This is a known limitation — the Agent Window (Glass) doesn’t support WSL connections yet. The extension install prompt loops because Glass doesn’t activate the WSL extension after installing it.
Workaround: Use the Editor Window for WSL projects. You can switch to it from the Agent Window via Open Editor Window, or launch Cursor in classic mode:
cursor --classic
In the Editor Window, WSL works as usual.
More discussion in this related thread: Cursor 3: Extension ‘WSL’ is required to open the remote window
The team is aware. No ETA yet, but every report helps with prioritization.