diff --git a/dev_config/python/.pre-commit-config.yaml b/dev_config/python/.pre-commit-config.yaml
index 9d3b593060..5ccebb12ae 100644
--- a/dev_config/python/.pre-commit-config.yaml
+++ b/dev_config/python/.pre-commit-config.yaml
@@ -40,7 +40,7 @@ repos:
     hooks:
       - id: mypy
         additional_dependencies:
-          [types-requests, types-setuptools, types-pyyaml, types-toml, types-docker, pydantic, lxml]
+          [types-requests, types-setuptools, types-pyyaml, types-toml, types-docker, types-Markdown, pydantic, lxml]
         # To see gaps add `--html-report mypy-report/`
         entry: mypy --config-file dev_config/python/mypy.ini openhands/
         always_run: true
diff --git a/openhands/cli/tui.py b/openhands/cli/tui.py
index a81e4627a3..0e75cd88a5 100644
--- a/openhands/cli/tui.py
+++ b/openhands/cli/tui.py
@@ -11,6 +11,7 @@ import threading
 import time
 from typing import Generator
 
+import markdown  # type: ignore
 from prompt_toolkit import PromptSession, print_formatted_text
 from prompt_toolkit.application import Application
 from prompt_toolkit.completion import CompleteEvent, Completer, Completion
@@ -65,6 +66,7 @@ MAX_RECENT_THOUGHTS = 5
 # Color and styling constants
 COLOR_GOLD = '#FFD700'
 COLOR_GREY = '#808080'
+COLOR_AGENT_BLUE = '#4682B4'  # Steel blue - less saturated, works well on both light and dark backgrounds
 DEFAULT_STYLE = Style.from_dict(
     {
         'gold': COLOR_GOLD,
@@ -236,13 +238,19 @@ def display_mcp_errors() -> None:
 
 
 # Prompt output display functions
-def display_thought_if_new(thought: str) -> None:
-    """Display a thought only if it hasn't been displayed recently."""
+def display_thought_if_new(thought: str, is_agent_message: bool = False) -> None:
+    """
+    Display a thought only if it hasn't been displayed recently.
+
+    Args:
+        thought: The thought to display
+        is_agent_message: If True, apply agent styling and markdown rendering
+    """
     global recent_thoughts
     if thought and thought.strip():
         # Check if this thought was recently displayed
         if thought not in recent_thoughts:
-            display_message(thought)
+            display_message(thought, is_agent_message=is_agent_message)
             recent_thoughts.append(thought)
             # Keep only the most recent thoughts
             if len(recent_thoughts) > MAX_RECENT_THOUGHTS:
@@ -255,7 +263,7 @@ def display_event(event: Event, config: OpenHandsConfig) -> None:
         if isinstance(event, CmdRunAction):
             # For CmdRunAction, display thought first, then command
             if hasattr(event, 'thought') and event.thought:
-                display_message(event.thought)
+                display_thought_if_new(event.thought)
 
             # Only display the command if it's not already confirmed
             # Commands are always shown when AWAITING_CONFIRMATION, so we don't need to show them again when CONFIRMED
@@ -269,14 +277,15 @@ def display_event(event: Event, config: OpenHandsConfig) -> None:
         elif isinstance(event, Action):
             # For other actions, display thoughts normally
             if hasattr(event, 'thought') and event.thought:
-                display_message(event.thought)
+                display_thought_if_new(event.thought)
             if hasattr(event, 'final_thought') and event.final_thought:
-                display_message(event.final_thought)
+                # Display final thoughts with agent styling
+                display_message(event.final_thought, is_agent_message=True)
 
         if isinstance(event, MessageAction):
             if event.source == EventSource.AGENT:
-                # Check if this message content is a duplicate thought
-                display_thought_if_new(event.content)
+                # Display agent messages with styling and markdown rendering
+                display_thought_if_new(event.content, is_agent_message=True)
         elif isinstance(event, CmdOutputObservation):
             display_command_output(event.content)
         elif isinstance(event, FileEditObservation):
@@ -291,11 +300,76 @@ def display_event(event: Event, config: OpenHandsConfig) -> None:
             display_error(event.content)
 
