diff --git a/src/jsc/bindings/NodeVMModule.cpp b/src/jsc/bindings/NodeVMModule.cpp
index 23292142dc3..c587d37a848 100644
--- a/src/jsc/bindings/NodeVMModule.cpp
+++ b/src/jsc/bindings/NodeVMModule.cpp
@@ -106,14 +106,20 @@ JSValue NodeVMModule::evaluate(JSGlobalObject* globalObject, uint32_t timeout, b
             std::ignore = scope.exception();
             if (vm.hasTerminationRequest() || vm.hasPendingTerminationException()) {
                 vm.drainMicrotasksForGlobalObject(nodeVmGlobalObject);
-                DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
-                vm.clearHasTerminationRequest();
                 if (getSigintReceived()) {
+                    DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
+                    vm.clearHasTerminationRequest();
                     setSigintReceived(false);
                     throwError(globalObject, scope, ErrorCode::ERR_SCRIPT_EXECUTION_INTERRUPTED, "Script execution was interrupted by `SIGINT`"_s);
-                } else {
+                } else if (timeout != 0) {
+                    DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
+                    vm.clearHasTerminationRequest();
                     throwError(globalObject, scope, ErrorCode::ERR_SCRIPT_EXECUTION_TIMEOUT, makeString("Script execution timed out after "_s, timeout, "ms"_s));
                 }
+                // else: termination came from outside this module evaluation
+                // (the bun:test watchdog around the test body,
+                // Worker.terminate(), etc.). Leave the TerminationException
+                // pending so it propagates to whoever armed it.
                 return {};
             }
         }
@@ -246,16 +252,20 @@ JSValue NodeVMModule::evaluate(JSGlobalObject* globalObject, uint32_t timeout, b
     std::ignore = scope.exception();
     if (vm.hasTerminationRequest() || vm.hasPendingTerminationException()) {
         vm.drainMicrotasksForGlobalObject(nodeVmGlobalObject);
-        DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
-        vm.clearHasTerminationRequest();
         if (getSigintReceived()) {
+            DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
+            vm.clearHasTerminationRequest();
             setSigintReceived(false);
             throwError(globalObject, scope, ErrorCode::ERR_SCRIPT_EXECUTION_INTERRUPTED, "Script execution was interrupted by `SIGINT`"_s);
         } else if (timeout != 0) {
+            DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
+            vm.clearHasTerminationRequest();
             throwError(globalObject, scope, ErrorCode::ERR_SCRIPT_EXECUTION_TIMEOUT, makeString("Script execution timed out after "_s, timeout, "ms"_s));
-        } else {
-            RELEASE_ASSERT_NOT_REACHED_WITH_MESSAGE("vm.SourceTextModule evaluation terminated due neither to SIGINT nor to timeout");
         }
+        // else: termination came from outside this module evaluation (the
+        // bun:test watchdog around the test body, Worker.terminate(), etc.).
+        // Leave the TerminationException pending so it propagates to
+        // whoever armed it; VM_RETURN_IF_EXCEPTION below bails out.
     } else {
         setSigintReceived(false);
     }
diff --git a/src/jsc/bindings/NodeVMScript.cpp b/src/jsc/bindings/NodeVMScript.cpp
index 90d1df51b52..edbf1aec920 100644
--- a/src/jsc/bindings/NodeVMScript.cpp
+++ b/src/jsc/bindings/NodeVMScript.cpp
@@ -288,17 +288,23 @@ static bool checkForTermination(JSC::VM& vm, JSC::JSGlobalObject* globalObject,
         // The termination may have fired inside an afterEvaluate microtask
         // checkpoint, leaving the termination exception pending; clear it so
         // the ERR_SCRIPT_EXECUTION_* error below replaces it.
-        if (vm.hasPendingTerminationException())
-            DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
-        vm.clearHasTerminationRequest();
+        auto clearPendingTermination = [&] {
+            if (vm.hasPendingTerminationException())
+                DECLARE_TOP_EXCEPTION_SCOPE(vm).clearException();
+            vm.clearHasTerminationRequest();
+        };
         if (script->getSigintReceived()) {
+            clearPendingTermination();
             script->setSigintReceived(false);
             throwError(globalObject, scope, ErrorCode::ERR_SCRIPT_EXECUTION_INTERRUPTED, "Script execution was interrupted by `SIGINT`"_s);
         } else if (timeout) {
+            clearPendingTermination();
             throwError(globalObject, scope, ErrorCode::ERR_SCRIPT_EXECUTION_TIMEOUT, makeString("Script execution timed out after "_s, *timeout, "ms"_s));
-        } else {
-            RELEASE_ASSERT_NOT_REACHED_WITH_MESSAGE("vm.Script terminated due neither to SIGINT nor to timeout");
         }
+        // else: termination came from outside this Script (the bun:test
+        // watchdog around the test body, Worker.terminate(), etc.). Leave
+        // the request set and the TerminationException in the scope so it
+        // propagates to whoever armed it.
         return true;
     }
 
