in-progress and/or unread session counts.
+	 * Shows split UI with both indicators when both types exist.
+	 * Always renders for smooth fade transitions - uses visibility classes.
+	 */
+	private _renderStatusBadge(disposables: DisposableStore, activeSessions: IAgentSession[], unreadSessions: IAgentSession[]): void {
+		if (!this._container) {
+			return;
+		}
+
+		const hasActiveSessions = activeSessions.length > 0;
+		const hasUnreadSessions = unreadSessions.length > 0;
+		const hasContent = hasActiveSessions || hasUnreadSessions;
+
+		const badge = $('div.agent-status-badge');
+		if (!hasContent) {
+			badge.classList.add('empty');
+		}
+		this._container.appendChild(badge);
+
+		// Unread section (blue dot + count)
+		if (hasUnreadSessions) {
+			const unreadSection = $('span.agent-status-badge-section.unread');
+			const unreadIcon = $('span.agent-status-icon');
+			reset(unreadIcon, renderIcon(Codicon.circleFilled));
+			unreadSection.appendChild(unreadIcon);
+			const unreadCount = $('span.agent-status-text');
+			unreadCount.textContent = String(unreadSessions.length);
+			unreadSection.appendChild(unreadCount);
+			badge.appendChild(unreadSection);
+		}
+
+		// In-progress section (session-in-progress icon + count)
+		if (hasActiveSessions) {
+			const activeSection = $('span.agent-status-badge-section.active');
+			const runningIcon = $('span.agent-status-icon');
+			reset(runningIcon, renderIcon(Codicon.sessionInProgress));
+			activeSection.appendChild(runningIcon);
+			const runningCount = $('span.agent-status-text');
+			runningCount.textContent = String(activeSessions.length);
+			activeSection.appendChild(runningCount);
+			badge.appendChild(activeSection);
+		}
+
+		// Setup hover with combined tooltip
+		const hoverDelegate = getDefaultHoverDelegate('mouse');
+		disposables.add(this.hoverService.setupManagedHover(hoverDelegate, badge, () => {
+			const parts: string[] = [];
+			if (hasUnreadSessions) {
+				parts.push(unreadSessions.length === 1
+					? localize('unreadSessionsTooltip1', "{0} unread session", unreadSessions.length)
+					: localize('unreadSessionsTooltip', "{0} unread sessions", unreadSessions.length));
+			}
+			if (hasActiveSessions) {
+				parts.push(activeSessions.length === 1
+					? localize('activeSessionsTooltip1', "{0} session in progress", activeSessions.length)
+					: localize('activeSessionsTooltip', "{0} sessions in progress", activeSessions.length));
+			}
+			return parts.join(', ');
+		}));
+	}
+
+	/**
+	 * Render the escape button for exiting session projection mode.
+	 */
+	private _renderEscapeButton(disposables: DisposableStore, parent: HTMLElement): void {
+		const escButton = $('span.agent-status-esc-button');
+		escButton.textContent = 'Esc';
+		escButton.setAttribute('role', 'button');
+		escButton.setAttribute('aria-label', localize('exitAgentSessionProjection', "Exit Agent Session Projection"));
+		escButton.tabIndex = 0;
+		parent.appendChild(escButton);
+
+		// Setup hover
+		const hoverDelegate = getDefaultHoverDelegate('mouse');
+		disposables.add(this.hoverService.setupManagedHover(hoverDelegate, escButton, localize('exitAgentSessionProjectionTooltip', "Exit Agent Session Projection (Escape)")));
+
+		// Click handler
+		disposables.add(addDisposableListener(escButton, EventType.MOUSE_DOWN, (e) => {
+			e.preventDefault();
+			e.stopPropagation();
+			this.commandService.executeCommand(ExitAgentSessionProjectionAction.ID);
+		}));
+
+		disposables.add(addDisposableListener(escButton, EventType.CLICK, (e) => {
+			e.preventDefault();
+			e.stopPropagation();
+			this.commandService.executeCommand(ExitAgentSessionProjectionAction.ID);
+		}));
+
+		// Keyboard handler
+		disposables.add(addDisposableListener(escButton, EventType.KEY_DOWN, (e) => {
+			if (e.key === 'Enter' || e.key === ' ') {
+				e.preventDefault();
+				e.stopPropagation();
+				this.commandService.executeCommand(ExitAgentSessionProjectionAction.ID);
+			}
+		}));
+	}
+
+	// #endregion
+
+	// #region Click Handlers
+
 	/**
 	 * Handle pill click - opens the displayed session if showing progress, otherwise executes default action
 	 */
@@ -337,17 +501,21 @@ export class AgentStatusWidget extends BaseActionViewItem {
 		}
 	}
 