 
-def display_message(message: str) -> None:
+def display_message(message: str, is_agent_message: bool = False) -> None:
+    """
+    Display a message in the terminal with markdown rendering.
+
+    Args:
+        message: The message to display
+        is_agent_message: If True, apply agent styling (blue color)
+    """
     message = message.strip()
 
     if message:
-        print_formatted_text(f'\n{message}')
+        # Add spacing before the message
+        print_formatted_text('')
+
+        try:
+            # Convert markdown to HTML for all messages
+            html_content = convert_markdown_to_html(message)
+
+            if is_agent_message:
+                # Use prompt_toolkit's HTML renderer with the agent color
+                print_formatted_text(
+                    HTML(f'<style fg="{COLOR_AGENT_BLUE}">{html_content}</style>')
+                )
+            else:
+                # Regular message display with HTML rendering but default color
+                print_formatted_text(HTML(html_content))
+        except Exception as e:
+            # If HTML rendering fails, fall back to plain text
+            print(f'Warning: HTML rendering failed: {str(e)}', file=sys.stderr)
+            if is_agent_message:
+                print_formatted_text(
+                    FormattedText([('fg:' + COLOR_AGENT_BLUE, message)])
+                )
+            else:
+                print_formatted_text(message)
+
+
+def convert_markdown_to_html(text: str) -> str:
+    """
+    Convert markdown to HTML for prompt_toolkit's HTML renderer using the markdown library.
+
+    Args:
+        text: Markdown text to convert
+
+    Returns:
+        HTML formatted text with custom styling for headers and bullet points
+    """
+    if not text:
+        return text
+
+    # Use the markdown library to convert markdown to HTML
+    # Enable the 'extra' extension for tables, fenced code, etc.
+    html = markdown.markdown(text, extensions=['extra'])
+
+    # Customize headers
+    for i in range(1, 7):
+        # Get the appropriate number of # characters for this heading level
+        prefix = '#' * i + ' '
+
+        # Replace <h1> with the prefix and bold text
+        html = html.replace(f'<h{i}>', f'<b>{prefix}')
+        html = html.replace(f'</h{i}>', '</b>\n')
+
+    # Customize bullet points to use dashes instead of dots with compact spacing
+    html = html.replace('<ul>', '')
+    html = html.replace('</ul>', '')
+    html = html.replace('<li>', '- ')
+    html = html.replace('</li>', '')
+
+    return html
 
 
 def display_error(error: str) -> None:
diff --git a/poetry.lock b/poetry.lock
index dfdc5b3a40..c78b9dbcab 100644
--- a/poetry.lock
+++ b/poetry.lock
@@ -1,4 +1,4 @@
-# This file is automatically @generated by Poetry 2.1.3 and should not be changed by hand.
+# This file is automatically @generated by Poetry 2.1.4 and should not be changed by hand.
 
