The issue appears to be resolved now, as of the version info below. Thank you Cursor team and @deanrie .
Version: 3.16.17 (user setup)
VS Code Extension API: 1.128.0
Commit: 6b2afae0257df2bb5e1835f15165dc2f0de056b0
Date: 2026-08-14T01:41:12.803Z
Layout: IDE
Build Type: Stable
Release Track: Default
Electron: 40.10.3
Chromium: 144.0.7559.236
Node.js: 24.15.0
V8: 14.4.258.32-electron.0
xterm.js: 6.1.0-beta.291
OS: Windows_NT x64 10.0.26200