Session locks with 'Prompt is too long' — blocks input, wastes tokens

Bug Description

When a conversation reaches the context limit, the session displays "Prompt is too long" and becomes completely locked. The user cannot type, send messages, or recover. This forces starting a new session, losing all context and wasting tokens from the previous conversation.

Steps to Reproduce

1. Have a long conversation with multiple tool calls (file reads, greps, edits)
2. Session hits the prompt size limit
3. UI shows "Prompt is too long"
4. Input is blocked — cannot send any new messages

Problems

• Input blocked: Cannot type or send anything after the error
• Token waste: All tokens spent in the session are lost with no way to continue
• No recovery: No option to compress context, trim history, or gracefully continue
• Re-explanation needed: User must start fresh and re-explain the entire task context

Expected Behavior

• Auto-compress older messages and allow conversation to continue
• Or provide actionable recovery options (compress context, start fresh with summary, etc.)
• At minimum, don't block the input field

Environment

• Client: VSCode extension
• OS: macOS (Darwin 25.2.0)
• Model: Claude Opus 4.6