diff --git a/src/jsc/bindings/bindings.cpp b/src/jsc/bindings/bindings.cpp
index 51044d19fe4..9452b428f6f 100644
--- a/src/jsc/bindings/bindings.cpp
+++ b/src/jsc/bindings/bindings.cpp
@@ -2870,8 +2870,15 @@ void JSC__VM__collectAsync(JSC::VM* vm)
 extern "C" bool JSC__VM__hasExecutionTimeLimit(JSC::VM* vm)
 {
     JSC::JSLockHolder locker(vm);
-    if (vm->watchdog()) {
-        return vm->watchdog()->hasTimeLimit();
+    if (auto* watchdog = vm->watchdog()) {
+        // The bun:test runner relaxes the watchdog to INT32_MAX seconds
+        // between test callbacks (see run_test_callback in bun_test.rs)
+        // instead of clearing it, to keep Watchdog's internal state
+        // consistent across stale dispatchAfter callbacks. Treat that idle
+        // sentinel as "no limit" so it doesn't permanently opt spawnSync
+        // out of its blocking fast path; no real caller sets a limit in
+        // this range.
+        return watchdog->hasTimeLimit() && watchdog->getTimeLimit() < WTF::Seconds { static_cast<double>(INT32_MAX) };
     }
 
     return false;
@@ -4922,6 +4929,21 @@ void JSC__VM__setExecutionTimeLimit(JSC::VM* vm, double limit)
 {
     JSC::JSLockHolder locker(vm);
     JSC::Watchdog& watchdog = vm->ensureWatchdog();
+    // When called from inside an existing VMEntryScope, start the watchdog
+    // timer now: the scope's own Watchdog::enteredVM() only runs on the
+    // outermost entry, so if the watchdog is being created for the first
+    // time here, m_hasEnteredVM would otherwise stay false and the timer
+    // would never arm. Mirrors setupWatchdog() in NodeVMScript.cpp.
+    //
+    // When called from *outside* any VMEntryScope (the test runner arming
+    // before callback.call()), leave m_hasEnteredVM alone — the next
+    // VMEntryScope's setUpSlow() will call enteredVM() and start the timer.
+    // Forcing it true here with no scope active would make
+    // Watchdog::isActive() lie, and VMTraps::handleTraps() would then
+    // dereference the null vm.entryScope when servicing a stale
+    // NeedWatchdogCheck trap from native code.
+    if (vm->entryScope)
+        watchdog.enteredVM();
     watchdog.setTimeLimit(WTF::Seconds { limit });
 }
 
diff --git a/src/runtime/test_runner/Execution.rs b/src/runtime/test_runner/Execution.rs
index a803a5a1fc8..d5f5deb278a 100644
--- a/src/runtime/test_runner/Execution.rs
+++ b/src/runtime/test_runner/Execution.rs
@@ -301,9 +301,6 @@ impl Execution {
     pub fn handle_timeout(&mut self, global_this: &JSGlobalObject) -> JsResult<()> {
         let _g = group_begin!();
 
-        // if the concurrent group has one sequence and the sequence has an active entry that has timed out,
-        //   kill any dangling processes
-        // when using test.concurrent(), we can't do this because it could kill multiple tests at once.
         if let Some(current_group) = self.active_group() {
             // reshaped for borrowck — capture range, drop &mut group, re-borrow sequences
             let (start, end) = (current_group.sequence_start, current_group.sequence_end);
@@ -315,16 +312,7 @@ impl Execution {
                     let entry = unsafe { entry.as_ref() };
                     let now = Timespec::now_force_real_time();
                     if entry.timespec.order(&now) == core::cmp::Ordering::Less {
-                        // SAFETY: bun_vm() returns the live per-thread VM.
-                        let kill_count = global_this.bun_vm().as_mut().auto_killer.kill();
-                        if kill_count.processes > 0 {
-                            bun_core::pretty_errorln!(
-                                "<d>killed {} dangling process{}<r>",
-                                kill_count.processes,
-                                if kill_count.processes != 1 { "es" } else { "" },
-                            );
-                            bun_core::Output::flush();
-                        }
+                        kill_dangling_processes(end - start, global_this);
                     }
                 }
             }
@@ -1029,7 +1017,11 @@ fn step_sequence_one(
             // SAFETY: re-deref after run_test_callback; sequence_ptr still valid (sequences is a
             // Box<[ExecutionSequence]>, never reallocated during execution).
             let sequence = unsafe { &mut *sequence_ptr.as_ptr() };
-            let _ = next_item.evaluate_timeout(sequence, now);
+            if next_item.evaluate_timeout(sequence, now) {
+                // SAFETY: group points into this.groups; read-only.
+                let g = unsafe { group.as_ref() };
+                kill_dangling_processes(g.sequence_end - g.sequence_start, global_this);
+            }
 
