[BUG] Tool approval settings ignored causing excessive approval prompting

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?

As of this morning, my carefully-crafted project settings that allow certain tools/invocations but reject dangerous ones are being ignored, causing my workflow to slow to a crawl because previously auto-approved tool invocations are now prompting for approval.

What Should Happen?

The settings should be applied properly and approved tools shouldn't require prompts.

Error Messages/Logs

Steps to Reproduce

1. Put an approved tool into project settings' permissions.allow (say, like mcp__figma__get_figma_data).
2. Ask the agent to use that tool
3. Receive erroneous approval prompt

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

2.1.211

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

VS Code integrated terminal

Additional Information

I've attempted to downgrade to 2.10.210 since this was working fine yesterday, but that doesn't seem to be helping.