[BUG] "Error: Claude Code process exited with code 1" with VSCode extension 2.0.0 on Windows 11

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?

Since getting updated to the 2.0.0 Claude Code extension for VSCode, I can't get Claude Code to load. It just displays a banner saying "Error: Claude Code process exited with code 1" and all prompts just spin endlessly. If I downgrade to 1.0.127, I lose the new UI but everything works as expected.

I installed Claude Code using the npm -g i method via Git Bash. I am on the latest version of VSCode, Windows 11, Node, and Claude Code.

What Should Happen?

Claude Code extension should load without crashing

Error Messages/Logs

Error: Claude Code process exited with code 1

Steps to Reproduce

1. Update to Claude Code for VS Code v2.0.0
2. Load the extension
3. Observe the extension failing to load

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

VS Code Extension 1.0.127, Claude Code 2.0.0

Claude Code Version

2.0.0

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

VS Code integrated terminal

Additional Information

_No response_