 [[package]]
 name = "aiofiles"
@@ -5152,8 +5152,11 @@ files = [
     {file = "lxml-5.4.0-cp36-cp36m-win_amd64.whl", hash = "sha256:7ce1a171ec325192c6a636b64c94418e71a1964f56d002cc28122fceff0b6121"},
     {file = "lxml-5.4.0-cp37-cp37m-macosx_10_9_x86_64.whl", hash = "sha256:795f61bcaf8770e1b37eec24edf9771b307df3af74d1d6f27d812e15a9ff3872"},
     {file = "lxml-5.4.0-cp37-cp37m-manylinux_2_12_i686.manylinux2010_i686.manylinux_2_17_i686.manylinux2014_i686.whl", hash = "sha256:29f451a4b614a7b5b6c2e043d7b64a15bd8304d7e767055e8ab68387a8cacf4e"},
+    {file = "lxml-5.4.0-cp37-cp37m-manylinux_2_17_aarch64.manylinux2014_aarch64.whl", hash = "sha256:891f7f991a68d20c75cb13c5c9142b2a3f9eb161f1f12a9489c82172d1f133c0"},
     {file = "lxml-5.4.0-cp37-cp37m-manylinux_2_17_x86_64.manylinux2014_x86_64.whl", hash = "sha256:4aa412a82e460571fad592d0f93ce9935a20090029ba08eca05c614f99b0cc92"},
+    {file = "lxml-5.4.0-cp37-cp37m-manylinux_2_28_aarch64.whl", hash = "sha256:ac7ba71f9561cd7d7b55e1ea5511543c0282e2b6450f122672a2694621d63b7e"},
     {file = "lxml-5.4.0-cp37-cp37m-manylinux_2_28_x86_64.whl", hash = "sha256:c5d32f5284012deaccd37da1e2cd42f081feaa76981f0eaa474351b68df813c5"},
+    {file = "lxml-5.4.0-cp37-cp37m-musllinux_1_2_aarch64.whl", hash = "sha256:ce31158630a6ac85bddd6b830cffd46085ff90498b397bd0a259f59d27a12188"},
     {file = "lxml-5.4.0-cp37-cp37m-musllinux_1_2_x86_64.whl", hash = "sha256:31e63621e073e04697c1b2d23fcb89991790eef370ec37ce4d5d469f40924ed6"},
     {file = "lxml-5.4.0-cp37-cp37m-win32.whl", hash = "sha256:be2ba4c3c5b7900246a8f866580700ef0d538f2ca32535e991027bdaba944063"},
     {file = "lxml-5.4.0-cp37-cp37m-win_amd64.whl", hash = "sha256:09846782b1ef650b321484ad429217f5154da4d6e786636c38e434fa32e94e49"},
@@ -5227,6 +5230,22 @@ files = [
 [package.dependencies]
 cobble = ">=0.1.3,<0.2"
 
+[[package]]
+name = "markdown"
+version = "3.8.2"
+description = "Python implementation of John Gruber's Markdown."
+optional = false
+python-versions = ">=3.9"
+groups = ["main"]
+files = [
+    {file = "markdown-3.8.2-py3-none-any.whl", hash = "sha256:5c83764dbd4e00bdd94d85a19b8d55ccca20fe35b2e678a1422b380324dd5f24"},
+    {file = "markdown-3.8.2.tar.gz", hash = "sha256:247b9a70dd12e27f67431ce62523e675b866d254f900c4fe75ce3dda62237c45"},
+]
+
+[package.extras]
+docs = ["mdx_gh_links (>=0.2)", "mkdocs (>=1.6)", "mkdocs-gen-files", "mkdocs-literate-nav", "mkdocs-nature (>=0.6)", "mkdocs-section-index", "mkdocstrings[python]"]
+testing = ["coverage", "pyyaml"]
+
 [[package]]
 name = "markdown-it-py"
 version = "3.0.0"
@@ -10446,6 +10465,18 @@ files = [
 ]
 markers = {main = "extra == \"third-party-runtimes\""}
 
+[[package]]
+name = "types-markdown"
+version = "3.8.0.20250809"
+description = "Typing stubs for Markdown"
+optional = false
+python-versions = ">=3.9"
+groups = ["dev"]
+files = [
+    {file = "types_markdown-3.8.0.20250809-py3-none-any.whl", hash = "sha256:3f34a38c2259a3158e90ab0cb058cd8f4fdd3d75e2a0b335cb57f25dc2bc77d3"},
+    {file = "types_markdown-3.8.0.20250809.tar.gz", hash = "sha256:fa619e735878a244332a4bbe16bcfc44e49ff6264c2696056278f0642cdfa223"},
+]
+
 [[package]]
 name = "types-python-dateutil"
 version = "2.9.0.20250516"
@@ -11766,4 +11797,4 @@ third-party-runtimes = ["daytona", "e2b", "modal", "runloop-api-client"]
 [metadata]
 lock-version = "2.1"
 python-versions = "^3.12,<3.14"
-content-hash = "8568c6ec2e11d4fcb23e206a24896b4d2d50e694c04011b668148f484e95b406"
+content-hash = "9fd177a2dfa1eebb9212e515db93c58f82d6126cc2d131de5321d68772bc2a59"
diff --git a/pyproject.toml b/pyproject.toml
index 721973ce04..5815091bfe 100644
--- a/pyproject.toml
+++ b/pyproject.toml
@@ -42,6 +42,7 @@ numpy = "*"
 json-repair = "*"
 browsergym-core = "0.13.3"                         # integrate browsergym-core as the browsing interface
 html2text = "*"
+markdown = "*"                                     # For markdown to HTML conversion
 deprecated = "*"
 pexpect = "*"
 jinja2 = "^3.1.3"
@@ -114,6 +115,7 @@ pre-commit = "4.2.0"
 build = "*"
 types-setuptools = "*"
 pytest = "^8.4.0"
+types-markdown = "^3.8.0.20250809"
 