             // the result is available immediately; advance the sequence and run again.
             Execution::advance_sequence(buntest_ptr, sequence_ptr, group);
@@ -1070,3 +1062,26 @@ fn step_sequence_one(
         return Ok(None); // run again
     }
 }
+
+/// Kill child processes spawned by the timed-out test so they don't outlive
+/// it. Skipped under test.concurrent() because the auto-killer tracks
+/// processes globally and we'd take out other still-running tests' children.
+/// Called from both the event-loop timer path (handle_timeout) and the
+/// synchronous-return path in step_sequence_one when the JSC watchdog has
+/// interrupted a busy-looping callback — in that case the event-loop timer
+/// never fires, so this is the only chance to clean up.
+fn kill_dangling_processes(group_sequence_count: usize, global_this: &JSGlobalObject) {
+    if group_sequence_count != 1 {
+        return;
+    }
+    // SAFETY: bun_vm() returns the live per-thread VM.
+    let kill_count = global_this.bun_vm().as_mut().auto_killer.kill();
+    if kill_count.processes > 0 {
+        bun_core::pretty_errorln!(
+            "<d>killed {} dangling process{}<r>",
+            kill_count.processes,
+            if kill_count.processes != 1 { "es" } else { "" },
+        );
+        bun_core::Output::flush();
+    }
+}
diff --git a/src/runtime/test_runner/bun_test.rs b/src/runtime/test_runner/bun_test.rs
index a59d41f484d..ccf069636f4 100644
--- a/src/runtime/test_runner/bun_test.rs
+++ b/src/runtime/test_runner/bun_test.rs
@@ -1150,6 +1150,48 @@ impl BunTest {
 
         // SAFETY: `UnsafeCell`-derived; sole `&mut` at this point (before JS re-entry).
         unsafe { (*this).update_min_timeout(global_this, timeout) };
+
+        // Arm the JSC watchdog so synchronous infinite loops (e.g.
+        // `while (true);`) in the test body are interrupted. The event-loop
+        // timer above can only fire once control returns to the event loop,
+        // which never happens if the callback never yields. JSC's Watchdog
+        // schedules on a separate VMTraps queue thread and raises a
+        // TerminationException at the next safepoint; the Err arm below
+        // clears it so subsequent tests can run, and evaluate_timeout() in
+        // step_sequence_one() reports FailBecauseTimeout.
+        //
+        // The watchdog is a hang detector, not the precise timer — that's the
+        // event-loop timer's job for callbacks that yield. A one-second grace
+        // over the test deadline avoids interrupting a synchronous prologue
+        // (spawning a child, building fixtures) that would have yielded in
+        // time for the event-loop timer to handle the timeout on the next
+        // tick; without it, very short per-test timeouts would be cut off
+        // before they reach their first await.
+        //
+        // On return, the limit is relaxed to a large finite sentinel rather
+        // than cleared to noTimeLimit. Watchdog::startTimer()'s dispatchAfter
+        // can't be cancelled; if m_timeLimit were infinity then the next
+        // VMEntryScope's enteredVM() would skip startTimer (no hasTimeLimit),
+        // leaving m_cpuDeadline at the infinity exitedVM() parked it at, and
+        // when the stale dispatch fires shouldTerminate() would call
+        // startTimer(∞) and trip ASSERT(hasTimeLimit()). Keeping a finite
+        // limit makes every enteredVM() refresh m_cpuDeadline so the stale
+        // timer resolves to a harmless early return.
+        const WATCHDOG_GRACE_SECONDS: f64 = 1.0;
+        const WATCHDOG_IDLE_SECONDS: f64 = i32::MAX as f64;
+        let watchdog_armed = !timeout.eql(&Timespec::EPOCH);
+        if watchdog_armed {
+            let now = Timespec::now_force_real_time();
+            let remaining_ns: u64 = if timeout.order(&now).is_gt() { timeout.duration(&now).ns() } else { 0 };
+            let remaining_seconds = remaining_ns as f64 / bun_core::time::NS_PER_S as f64;
+            vm.jsc_vm().set_execution_time_limit(remaining_seconds + WATCHDOG_GRACE_SECONDS);
+        }
+        let _watchdog_relax = scopeguard::guard(watchdog_armed, |armed| {
+            if armed {
+                vm.jsc_vm().set_execution_time_limit(WATCHDOG_IDLE_SECONDS);
+            }
+        });
+
         let args_slice: &[JSValue] = if !done_arg.is_empty() { core::slice::from_ref(&done_arg) } else { &[] };
         let result: JSValue = match vm.event_loop_mut().run_callback_with_result_and_forcefully_drain_microtasks(
             cfg_callback,
diff --git a/test/cli/test/test-timeout-behavior.test.ts b/test/cli/test/test-timeout-behavior.test.ts
index 07e02e3f039..64452fc33db 100644
--- a/test/cli/test/test-timeout-behavior.test.ts
+++ b/test/cli/test/test-timeout-behavior.test.ts
@@ -1,7 +1,102 @@
 import { expect, test } from "bun:test";
-import { bunEnv, bunExe, isFlaky, isLinux } from "harness";
+import { bunEnv, bunExe, isFlaky, isLinux, tempDir } from "harness";
 import path from "path";
 
