diff --git a/openhands-cli/openhands_cli/agent_chat.py b/openhands-cli/openhands_cli/agent_chat.py
index 4208169709..1782463502 100644
--- a/openhands-cli/openhands_cli/agent_chat.py
+++ b/openhands-cli/openhands_cli/agent_chat.py
@@ -29,11 +29,9 @@ from openhands_cli.user_actions import UserConfirmation, exit_session_confirmati
 from openhands_cli.user_actions.utils import get_session_prompter
 
 
-
-
 def _start_fresh_conversation(resume_conversation_id: str | None = None) -> BaseConversation:
     """Start a fresh conversation by creating a new conversation instance.
-    
+
     Handles the complete conversation setup process including settings screen
     if agent configuration is missing.
 
@@ -45,14 +43,16 @@ def _start_fresh_conversation(resume_conversation_id: str | None = None) -> Base
     """
     conversation = None
     settings_screen = SettingsScreen()
+    try:
+        conversation = setup_conversation(resume_conversation_id)
+        return conversation
+    except MissingAgentSpec:
+        # For first-time users, show the full settings flow with choice between basic/advanced
+        settings_screen.configure_settings(first_time=True)
 
-    while not conversation:
-        try:
-            conversation = setup_conversation(resume_conversation_id)
-        except MissingAgentSpec:
-            settings_screen.handle_basic_settings(escapable=False)
-    
-    return conversation
+
+    # Try once again after settings setup attempt
+    return setup_conversation(resume_conversation_id)
 
 
 def _restore_tty() -> None:
@@ -91,7 +91,14 @@ def run_cli_entry(resume_conversation_id: str | None = None) -> None:
         EOFError: If EOF is encountered
     """
 
-    conversation = _start_fresh_conversation(resume_conversation_id)
+    try:
+        conversation = _start_fresh_conversation(resume_conversation_id)
+    except MissingAgentSpec:
+        print_formatted_text(HTML('\n<yellow>Setup is required to use OpenHands CLI.</yellow>'))
+        print_formatted_text(HTML('\n<yellow>Goodbye! 👋</yellow>'))
+        return
+
+
     display_welcome(conversation.id, bool(resume_conversation_id))
 
     # Track session start time for uptime calculation
diff --git a/openhands-cli/openhands_cli/tui/settings/settings_screen.py b/openhands-cli/openhands_cli/tui/settings/settings_screen.py
index edfdecba93..4aa36cd0e2 100644
--- a/openhands-cli/openhands_cli/tui/settings/settings_screen.py
+++ b/openhands-cli/openhands_cli/tui/settings/settings_screen.py
@@ -1,5 +1,12 @@
 import os
 
+from openhands.sdk import LLM, BaseConversation, LocalFileStore
+from openhands.sdk.security.confirmation_policy import NeverConfirm
+from openhands.tools.preset.default import get_default_agent
+from prompt_toolkit import HTML, print_formatted_text
+from prompt_toolkit.shortcuts import print_container
+from prompt_toolkit.widgets import Frame, TextArea
+
 from openhands_cli.llm_utils import get_llm_metadata
 from openhands_cli.locations import AGENT_SETTINGS_PATH, PERSISTENCE_DIR
 from openhands_cli.pt_style import COLOR_GREY
@@ -16,13 +23,6 @@ from openhands_cli.user_actions.settings_action import (
     save_settings_confirmation,
     settings_type_confirmation,
 )
-from prompt_toolkit import HTML, print_formatted_text
-from prompt_toolkit.shortcuts import print_container
-from prompt_toolkit.widgets import Frame, TextArea
-
-from openhands.sdk import LLM, BaseConversation, LocalFileStore
-from openhands.sdk.security.confirmation_policy import NeverConfirm
-from openhands.tools.preset.default import get_default_agent
 
 
 class SettingsScreen:
@@ -116,9 +116,9 @@ class SettingsScreen:
 
         self.configure_settings()
 
-    def configure_settings(self):
+    def configure_settings(self, first_time=False):
         try:
-            settings_type = settings_type_confirmation()
+            settings_type = settings_type_confirmation(first_time=first_time)
         except KeyboardInterrupt:
             return
 
@@ -127,18 +127,18 @@ class SettingsScreen:
         elif settings_type == SettingsType.ADVANCED:
             self.handle_advanced_settings()
 
-    def handle_basic_settings(self, escapable=True):
+    def handle_basic_settings(self):
         step_counter = StepCounter(3)
         try:
-            provider = choose_llm_provider(step_counter, escapable=escapable)
-            llm_model = choose_llm_model(step_counter, provider, escapable=escapable)
+            provider = choose_llm_provider(step_counter, escapable=True)
+            llm_model = choose_llm_model(step_counter, provider, escapable=True)
             api_key = prompt_api_key(
                 step_counter,
                 provider,
                 self.conversation.state.agent.llm.api_key
                 if self.conversation
                 else None,
-                escapable=escapable,
+                escapable=True,
             )
             save_settings_confirmation()
         except KeyboardInterrupt:
diff --git a/openhands-cli/openhands_cli/user_actions/settings_action.py b/openhands-cli/openhands_cli/user_actions/settings_action.py
index 58632e3956..b2a0d85a37 100644
--- a/openhands-cli/openhands_cli/user_actions/settings_action.py
+++ b/openhands-cli/openhands_cli/user_actions/settings_action.py
@@ -1,9 +1,9 @@
 from enum import Enum
 