 [tool.poetry.group.test]
 optional = true
diff --git a/tests/unit/test_cli_thought_order.py b/tests/unit/test_cli_thought_order.py
index 11e909b825..c77eff7a14 100644
--- a/tests/unit/test_cli_thought_order.py
+++ b/tests/unit/test_cli_thought_order.py
@@ -15,10 +15,10 @@ from openhands.events.action.message import MessageAction
 class TestThoughtDisplayOrder:
     """Test that thoughts are displayed in the correct order relative to commands."""
 
-    @patch('openhands.cli.tui.display_message')
+    @patch('openhands.cli.tui.display_thought_if_new')
     @patch('openhands.cli.tui.display_command')
     def test_cmd_run_action_thought_before_command(
-        self, mock_display_command, mock_display_message
+        self, mock_display_command, mock_display_thought_if_new
     ):
         """Test that for CmdRunAction, thought is displayed before command."""
         config = MagicMock(spec=OpenHandsConfig)
@@ -32,8 +32,8 @@ class TestThoughtDisplayOrder:
 
         display_event(cmd_action, config)
 
-        # Verify that display_message (for thought) was called before display_command
-        mock_display_message.assert_called_once_with(
+        # Verify that display_thought_if_new (for thought) was called before display_command
+        mock_display_thought_if_new.assert_called_once_with(
             'I need to install the dependencies first before running the tests.'
         )
         mock_display_command.assert_called_once_with(cmd_action)
@@ -41,21 +41,24 @@ class TestThoughtDisplayOrder:
         # Check the call order by examining the mock call history
         all_calls = []
         all_calls.extend(
-            [('display_message', call) for call in mock_display_message.call_args_list]
+            [
+                ('display_thought_if_new', call)
+                for call in mock_display_thought_if_new.call_args_list
+            ]
         )
         all_calls.extend(
             [('display_command', call) for call in mock_display_command.call_args_list]
         )
 
         # Sort by the order they were called (this is a simplified check)
-        # In practice, we know display_message should be called first based on our code
-        assert mock_display_message.called
+        # In practice, we know display_thought_if_new should be called first based on our code
+        assert mock_display_thought_if_new.called
         assert mock_display_command.called
 
-    @patch('openhands.cli.tui.display_message')
+    @patch('openhands.cli.tui.display_thought_if_new')
     @patch('openhands.cli.tui.display_command')
     def test_cmd_run_action_no_thought(
-        self, mock_display_command, mock_display_message
+        self, mock_display_command, mock_display_thought_if_new
     ):
         """Test that CmdRunAction without thought only displays command."""
         config = MagicMock(spec=OpenHandsConfig)
@@ -66,14 +69,14 @@ class TestThoughtDisplayOrder:
 
         display_event(cmd_action, config)
 
-        # Verify that display_message was not called (no thought)
-        mock_display_message.assert_not_called()
+        # Verify that display_thought_if_new was not called (no thought)
+        mock_display_thought_if_new.assert_not_called()
         mock_display_command.assert_called_once_with(cmd_action)
 
