diff --git a/packages/cli/src/ui/hooks/useApprovalModeIndicator.test.ts b/packages/cli/src/ui/hooks/useApprovalModeIndicator.test.ts
index 08ddd362f7d..75d39a27845 100644
--- a/packages/cli/src/ui/hooks/useApprovalModeIndicator.test.ts
+++ b/packages/cli/src/ui/hooks/useApprovalModeIndicator.test.ts
@@ -145,7 +145,7 @@ describe('useApprovalModeIndicator', () => {
       }),
     );
     expect(result.current).toBe(ApprovalMode.AUTO_EDIT);
-    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(1);
+    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(2);
   });
 
   it('should initialize with ApprovalMode.DEFAULT if config.getApprovalMode returns ApprovalMode.DEFAULT', () => {
@@ -157,7 +157,7 @@ describe('useApprovalModeIndicator', () => {
       }),
     );
     expect(result.current).toBe(ApprovalMode.DEFAULT);
-    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(1);
+    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(2);
   });
 
   it('should initialize with ApprovalMode.YOLO if config.getApprovalMode returns ApprovalMode.YOLO', () => {
@@ -169,7 +169,8 @@ describe('useApprovalModeIndicator', () => {
       }),
     );
     expect(result.current).toBe(ApprovalMode.YOLO);
-    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(1);
+    // Hook calls getApprovalMode twice on mount: (1) for useState initial value, (2) in effect that captures "mode at CLI open" for Plan exit restore
+    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(2);
   });
 
   it('should cycle the indicator and update config when Shift+Tab or Ctrl+Y is pressed', () => {
@@ -202,7 +203,7 @@ describe('useApprovalModeIndicator', () => {
     );
     expect(result.current).toBe(ApprovalMode.YOLO);
 
-    // Shift+Tab cycles back to AUTO_EDIT (from YOLO)
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.YOLO);
     act(() => {
       capturedUseKeypressHandler({
         name: 'tab',
@@ -210,11 +211,11 @@ describe('useApprovalModeIndicator', () => {
       } as Key);
     });
     expect(mockConfigInstance.setApprovalMode).toHaveBeenCalledWith(
-      ApprovalMode.AUTO_EDIT,
+      ApprovalMode.DEFAULT,
     );
-    expect(result.current).toBe(ApprovalMode.AUTO_EDIT);
+    expect(result.current).toBe(ApprovalMode.DEFAULT);
 
-    // Ctrl+Y toggles YOLO
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.DEFAULT);
     act(() => {
       capturedUseKeypressHandler({ name: 'y', ctrl: true } as Key);
     });
@@ -223,7 +224,7 @@ describe('useApprovalModeIndicator', () => {
     );
     expect(result.current).toBe(ApprovalMode.YOLO);
 
-    // Shift+Tab from YOLO jumps to AUTO_EDIT
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.YOLO);
     act(() => {
       capturedUseKeypressHandler({
         name: 'tab',
@@ -231,9 +232,9 @@ describe('useApprovalModeIndicator', () => {
       } as Key);
     });
     expect(mockConfigInstance.setApprovalMode).toHaveBeenCalledWith(
-      ApprovalMode.AUTO_EDIT,
+      ApprovalMode.DEFAULT,
     );
-    expect(result.current).toBe(ApprovalMode.AUTO_EDIT);
+    expect(result.current).toBe(ApprovalMode.DEFAULT);
   });
 
   it('should not toggle if only one key or other keys combinations are pressed', () => {
@@ -316,7 +317,7 @@ describe('useApprovalModeIndicator', () => {
       addItem: vi.fn(),
     });
     expect(result.current).toBe(ApprovalMode.AUTO_EDIT);
-    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(3);
+    expect(mockConfigInstance.getApprovalMode).toHaveBeenCalledTimes(4);
   });
 
   describe('in untrusted folders', () => {
@@ -679,7 +680,7 @@ describe('useApprovalModeIndicator', () => {
       capturedUseKeypressHandler({ name: 'y', ctrl: true } as Key);
     });
 
-    // Switch to AUTO_EDIT
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.YOLO);
     act(() => {
       capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
     });
@@ -691,12 +692,12 @@ describe('useApprovalModeIndicator', () => {
     );
     expect(mockOnApprovalModeChange).toHaveBeenNthCalledWith(
       2,
-      ApprovalMode.AUTO_EDIT,
+      ApprovalMode.DEFAULT,
     );
   });
 
-  it('should cycle to PLAN when allowPlanMode is true', () => {
-    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.AUTO_EDIT);
+  it('should cycle to PLAN when allowPlanMode is true (default sequence: DEFAULT -> PLAN)', () => {
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.DEFAULT);
 
     renderHook(() =>
       useApprovalModeIndicator({
@@ -706,7 +707,6 @@ describe('useApprovalModeIndicator', () => {
       }),
     );
 