+// https://github.com/oven-sh/bun/issues/21277
+// A synchronous infinite loop in a test body must be interrupted by the
+// per-test timeout. The event-loop timer alone cannot fire while JS is
+// running, so the JSC watchdog is armed around the callback to raise a
+// TerminationException at the next safepoint.
+test.concurrent("synchronous infinite loop is interrupted by --timeout", async () => {
+  using dir = tempDir("timeout-sync-loop", {
+    "loop.test.ts": `
+      import { test } from "bun:test";
+      test("spins forever", () => {
+        while (true);
+      });
+      test("runs after the timed-out test", () => {});
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test", "--timeout=500", "loop.test.ts"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+  const combined = stdout + stderr;
+
+  // The spinning test is reported as a timeout (not a generic failure),
+  // and the next test in the file still runs.
+  expect(combined).toContain("(fail) spins forever");
+  expect(combined).toContain("timed out after 500ms");
+  expect(combined).toContain("(pass) runs after the timed-out test");
+  expect(exitCode).toBe(1);
+});
+
+test.concurrent("synchronous infinite loop after awaited microtask is interrupted by --timeout", async () => {
+  using dir = tempDir("timeout-sync-loop-microtask", {
+    "loop.test.ts": `
+      import { test } from "bun:test";
+      test("spins after await", async () => {
+        await Promise.resolve();
+        while (true);
+      });
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test", "--timeout=500", "loop.test.ts"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+  const combined = stdout + stderr;
+
+  expect(combined).toContain("(fail) spins after await");
+  expect(combined).toContain("timed out after 500ms");
+  expect(exitCode).toBe(1);
+});
+
+// The outer watchdog's TerminationException must propagate through
+// node:vm's Script/Module evaluation when the user didn't pass a
+// {timeout} option — NodeVMScript::checkForTermination previously
+// RELEASE_ASSERT'd that the termination came from its own watchdog.
+test.concurrent("synchronous infinite loop inside node:vm without {timeout} is interrupted", async () => {
+  using dir = tempDir("timeout-sync-loop-nodevm", {
+    "loop.test.ts": `
+      import { test } from "bun:test";
+      import vm from "node:vm";
+      test("spins inside runInThisContext", () => {
+        vm.runInThisContext("while (true);");
+      });
+      test("runs after the timed-out test", () => {});
+    `,
+  });
+
+  await using proc = Bun.spawn({
+    cmd: [bunExe(), "test", "--timeout=500", "loop.test.ts"],
+    env: bunEnv,
+    cwd: String(dir),
+    stdout: "pipe",
+    stderr: "pipe",
+  });
+
+  const [stdout, stderr, exitCode] = await Promise.all([proc.stdout.text(), proc.stderr.text(), proc.exited]);
+  const combined = stdout + stderr;
+
+  expect(combined).toContain("(fail) spins inside runInThisContext");
+  expect(combined).toContain("timed out after 500ms");
+  expect(combined).toContain("(pass) runs after the timed-out test");
+  expect(exitCode).toBe(1);
+});
+
 if (isFlaky && isLinux) {
   test.todo("processes get killed");
 } else {