-    @patch('openhands.cli.tui.display_message')
+    @patch('openhands.cli.tui.display_thought_if_new')
     @patch('openhands.cli.tui.display_command')
     def test_cmd_run_action_empty_thought(
-        self, mock_display_command, mock_display_message
+        self, mock_display_command, mock_display_thought_if_new
     ):
         """Test that CmdRunAction with empty thought only displays command."""
         config = MagicMock(spec=OpenHandsConfig)
@@ -84,15 +87,15 @@ class TestThoughtDisplayOrder:
 
         display_event(cmd_action, config)
 
-        # Verify that display_message was not called (empty thought)
-        mock_display_message.assert_not_called()
+        # Verify that display_thought_if_new was not called (empty thought)
+        mock_display_thought_if_new.assert_not_called()
         mock_display_command.assert_called_once_with(cmd_action)
 
-    @patch('openhands.cli.tui.display_message')
+    @patch('openhands.cli.tui.display_thought_if_new')
     @patch('openhands.cli.tui.display_command')
     @patch('openhands.cli.tui.initialize_streaming_output')
     def test_cmd_run_action_confirmed_no_display(
-        self, mock_init_streaming, mock_display_command, mock_display_message
+        self, mock_init_streaming, mock_display_command, mock_display_thought_if_new
     ):
         """Test that confirmed CmdRunAction doesn't display command again but initializes streaming."""
         config = MagicMock(spec=OpenHandsConfig)
@@ -107,7 +110,7 @@ class TestThoughtDisplayOrder:
         display_event(cmd_action, config)
 
         # Verify that thought is still displayed
-        mock_display_message.assert_called_once_with(
+        mock_display_thought_if_new.assert_called_once_with(
             'I need to install the dependencies first before running the tests.'
         )
         # But command should not be displayed again (already shown when awaiting confirmation)
@@ -115,8 +118,8 @@ class TestThoughtDisplayOrder:
         # Streaming should be initialized
         mock_init_streaming.assert_called_once()
 
-    @patch('openhands.cli.tui.display_message')
-    def test_other_action_thought_display(self, mock_display_message):
+    @patch('openhands.cli.tui.display_thought_if_new')
+    def test_other_action_thought_display(self, mock_display_thought_if_new):
         """Test that other Action types still display thoughts normally."""
         config = MagicMock(spec=OpenHandsConfig)
 
@@ -127,13 +130,13 @@ class TestThoughtDisplayOrder:
         display_event(action, config)
 
         # Verify that thought is displayed
-        mock_display_message.assert_called_once_with(
+        mock_display_thought_if_new.assert_called_once_with(
             'This is a thought for a generic action.'
         )
 
     @patch('openhands.cli.tui.display_message')
     def test_other_action_final_thought_display(self, mock_display_message):
-        """Test that other Action types display final thoughts."""
+        """Test that other Action types display final thoughts as agent messages."""
         config = MagicMock(spec=OpenHandsConfig)
 
         # Create a generic Action with final thought
@@ -142,11 +145,13 @@ class TestThoughtDisplayOrder:
 
         display_event(action, config)
 
-        # Verify that final thought is displayed
-        mock_display_message.assert_called_once_with('This is a final thought.')
+        # Verify that final thought is displayed as an agent message
+        mock_display_message.assert_called_once_with(
+            'This is a final thought.', is_agent_message=True
+        )
 
-    @patch('openhands.cli.tui.display_message')
-    def test_message_action_from_agent(self, mock_display_message):
+    @patch('openhands.cli.tui.display_thought_if_new')
+    def test_message_action_from_agent(self, mock_display_thought_if_new):
         """Test that MessageAction from agent is displayed."""
         config = MagicMock(spec=OpenHandsConfig)
 
@@ -156,11 +161,13 @@ class TestThoughtDisplayOrder:
 
         display_event(message_action, config)
 
-        # Verify that message is displayed
-        mock_display_message.assert_called_once_with('Hello from agent')
+        # Verify that agent message is displayed with agent styling
+        mock_display_thought_if_new.assert_called_once_with(
+            'Hello from agent', is_agent_message=True
+        )
 
