I’m experiencing the same issue, and it seems to be related to what I described here: Agent loses terminal output - #42 by Green .
In my case, the only thing that helps is deleting the entire directory located at
AppData\Roaming\Cursor\User\workspaceStorage, which of course removes the whole chat history.
After deleting the folder, Cursor works for a while, but then the problem eventually returns.
The issue isn’t just about capturing terminal output — the main problem is that Cursor is unable to run tools at all. For example, try building a project: when everything is working, it takes several seconds. But when Cursor is “broken,” it instantly returns a “success” response even though the build never actually starts.