-    // AUTO_EDIT -> PLAN
     act(() => {
       capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
     });
@@ -734,4 +734,93 @@ describe('useApprovalModeIndicator', () => {
       ApprovalMode.DEFAULT,
     );
   });
+
+  it('should restore YOLO when exiting Plan via Shift+Tab after YOLO -> DEFAULT -> AUTO_EDIT -> PLAN (allowPlanMode true)', () => {
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.YOLO);
+
+    const { result } = renderHook(() =>
+      useApprovalModeIndicator({
+        config: mockConfigInstance as unknown as ActualConfigType,
+        addItem: vi.fn(),
+        allowPlanMode: true,
+      }),
+    );
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenCalledWith(
+      ApprovalMode.DEFAULT,
+    );
+    expect(result.current).toBe(ApprovalMode.DEFAULT);
+
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.DEFAULT);
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenCalledWith(
+      ApprovalMode.AUTO_EDIT,
+    );
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.AUTO_EDIT);
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenCalledWith(
+      ApprovalMode.PLAN,
+    );
+    expect(result.current).toBe(ApprovalMode.PLAN);
+
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.PLAN);
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenCalledWith(
+      ApprovalMode.YOLO,
+    );
+    expect(result.current).toBe(ApprovalMode.YOLO);
+  });
+
+  it('should complete default sequence: DEFAULT then PLAN then AUTO_EDIT then DEFAULT when allowPlanMode is true', () => {
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.DEFAULT);
+
+    const { result } = renderHook(() =>
+      useApprovalModeIndicator({
+        config: mockConfigInstance as unknown as ActualConfigType,
+        addItem: vi.fn(),
+        allowPlanMode: true,
+      }),
+    );
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenNthCalledWith(
+      1,
+      ApprovalMode.PLAN,
+    );
+    expect(result.current).toBe(ApprovalMode.PLAN);
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.PLAN);
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenNthCalledWith(
+      2,
+      ApprovalMode.AUTO_EDIT,
+    );
+    expect(result.current).toBe(ApprovalMode.AUTO_EDIT);
+    mockConfigInstance.getApprovalMode.mockReturnValue(ApprovalMode.AUTO_EDIT);
+
+    act(() => {
+      capturedUseKeypressHandler({ name: 'tab', shift: true } as Key);
+    });
+    expect(mockConfigInstance.setApprovalMode).toHaveBeenNthCalledWith(
+      3,
+      ApprovalMode.DEFAULT,
+    );
+    expect(result.current).toBe(ApprovalMode.DEFAULT);
+  });
 });
diff --git a/packages/cli/src/ui/hooks/useApprovalModeIndicator.ts b/packages/cli/src/ui/hooks/useApprovalModeIndicator.ts
index 1b5076027fd..e7c66a5a9ca 100644
--- a/packages/cli/src/ui/hooks/useApprovalModeIndicator.ts
+++ b/packages/cli/src/ui/hooks/useApprovalModeIndicator.ts
@@ -4,7 +4,7 @@
  * SPDX-License-Identifier: Apache-2.0
  */
 
-import { useState, useEffect } from 'react';
+import { useState, useEffect, useRef } from 'react';
 import {
   ApprovalMode,
   type Config,
@@ -32,11 +32,20 @@ export function useApprovalModeIndicator({
 }: UseApprovalModeIndicatorArgs): ApprovalMode {
   const currentConfigValue = config.getApprovalMode();
   const [showApprovalMode, setApprovalMode] = useState(currentConfigValue);
+  const initialModeRef = useRef<ApprovalMode | null>(null);
 
   useEffect(() => {
     setApprovalMode(currentConfigValue);
   }, [currentConfigValue]);
 
+  useEffect(() => {
+    if (initialModeRef.current === null) {
+      const mode = config.getApprovalMode();
+      initialModeRef.current =
+        mode === ApprovalMode.PLAN ? ApprovalMode.DEFAULT : mode;
+    }
+  }, [config]);
+
   useKeypress(
     (key) => {
       let nextApprovalMode: ApprovalMode | undefined;
@@ -72,20 +81,29 @@ export function useApprovalModeIndicator({
             : ApprovalMode.YOLO;
       } else if (keyMatchers[Command.CYCLE_APPROVAL_MODE](key)) {
         const currentMode = config.getApprovalMode();
+        const initial = initialModeRef.current ?? ApprovalMode.DEFAULT;
+        const fromYolo = initial === ApprovalMode.YOLO;
+
         switch (currentMode) {
           case ApprovalMode.DEFAULT:
-            nextApprovalMode = ApprovalMode.AUTO_EDIT;
+            nextApprovalMode =
+              allowPlanMode && !fromYolo
+                ? ApprovalMode.PLAN
+                : ApprovalMode.AUTO_EDIT;
             break;
           case ApprovalMode.AUTO_EDIT:
-            nextApprovalMode = allowPlanMode
-              ? ApprovalMode.PLAN
-              : ApprovalMode.DEFAULT;
+            nextApprovalMode =
+              fromYolo && allowPlanMode
+                ? ApprovalMode.PLAN
+                : ApprovalMode.DEFAULT;
             break;
           case ApprovalMode.PLAN:
-            nextApprovalMode = ApprovalMode.DEFAULT;
+            nextApprovalMode = fromYolo
+              ? ApprovalMode.YOLO
+              : ApprovalMode.AUTO_EDIT;
             break;
           case ApprovalMode.YOLO:
-            nextApprovalMode = ApprovalMode.AUTO_EDIT;
+            nextApprovalMode = ApprovalMode.DEFAULT;
             break;
           default:
         }
@@ -94,10 +112,7 @@ export function useApprovalModeIndicator({
       if (nextApprovalMode) {
         try {
           config.setApprovalMode(nextApprovalMode);
-          // Update local state immediately for responsiveness
           setApprovalMode(nextApprovalMode);
-
-          // Notify the central handler about the approval mode change
           onApprovalModeChange?.(nextApprovalMode);
         } catch (e) {
           if (addItem) {