Hello, I managed to unblock the situation, but I had to use a brute force workaround.
The Fix: I simply renamed my project folder in the OS (e.g., from MyProject to MyProject_v2) and opened it as a fresh directory in Cursor. The Agent started working immediately.
Since Cursor treats this as a new project, I have lost all my previous chat history and context which is quite frustrating.
This confirms that the root cause was definitely a corrupted local index/cache specific to that folder (matching the Extension host terminated unexpectedly: Code 5 error in my logs).
For the future, is there a specific command or button to forcefully purge/reset the local index for a workspace without having to rename the directory and lose our chat history? The standard Resync Index didn’t seem to touch the corrupted file.