[BUG] VSCode extension v2.0.31 does not respect CLAUDE_CODE_USE_BEDROCK in .claude/settings.json

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Claude Code VSCode extension (version 2.0.31) does not read CLAUDE_CODE_USE_BEDROCK environment variable from .claude/settings.json file.

It displays a sign-in screen even when CLAUDE_CODE_USE_BEDROCK is set to 1 in .claude/settings.json.

What Should Happen?

Claude Code should respect the CLAUDE_CODE_USE_BEDROCK environment variable from .claude/settings.json, and no sign-in screen should appear.

Error Messages/Logs

Steps to Reproduce

I've created a PoC repository demonstrating this issue with DevContainer definition.

1. Clone the PoC repository.
2. Open the repository with VSCode in without-vscode-setting DevContainer.
3. Open Claude Code Panel.

or, you can confirm this behavior without using the repository above.
Just create .claude/settings.json with the following content, and open Claude Code Panel from VSCode extension.

{
    "env": {
        "CLAUDE_CODE_USE_BEDROCK": "1"
    }
}

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

1.x

Claude Code Version

2.0.31

Platform

AWS Bedrock

Operating System

macOS

Terminal/Shell

VS Code integrated terminal

Additional Information

• If CLAUDE_CODE_USE_BEDROCK is defined in VS Code settings (claudeCode.environmentVariables), it works as expected (no sign-in screen). You can confirm this by opening the PoC repository with the with-vscode-setting Dev Container.
• When launching the CLI version from the shell, CLAUDE_CODE_USE_BEDROCK is correctly loaded from .claude/settings.json.