diff --git a/packages/provider-acp/src/server/clientTerminals.test.ts b/packages/provider-acp/src/server/clientTerminals.test.ts
index 791bbc22a6a03..5955690dc6b70 100644
--- a/packages/provider-acp/src/server/clientTerminals.test.ts
+++ b/packages/provider-acp/src/server/clientTerminals.test.ts
@@ -51,6 +51,52 @@ describe("AcpClientTerminals", () => {
     ),
   );
 
+  it.effect("preserves UTF-8 when stderr interleaves a split stdout character", () =>
+    Effect.gen(function* () {
+      const stdoutStarted = yield* Deferred.make<void>();
+      const stderrWritten = yield* Deferred.make<void>();
+      const child = ChildProcessSpawner.makeHandle({
+        pid: ChildProcessSpawner.ProcessId(1),
+        exitCode: Effect.succeed(ChildProcessSpawner.ExitCode(0)),
+        isRunning: Effect.succeed(false),
+        kill: () => Effect.void,
+        stdin: Sink.drain,
+        stdout: Stream.make(new Uint8Array([0xe2])).pipe(
+          Stream.concat(Stream.fromEffectDrain(Deferred.succeed(stdoutStarted, undefined))),
+          Stream.concat(Stream.fromEffectDrain(Deferred.await(stderrWritten))),
+          Stream.concat(Stream.make(new Uint8Array([0x82, 0xac]))),
+        ),
+        stderr: Stream.fromEffectDrain(Deferred.await(stdoutStarted)).pipe(
+          Stream.concat(Stream.make(new Uint8Array([0x58]))),
+          Stream.concat(Stream.fromEffectDrain(Deferred.succeed(stderrWritten, undefined))),
+        ),
+        all: Stream.empty,
+        getInputFd: () => Sink.drain,
+        getOutputFd: () => Stream.empty,
+        unref: Effect.succeed(Effect.void),
+      });
+      const terminals = yield* makeAcpClientTerminals({ defaultCwd: process.cwd() }).pipe(
+        Effect.provideService(
+          ChildProcessSpawner.ChildProcessSpawner,
+          ChildProcessSpawner.make(() => Effect.succeed(child)),
+        ),
+      );
+      yield* Effect.addFinalizer(() => terminals.disposeAll);
+      const terminal = yield* terminals.create({ sessionId: "session", command: "fixture" });
+      const request = { sessionId: "session", ...terminal };
+      yield* terminals.waitForExit(request);
+
+      const output = yield* terminals.output(request);
+      expect(output.output).toContain("€");
+      expect(output.output).toContain("X");
+      expect(output.output).not.toContain("\uFFFD");
+      expect(output.truncated).toBe(false);
+      expect(terminals.readOutputSnapshot("session", terminal.terminalId)?.output).toBe(
+        output.output,
+      );
+    }).pipe(Effect.scoped),
+  );
+
   it.live("resolves terminal environment from the requesting ACP session", () =>
     Effect.gen(function* () {
       const terminals = yield* makeAcpClientTerminals({
@@ -96,14 +142,17 @@ describe("AcpClientTerminals", () => {
     }).pipe(Effect.provide(NodeServices.layer), Effect.scoped),
   );
 
-  it.live("truncates buffered output from the beginning at the byte limit", () =>
+  it.live.each([
+    { text: "a".repeat(64) + "TAIL", limit: 16 },
+    { text: "€".repeat(16) + "TAIL", limit: 6 },
+  ])("truncates buffered output from the beginning at the $limit byte limit", ({ text, limit }) =>
     withTerminals((terminals) =>
       Effect.gen(function* () {
         const created = yield* terminals.create({
           sessionId: "session",
           command: process.execPath,
-          args: ["-e", "process.stdout.write('a'.repeat(64) + 'TAIL');"],
-          outputByteLimit: 16,
+          args: ["-e", `process.stdout.write(${JSON.stringify(text)});`],
+          outputByteLimit: limit,
         });
         yield* terminals.waitForExit({ sessionId: "session", terminalId: created.terminalId });
 
@@ -113,7 +162,8 @@ describe("AcpClientTerminals", () => {
         });
         expect(output.truncated).toBe(true);
         expect(output.output.endsWith("TAIL")).toBe(true);
-        expect(output.output.length).toBeLessThanOrEqual(16);
+        expect(Buffer.byteLength(output.output)).toBeLessThanOrEqual(limit);
+        expect(output.output).not.toContain("\uFFFD");
       }),
     ),
   );
diff --git a/packages/provider-acp/src/server/clientTerminals.ts b/packages/provider-acp/src/server/clientTerminals.ts
index 2c3278d3c144d..a62698f496351 100644
--- a/packages/provider-acp/src/server/clientTerminals.ts
+++ b/packages/provider-acp/src/server/clientTerminals.ts
@@ -1,3 +1,4 @@
+import * as Channel from "effect/Channel";
 import * as Deferred from "effect/Deferred";
 import * as Duration from "effect/Duration";
 import * as Effect from "effect/Effect";
@@ -277,6 +278,9 @@ export const makeAcpClientTerminals = Effect.fn("makeAcpClientTerminals")(functi
 
           const pump = (stream: typeof child.stdout) =>
             stream.pipe(
+              // Keep each pipe's UTF-8 decoder independent and preserve literal BOMs.
+              Stream.pipeThroughChannel(Channel.decodeText("utf-8", { ignoreBOM: true })),
+              Stream.encodeText,
               Stream.runForEach((chunk) =>
                 Effect.sync(() => {
                   appendOutput(record.buffer, chunk);