VS Code extension crashes with 'prompt too long' requiring restart

Bug Description

The Claude Code VS Code extension repeatedly crashes/becomes unresponsive with a "prompt too long" error, requiring a full VS Code restart to recover. This has occurred approximately 5 times over the past few days during normal usage.

Environment

• OS: Windows 11
• VS Code: Latest stable
• Claude Code: Latest version (VS Code extension)
• Model: Claude Opus 4.6
• Project size: Large UE5 game project (~19 plugins, extensive CLAUDE.md + rules + memory files)

Steps to Reproduce

1. Work in a session with a moderately large project (extensive CLAUDE.md, .claude/rules/, .claude/skills/, and memory files)
2. Conduct normal back-and-forth conversation with tool usage (file reads, edits, MCP tool calls)
3. After extended usage, the extension hits "prompt too long" and becomes unresponsive
4. Only fix is to restart VS Code entirely

Expected Behavior

The extension should handle context window limits gracefully — either by compacting/summarizing older context automatically or by providing a clear recovery path that doesn't require restarting VS Code.

Actual Behavior

The extension crashes/freezes with "prompt too long" and requires a full VS Code restart. No graceful degradation or recovery option is presented.

Impact

• Interrupts workflow requiring full restart (~30-60 seconds lost each time)
• Any unsaved conversational context is lost
• Has occurred ~5 times in ~4 days of active use
• Particularly disruptive during multi-step implementation tasks

Additional Context

The project uses auto-loaded context files (CLAUDE.md, 7 rule files in .claude/rules/, memory files) which consume a significant portion of the context window before any conversation begins. This likely contributes to hitting the limit faster than projects with less configuration.