+from openhands.sdk.llm import UNVERIFIED_MODELS_EXCLUDING_BEDROCK, VERIFIED_MODELS
 from prompt_toolkit.completion import FuzzyWordCompleter
 from pydantic import SecretStr
 
-from openhands.sdk.llm import UNVERIFIED_MODELS_EXCLUDING_BEDROCK, VERIFIED_MODELS
 from openhands_cli.tui.utils import StepCounter
 from openhands_cli.user_actions.utils import (
     NonEmptyValueValidator,
@@ -17,13 +17,19 @@ class SettingsType(Enum):
     ADVANCED = 'advanced'
 
 
-def settings_type_confirmation() -> SettingsType:
-    question = 'Which settings would you like to modify?'
+def settings_type_confirmation(first_time: bool = False) -> SettingsType:
+    question = (
+            '\nWelcome to OpenHands! Let\'s configure your LLM settings.\n'
+            'Choose your preferred setup method:'
+        )
     choices = [
         'LLM (Basic)',
-        'LLM (Advanced)',
-        'Go back',
+        'LLM (Advanced)'
     ]
+    if not first_time:
+        question = 'Which settings would you like to modify?'
+        choices.append('Go back')
+
 
     index = cli_confirm(question, choices, escapable=True)
 
diff --git a/openhands-cli/tests/settings/test_first_time_user_settings.py b/openhands-cli/tests/settings/test_first_time_user_settings.py
new file mode 100644
index 0000000000..64d4a59a2f
--- /dev/null
+++ b/openhands-cli/tests/settings/test_first_time_user_settings.py
@@ -0,0 +1,54 @@
+from unittest.mock import patch
+from openhands_cli.agent_chat import run_cli_entry
+import pytest
+
+
+@patch("openhands_cli.agent_chat.print_formatted_text")
+@patch("openhands_cli.tui.settings.settings_screen.save_settings_confirmation")
+@patch("openhands_cli.tui.settings.settings_screen.prompt_api_key")
+@patch("openhands_cli.tui.settings.settings_screen.choose_llm_model")
+@patch("openhands_cli.tui.settings.settings_screen.choose_llm_provider")
+@patch("openhands_cli.tui.settings.settings_screen.settings_type_confirmation")
+@patch("openhands_cli.tui.settings.store.AgentStore.load")
+@pytest.mark.parametrize("interrupt_step", ["settings_type", "provider", "model", "api_key", "save"])
+def test_first_time_users_can_escape_settings_flow_and_exit_app(
+    mock_agentstore_load,
+    mock_type,
+    mock_provider,
+    mock_model,
+    mock_api_key,
+    mock_save,
+    mock_print,
+    interrupt_step,
+):
+    """Test that KeyboardInterrupt is handled at each step of basic settings."""
+
+    # Force first-time user: no saved agent
+    mock_agentstore_load.return_value = None
+
+    # Happy path defaults
+    mock_type.return_value = "basic"
+    mock_provider.return_value = "openai"
+    mock_model.return_value = "gpt-4o-mini"
+    mock_api_key.return_value = "sk-test"
+    mock_save.return_value = True
+
+    # Inject KeyboardInterrupt at the specified step
+    if interrupt_step == "settings_type":
+        mock_type.side_effect = KeyboardInterrupt()
+    elif interrupt_step == "provider":
+        mock_provider.side_effect = KeyboardInterrupt()
+    elif interrupt_step == "model":
+        mock_model.side_effect = KeyboardInterrupt()
+    elif interrupt_step == "api_key":
+        mock_api_key.side_effect = KeyboardInterrupt()
+    elif interrupt_step == "save":
+        mock_save.side_effect = KeyboardInterrupt()
+
+    # Run
+    run_cli_entry()
+
+    # Assert graceful messaging
+    calls = [call.args[0] for call in mock_print.call_args_list]
+    assert any("Setup is required" in str(c) for c in calls)
+    assert any("Goodbye!" in str(c) for c in calls)
diff --git a/openhands-cli/tests/test_settings_input.py b/openhands-cli/tests/settings/test_settings_input.py
similarity index 100%
rename from openhands-cli/tests/test_settings_input.py
rename to openhands-cli/tests/settings/test_settings_input.py
diff --git a/openhands-cli/tests/test_settings_workflow.py b/openhands-cli/tests/settings/test_settings_workflow.py
similarity index 100%
rename from openhands-cli/tests/test_settings_workflow.py
rename to openhands-cli/tests/settings/test_settings_workflow.py
diff --git a/openhands-cli/tests/test_new_command.py b/openhands-cli/tests/test_new_command.py
index 82d20dea29..33682c416b 100644
--- a/openhands-cli/tests/test_new_command.py
+++ b/openhands-cli/tests/test_new_command.py
@@ -51,8 +51,8 @@ def test_start_fresh_conversation_missing_agent_spec(
     assert result == mock_conversation
     # Should be called twice: first fails, second succeeds
     assert mock_setup_conversation.call_count == 2
-    # Settings screen should be called once
-    mock_settings_screen.handle_basic_settings.assert_called_once_with(escapable=False)
+    # Settings screen should be called once with first_time=True (new behavior)
+    mock_settings_screen.configure_settings.assert_called_once_with(first_time=True)