+	// #endregion
+
+	// #region Session Helpers
+
 	/**
-	 * Get the most recently interacted active session and its progress text.
-	 * Returns undefined session if no active sessions.
+	 * Get the session most urgently needing user attention (approval/confirmation/input).
+	 * Returns undefined if no sessions need attention.
 	 */
-	private _getMostRecentActiveSession(activeSessions: IAgentSession[]): { session: IAgentSession | undefined; progress: string | undefined } {
-		if (activeSessions.length === 0) {
+	private _getSessionNeedingAttention(attentionNeededSessions: IAgentSession[]): { session: IAgentSession | undefined; progress: string | undefined } {
+		if (attentionNeededSessions.length === 0) {
 			return { session: undefined, progress: undefined };
 		}
 
 		// Sort by most recently started request
-		const sorted = [...activeSessions].sort((a, b) => {
+		const sorted = [...attentionNeededSessions].sort((a, b) => {
 			const timeA = a.timing.lastRequestStarted ?? a.timing.created;
 			const timeB = b.timing.lastRequestStarted ?? b.timing.created;
 			return timeB - timeA;
@@ -355,7 +523,7 @@ export class AgentStatusWidget extends BaseActionViewItem {
 
 		const mostRecent = sorted[0];
 		if (!mostRecent.description) {
-			return { session: mostRecent, progress: undefined };
+			return { session: mostRecent, progress: mostRecent.label };
 		}
 
 		// Convert markdown to plain text if needed
@@ -366,6 +534,10 @@ export class AgentStatusWidget extends BaseActionViewItem {
 		return { session: mostRecent, progress };
 	}
 
+	// #endregion
+
+	// #region Label Helpers
+
 	/**
 	 * Compute the label to display, matching the command center behavior.
 	 * Includes prefix and suffix decorations (remote host, extension dev host, etc.)
@@ -419,4 +591,6 @@ export class AgentStatusWidget extends BaseActionViewItem {
 
 		return { prefix, suffix };
 	}
+
+	// #endregion
 }
diff --git a/src/vs/workbench/contrib/chat/browser/agentSessions/media/agentStatusWidget.css b/src/vs/workbench/contrib/chat/browser/agentSessions/media/agentStatusWidget.css
index 541e3bf02a5a..0b7063507a4b 100644
--- a/src/vs/workbench/contrib/chat/browser/agentSessions/media/agentStatusWidget.css
+++ b/src/vs/workbench/contrib/chat/browser/agentSessions/media/agentStatusWidget.css
@@ -76,7 +76,7 @@ Agent Status Widget - Titlebar control
 }
 
 .agent-status-pill.chat-input-mode.has-active .agent-status-label {
-	color: var(--vscode-progressBar-background);
+	color: var(--vscode-foreground);
 	opacity: 1;
 }
 
