[BUG] VSCode chat panel completely broken after update to 2.1.74 — "Error during execution" + exit code 126

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?

After updating the Claude Code VS Code extension to version 2.1.74, the chat panel is completely non-functional on Windows 11. Every prompt submitted in the Chat tab immediately fails with:

Error: Error during execution

Additionally, the Claude Code tab shows:

Error: Claude Code process exited with code 126

What Should Happen?

fter updating the Claude Code VS Code extension to version 2.1.74, the chat panel is completely non-functional on Windows 11. Every prompt submitted in the Chat tab immediately fails with:

Error: Error during execution

Additionally, the Claude Code tab shows:

Error: Claude Code process exited with code 126

Regression Details

• Before the update (2.1.74): "Error during execution" occurred occasionally but the chat was still usable most of the time.
• After the update to 2.1.74: The chat panel fails on every single request — it is now completely unusable.
• Claude Code CLI in the terminal works correctly — this issue is isolated to the VS Code GUI chat panel.

Steps to Reproduce

1. Install or update Claude Code VS Code extension to version 2.1.74 on Windows 11
2. Open the Claude Code chat panel in VS Code
3. Type any prompt and submit
4. Observe: "Error: Error during execution" appears immediately
5. Switch to the Claude Code tab — observe: "Error: Claude Code process exited with code 126"

Expected Behavior

The chat panel should process prompts and return responses, as it did before the update.

Actual Behavior

• Chat tab: Error: Error during execution on every prompt
• Claude Code tab: Error: Claude Code process exited with code 126
• The chat is completely non-functional

Screenshots

_[Please attach screenshots here — two errors visible: exit code 126 in Claude Code tab, "Error during execution" in Chat tab]_

Environment

| Item | Value |
|------|-------|
| Claude Code Extension Version | 2.1.74 |
| VS Code Version | _[please fill in: run 1.111.0
ce099c1ed25d9eb3076c11e4a280f3eb52b4fbeb
x64 ]_ |
| OS | Windows 11 |
| Terminal | VS Code integrated terminal |
| Auth method | Anthropic API / Claude.ai subscription |
| Claude Code CLI (terminal) | Working correctly |

Additional Notes

Exit code 126 typically indicates a permission denied or file not executable error on Unix-like systems. On Windows, this may point to a misconfigured binary path or a missing/corrupt file introduced in the 2.1.74 update — possibly related to the known sdk.mjs path issues reported in previous versions.

This is a regression — the extension worked (with occasional errors) on the previous version.

Error Messages/Logs

Steps to Reproduce

Install or update Claude Code VS Code extension to version 2.1.74 on Windows 11
Open the Claude Code chat panel in VS Code
Type any prompt and submit
Observe: "Error: Error during execution" appears immediately
Switch to the Claude Code tab — observe: "Error: Claude Code process exited with code 126"

Expected Behavior
The chat panel should process prompts and return responses, as it did before the update.
Actual Behavior

Chat tab: Error: Error during execution on every prompt
Claude Code tab: Error: Claude Code process exited with code 126
The chat is completely non-functional

<img width="508" height="967" alt="Image" src="https://github.com/user-attachments/assets/ed1e5499-27a0-42a9-893f-adaaf6a4871f" />
<img width="519" height="941" alt="Image" src="https://github.com/user-attachments/assets/b39d35b7-a02a-4e83-9dfc-72bd264c1e6e" />

Claude Model

Opus

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

1.111.0

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

VS Code integrated terminal

Additional Information

Exit code 126 typically indicates a permission denied or file not executable error on Unix-like systems. On Windows, this may point to a misconfigured binary path or a missing/corrupt file introduced in the 2.1.74 update — possibly related to the known sdk.mjs path issues reported in previous versions.
This is a regression — the extension worked (with occasional errors) on the previous version.