Hey, this is a known issue. The cursor.diffs.useCharacterLevelDiffs setting was intentionally removed back in version 2.0.60 because it was too often showing inaccurate diffs. That’s why it now shows up as an unknown setting.
You’re right that character-level diffs still work in the Chat window, but they were intentionally removed from the editor diff view.
This is a very popular feature request that a lot of users want back. Here’s the main thread with lots of discussion and votes: cursor.diffs.useCharacterLevelDiffs
I’d recommend upvoting the feature request here to help with prioritization: Agent diff review: show character-level (word-level) changes, not just changed lines
The team knows there’s strong demand for this. There’s no ETA yet, but messages like yours help with prioritization.