@@ -85,6 +85,22 @@ Agent Status Widget - Titlebar control
 	font-size: 8px;
 }
 
+/* Needs attention state - session requires user approval/confirmation/input */
+.agent-status-pill.chat-input-mode.needs-attention {
+	background-color: color-mix(in srgb, var(--vscode-progressBar-background) 15%, transparent);
+	border: 1px solid color-mix(in srgb, var(--vscode-progressBar-background) 50%, transparent);
+}
+
+.agent-status-pill.chat-input-mode.needs-attention:hover {
+	background-color: color-mix(in srgb, var(--vscode-progressBar-background) 25%, transparent);
+	border-color: color-mix(in srgb, var(--vscode-progressBar-background) 70%, transparent);
+}
+
+.agent-status-pill.chat-input-mode.needs-attention .agent-status-label {
+	color: var(--vscode-foreground);
+	opacity: 1;
+}
+
 /* Session mode (viewing a session) */
 .agent-status-pill.session-mode {
 	background-color: color-mix(in srgb, var(--vscode-progressBar-background) 15%, transparent);
@@ -111,7 +127,7 @@ Agent Status Widget - Titlebar control
 /* Progress label - fade in animation when showing session progress */
 .agent-status-label.has-progress {
 	animation: agentStatusFadeIn 0.3s ease-out;
-	color: var(--vscode-progressBar-background);
+	color: var(--vscode-foreground);
 	opacity: 1;
 }
 
@@ -159,6 +175,11 @@ Agent Status Widget - Titlebar control
 	align-items: center;
 	color: var(--vscode-foreground);
 	opacity: 0.7;
+	flex-shrink: 0;
+}
+
+.agent-status-send.hidden {
+	display: none;
 }
 
 .agent-status-pill.has-active .agent-status-send {
@@ -166,6 +187,28 @@ Agent Status Widget - Titlebar control
 	opacity: 1;
 }
 
+/* Left icon (sparkle default, report+count when attention needed, search on hover) */
+.agent-status-left-icon {
+	display: flex;
+	align-items: center;
+	justify-content: center;
+	gap: 3px;
+	color: var(--vscode-foreground);
+	opacity: 0.7;
+	flex-shrink: 0;
+}
+
+/* Left icon with attention - show report icon + count */
+.agent-status-left-icon.has-attention {
+	color: var(--vscode-foreground);
+	opacity: 1;
+}
+
+.agent-status-left-icon.has-attention .agent-status-attention-count {
+	font-size: 11px;
+	font-weight: 500;
+}
+
 /* Session title */
 .agent-status-title {
 	flex: 1;
@@ -208,26 +251,78 @@ Agent Status Widget - Titlebar control
 	outline-offset: 1px;
 }
 
-/* Search button (right of pill) */
+/* Search button (inside pill on left) */
 .agent-status-search {
 	display: flex;
 	align-items: center;
 	justify-content: center;
-	width: 22px;
-	height: 22px;
-	border-radius: 4px;
-	cursor: pointer;
 	color: var(--vscode-foreground);
 	opacity: 0.7;
 	-webkit-app-region: no-drag;
+	flex-shrink: 0;
 }
 
 .agent-status-search:hover {
 	opacity: 1;
-	background-color: var(--vscode-commandCenter-activeBackground, rgba(0, 0, 0, 0.1));
 }
 
