diff --git a/crates/terminal_view/src/terminal_view.rs b/crates/terminal_view/src/terminal_view.rs
index f3188f0f3ab..98b37eee576 100644
--- a/crates/terminal_view/src/terminal_view.rs
+++ b/crates/terminal_view/src/terminal_view.rs
@@ -754,7 +754,14 @@ impl TerminalView {
     }
 
     pub fn should_show_cursor(&self, focused: bool, cx: &mut Context<Self>) -> bool {
-        // Always show cursor when not focused or in special modes
+        // Hide cursor when in embedded mode and not focused (read-only output like Agent panel)
+        if let TerminalMode::Embedded { .. } = &self.mode {
+            if !focused {
+                return false;
+            }
+        }
+
+        // For Standalone mode: always show cursor when not focused or in special modes
         if !focused
             || self
                 .terminal