diff --git a/packages/cli/src/config/settings.test.ts b/packages/cli/src/config/settings.test.ts
index 6e9bcee9991..f3934a9cbba 100644
--- a/packages/cli/src/config/settings.test.ts
+++ b/packages/cli/src/config/settings.test.ts
@@ -3636,15 +3636,16 @@ describe('LoadedSettings Isolation and Serializability', () => {
       expect(settingsValue.myMap).not.toBe(mapValue.myMap);
     });
 
-    it('should handle circular references (structuredClone supports them, but deepMerge may not)', () => {
+    it('should handle circular references without crashing', () => {
       const circular: Record<string, unknown> = { a: 1 };
       circular['self'] = circular;
 
-      // structuredClone(circular) works, but LoadedSettings.setValue calls
-      // computeMergedSettings() -> customDeepMerge() which blows up on circularity.
+      // LoadedSettings.setValue() calls computeMergedSettings() ->
+      // customDeepMerge(), which now guards against circular references instead
+      // of overflowing the stack (see deepMerge cycle handling).
       expect(() => {
         loadedSettings.setValue(SettingScope.User, 'test', circular);
-      }).toThrow(/Maximum call stack size exceeded/);
+      }).not.toThrow();
     });
   });
 });
diff --git a/packages/cli/src/utils/deepMerge.test.ts b/packages/cli/src/utils/deepMerge.test.ts
index 3310924795c..c5d6ffc573c 100644
--- a/packages/cli/src/utils/deepMerge.test.ts
+++ b/packages/cli/src/utils/deepMerge.test.ts
@@ -5,7 +5,7 @@
  */
 
 import { describe, it, expect } from 'vitest';
-import { customDeepMerge } from './deepMerge.js';
+import { customDeepMerge, type MergeableObject } from './deepMerge.js';
 import { MergeStrategy } from '../config/settingsSchema.js';
 
 describe('customDeepMerge', () => {
@@ -237,4 +237,47 @@ describe('customDeepMerge', () => {
     const result = customDeepMerge(getMergeStrategy, target, source);
     expect(result).toEqual({ a: 1 });
   });
+
+  it('should handle self-referential objects without stack overflow', () => {
+    const circular: MergeableObject = { a: 1 };
+    circular['self'] = circular;
+    const getMergeStrategy = () => undefined;
+
+    expect(() =>
+      customDeepMerge(getMergeStrategy, { existing: true }, circular),
+    ).not.toThrow();
+
+    const result = customDeepMerge(getMergeStrategy, {}, circular);
+    expect(result['a']).toBe(1);
+    // The cycle is reproduced inside the cloned structure rather than pointing
+    // back to the original source object (a fully independent clone).
+    expect(result['self']).toBe(result);
+    expect(result['self']).not.toBe(circular);
+  });
+
+  it('should handle indirect (mutual) circular references', () => {
+    const a: MergeableObject = { name: 'a' };
+    const b: MergeableObject = { name: 'b' };
+    a['b'] = b;
+    b['a'] = a; // a -> b -> a
+    const getMergeStrategy = () => undefined;
+
+    const result = customDeepMerge(getMergeStrategy, {}, a);
+    // The mutual cycle is reproduced within the clone (a -> b -> a), not shared
+    // with the original source objects.
+    // eslint-disable-next-line @typescript-eslint/no-explicit-any
+    expect((result as any)['b']['a']).toBe(result);
+    // eslint-disable-next-line @typescript-eslint/no-explicit-any
+    expect((result as any)['b']['a']).not.toBe(a);
+  });
+
+  it('should still merge shared but non-circular references normally', () => {
+    // The same nested object referenced twice is a DAG, not a cycle, and must
+    // still be merged (the cycle guard must not short-circuit it).
+    const shared = { x: 1 };
+    const source = { first: shared, second: shared };
+    const getMergeStrategy = () => undefined;
+    const result = customDeepMerge(getMergeStrategy, {}, source);
+    expect(result).toEqual({ first: { x: 1 }, second: { x: 1 } });
+  });
 });
diff --git a/packages/cli/src/utils/deepMerge.ts b/packages/cli/src/utils/deepMerge.ts
index 2eef3b4adae..b0d644de4a9 100644
--- a/packages/cli/src/utils/deepMerge.ts
+++ b/packages/cli/src/utils/deepMerge.ts
@@ -26,7 +26,17 @@ function mergeRecursively(
   source: MergeableObject,
   getMergeStrategyForPath: (path: string[]) => MergeStrategy | undefined,
   path: string[] = [],
+  clones: Map<object, MergeableObject> = new Map(),
 ) {
+  // Track the chain of source objects currently being merged, mapping each to
+  // the clone being built for it. A circular reference (a source object that
+  // points back to one of its own ancestors) is resolved to that ancestor's
+  // clone instead of being recursed into, which would otherwise overflow the
+  // stack — and keeps the merged result a fully independent clone rather than
+  // embedding a reference to the original source. Entries are scoped to the
+  // current recursion branch (added on entry, removed on exit), so shared but
+  // non-circular references are still merged normally.
+  clones.set(source, target);
   for (const key of Object.keys(source)) {
     // JSON.parse can create objects with __proto__ as an own property.
     // We must skip it to prevent prototype pollution.
@@ -62,8 +72,25 @@ function mergeRecursively(
       }
     }
 
+    const ancestorClone = isPlainObject(srcValue)
+      ? clones.get(srcValue)
+      : undefined;
+    if (ancestorClone !== undefined) {
+      // Circular reference back to an ancestor source object: assign that
+      // ancestor's clone so the cycle is reproduced inside the new structure,
+      // instead of recursing forever or leaking a reference to the source.
+      target[key] = ancestorClone;
+      continue;
+    }
+
     if (isPlainObject(objValue) && isPlainObject(srcValue)) {
-      mergeRecursively(objValue, srcValue, getMergeStrategyForPath, newPath);
+      mergeRecursively(
+        objValue,
+        srcValue,
+        getMergeStrategyForPath,
+        newPath,
+        clones,
+      );
     } else if (isPlainObject(srcValue)) {
       target[key] = {};
       mergeRecursively(
@@ -72,11 +99,13 @@ function mergeRecursively(
         srcValue,
         getMergeStrategyForPath,
         newPath,
+        clones,
       );
     } else {
       target[key] = srcValue;
     }
   }
+  clones.delete(source);
   return target;
 }