 .agent-status-search:focus {
 	outline: 1px solid var(--vscode-focusBorder);
 	outline-offset: -1px;
 }
+
+/* Status badge (separate rectangle on right of pill) */
+.agent-status-badge {
+	display: flex;
+	align-items: center;
+	gap: 0;
+	height: 22px;
+	border-radius: 6px;
+	overflow: hidden;
+	background-color: color-mix(in srgb, var(--vscode-progressBar-background) 15%, transparent);
+	border: 1px solid color-mix(in srgb, var(--vscode-progressBar-background) 50%, transparent);
+	flex-shrink: 0;
+	-webkit-app-region: no-drag;
+	transition: opacity 0.2s ease-in-out, background-color 0.2s ease-in-out, border-color 0.2s ease-in-out;
+	opacity: 1;
+	/* Reserve minimum width to prevent layout shift */
+	min-width: 50px;
+	justify-content: center;
+}
+
+/* Empty badge - invisible but reserves space to prevent layout shift */
+.agent-status-badge.empty {
+	opacity: 0;
+	pointer-events: none;
+	background-color: transparent;
+	border-color: transparent;
+}
+
+/* Badge section (for split UI) */
+.agent-status-badge-section {
+	display: flex;
+	align-items: center;
+	gap: 4px;
+	padding: 0 8px;
+	height: 100%;
+}
+
+/* Separator between sections */
+.agent-status-badge-section + .agent-status-badge-section {
+	border-left: 1px solid color-mix(in srgb, var(--vscode-progressBar-background) 40%, transparent);
+}
+
+/* Unread section styling */
+.agent-status-badge-section.unread {
+	color: var(--vscode-foreground);
+}
+
+.agent-status-badge-section.unread .agent-status-icon {
+	font-size: 8px;
+	color: var(--vscode-notificationsInfoIcon-foreground);
+}
+
+/* Active/in-progress section styling */
+.agent-status-badge-section.active {
+	color: var(--vscode-foreground);
+}
diff --git a/src/vs/workbench/contrib/chat/browser/chatSessions/chatSessions.contribution.ts b/src/vs/workbench/contrib/chat/browser/chatSessions/chatSessions.contribution.ts
index c9510266cbcd..3fb5d98607c7 100644
--- a/src/vs/workbench/contrib/chat/browser/chatSessions/chatSessions.contribution.ts
+++ b/src/vs/workbench/contrib/chat/browser/chatSessions/chatSessions.contribution.ts
@@ -756,6 +756,9 @@ export class ChatSessionsService extends Disposable implements IChatSessionsServ
 
 	public async getChatSessionItems(providersToResolve: readonly string[] | undefined, token: CancellationToken): Promise<Array<{ readonly chatSessionType: string; readonly items: IChatSessionItem[] }>> {
 		const results: Array<{ readonly chatSessionType: string; readonly items: IChatSessionItem[] }> = [];
+		const resolvedProviderTypes = new Set<string>();
+
+		// First, iterate over extension point contributions
 		for (const contrib of this.getAllChatSessionContributions()) {
 			if (providersToResolve && !providersToResolve.includes(contrib.type)) {
 				continue; // skip: not considered for resolving
@@ -774,6 +777,7 @@ export class ChatSessionsService extends Disposable implements IChatSessionsServ
 				const providerSessions = await raceCancellationError(provider.provideChatSessionItems(token), token);
 				this._logService.trace(`[ChatSessionsService] Resolved ${providerSessions.length} sessions for provider ${provider.chatSessionType}`);
 				results.push({ chatSessionType: provider.chatSessionType, items: providerSessions });
+				resolvedProviderTypes.add(provider.chatSessionType);
 			} catch (error) {
 				// Log error but continue with other providers
 				this._logService.error(`[ChatSessionsService] Failed to resolve sessions for provider ${provider.chatSessionType}`, error);
@@ -781,6 +785,26 @@ export class ChatSessionsService extends Disposable implements IChatSessionsServ
 			}
 		}
 
+		// Also include registered items providers that don't have corresponding contributions
+		// (e.g., the local session provider which is built-in and not an extension contribution)
+		for (const [chatSessionType, provider] of this._itemsProviders) {
+			if (resolvedProviderTypes.has(chatSessionType)) {
+				continue; // already resolved via contribution
+			}
+			if (providersToResolve && !providersToResolve.includes(chatSessionType)) {
+				continue; // skip: not considered for resolving
+			}
+
+			try {
+				const providerSessions = await raceCancellationError(provider.provideChatSessionItems(token), token);
+				this._logService.trace(`[ChatSessionsService] Resolved ${providerSessions.length} sessions for built-in provider ${chatSessionType}`);
+				results.push({ chatSessionType, items: providerSessions });
+			} catch (error) {
+				this._logService.error(`[ChatSessionsService] Failed to resolve sessions for built-in provider ${chatSessionType}`, error);
+				continue;
+			}
+		}
+
 		return results;
 	}