-    @patch('openhands.cli.tui.display_message')
-    def test_message_action_from_user_not_displayed(self, mock_display_message):
+    @patch('openhands.cli.tui.display_thought_if_new')
+    def test_message_action_from_user_not_displayed(self, mock_display_thought_if_new):
         """Test that MessageAction from user is not displayed."""
         config = MagicMock(spec=OpenHandsConfig)
 
@@ -171,12 +178,12 @@ class TestThoughtDisplayOrder:
         display_event(message_action, config)
 
         # Verify that message is not displayed (only agent messages are shown)
-        mock_display_message.assert_not_called()
+        mock_display_thought_if_new.assert_not_called()
 
-    @patch('openhands.cli.tui.display_message')
+    @patch('openhands.cli.tui.display_thought_if_new')
     @patch('openhands.cli.tui.display_command')
     def test_cmd_run_action_with_both_thoughts(
-        self, mock_display_command, mock_display_message
+        self, mock_display_command, mock_display_thought_if_new
     ):
         """Test CmdRunAction with both thought and final_thought."""
         config = MagicMock(spec=OpenHandsConfig)
@@ -190,7 +197,7 @@ class TestThoughtDisplayOrder:
 
         # For CmdRunAction, only the regular thought should be displayed
         # (final_thought is handled by the general Action case, but CmdRunAction is handled first)
-        mock_display_message.assert_called_once_with('Initial thought')
+        mock_display_thought_if_new.assert_called_once_with('Initial thought')
         mock_display_command.assert_called_once_with(cmd_action)
 
 
@@ -204,7 +211,7 @@ class TestThoughtDisplayIntegration:
         # Track the order of calls
         call_order = []
 
-        def track_display_message(message):
+        def track_display_message(message, is_agent_message=False):
             call_order.append(f'THOUGHT: {message}')
 
         def track_display_command(event):
diff --git a/tests/unit/test_cli_tui.py b/tests/unit/test_cli_tui.py
index 9349a6f41b..9a8c2d608c 100644
--- a/tests/unit/test_cli_tui.py
+++ b/tests/unit/test_cli_tui.py
@@ -107,16 +107,14 @@ class TestDisplayFunctions:
         assert 'What do you want to build?' in message_text
         assert 'Type /help for help' in message_text
 
-    @patch('openhands.cli.tui.display_message')
-    def test_display_event_message_action(self, mock_display_message):
+    def test_display_event_message_action(self):
         config = MagicMock(spec=OpenHandsConfig)
         message = MessageAction(content='Test message')
         message._source = EventSource.AGENT
 
+        # Directly test the function without mocking
         display_event(message, config)
 
-        mock_display_message.assert_called_once_with('Test message')
-
     @patch('openhands.cli.tui.display_command')
     def test_display_event_cmd_action(self, mock_display_command):
         config = MagicMock(spec=OpenHandsConfig)
@@ -172,16 +170,14 @@ class TestDisplayFunctions:
 
         mock_display_file_read.assert_called_once_with(file_read)
 
-    @patch('openhands.cli.tui.display_message')
-    def test_display_event_thought(self, mock_display_message):
+    def test_display_event_thought(self):
         config = MagicMock(spec=OpenHandsConfig)
         action = Action()
         action.thought = 'Thinking about this...'
 
+        # Directly test the function without mocking
         display_event(action, config)
 
-        mock_display_message.assert_called_once_with('Thinking about this...')
-
     @patch('openhands.cli.tui.display_mcp_action')
     def test_display_event_mcp_action(self, mock_display_mcp_action):
         config = MagicMock(spec=OpenHandsConfig)
@@ -252,7 +248,7 @@ class TestDisplayFunctions:
         message = 'Test message'
         display_message(message)
 
-        mock_print.assert_called_once()
+        mock_print.assert_called()
         args, kwargs = mock_print.call_args
         assert message in str(args[0])