diff --git a/src/integrations/misc/__tests__/extract-text.test.ts b/src/integrations/misc/__tests__/extract-text.test.ts
index c6bca0a88d9..04b06cfa836 100644
--- a/src/integrations/misc/__tests__/extract-text.test.ts
+++ b/src/integrations/misc/__tests__/extract-text.test.ts
@@ -5,6 +5,7 @@ import {
 	truncateOutput,
 	applyRunLengthEncoding,
 	processCarriageReturns,
+	processBackspaces,
 } from "../extract-text"
 
 describe("addLineNumbers", () => {
@@ -229,6 +230,69 @@ describe("truncateOutput", () => {
 		expect(truncateOutput("single line", 10)).toBe("single line")
 	})
 
+	describe("processBackspaces", () => {
+		it("should handle basic backspace deletion", () => {
+			const input = "abc\b\bxy"
+			const expected = "axy"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle backspaces at start of input", () => {
+			const input = "\b\babc"
+			const expected = "abc"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle backspaces with newlines", () => {
+			const input = "abc\b\n123\b\b"
+			const expected = "ab\n1"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle consecutive backspaces", () => {
+			const input = "abcdef\b\b\b\bxy"
+			const expected = "abxy"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle backspaces at end of input", () => {
+			const input = "abc\b\b"
+			const expected = "a"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle mixed backspaces and content", () => {
+			const input = "abc\bx\byz\b\b123"
+			const expected = "ab123"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle multiple groups of consecutive backspaces", () => {
+			const input = "abc\b\bdef\b\b\bghi\b\b\b\bjkl"
+			const expected = "jkl"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle backspaces with empty content between them", () => {
+			const input = "abc\b\b\b\b\b\bdef"
+			const expected = "def"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle complex mixed content with backspaces", () => {
+			const input = "Loading[\b\b\b\b\b\b\b\bProgress[\b\b\b\b\b\b\b\b\bStatus: \b\b\b\b\b\b\b\bDone!"
+			// Technically terminal displays "Done!s: [" but we assume \b is destructive as an optimization
+			const expected = "Done!"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+
+		it("should handle backspaces with special characters", () => {
+			const input = "abc😀\b\bdef🎉\b\b\bghi"
+			const expected = "abcdeghi"
+			expect(processBackspaces(input)).toBe(expected)
+		})
+	})
+
 	it("handles windows-style line endings", () => {
 		// Create content with windows line endings
 		const lines = Array.from({ length: 15 }, (_, i) => `line${i + 1}`)
diff --git a/src/integrations/misc/extract-text.ts b/src/integrations/misc/extract-text.ts
index 5bbbbf85140..596923d93e4 100644
--- a/src/integrations/misc/extract-text.ts
+++ b/src/integrations/misc/extract-text.ts
@@ -288,6 +288,53 @@ export function processCarriageReturns(input: string): string {
 	return output
 }
 
+/**
+ * Processes backspace characters (\b) in terminal output using index operations.
+ * Uses indexOf to efficiently locate and handle backspaces.
+ *
+ * Technically terminal only moves the cursor and overwrites in-place,
+ * but we assume \b is destructive as an optimization which is acceptable
+ * for all progress spinner cases and most terminal output cases.
+ *
+ * @param input The terminal output to process
+ * @returns The processed output with backspaces handled
+ */
+export function processBackspaces(input: string): string {
+	let output = ""
+	let pos = 0
+	let bsPos = input.indexOf("\b")
+
+	while (bsPos !== -1) {
+		// Fast path: exclude char before backspace
+		output += input.substring(pos, bsPos - 1)
+
+		// Move past backspace
+		pos = bsPos + 1
+
+		// Count consecutive backspaces
+		let count = 0
+		while (input[pos] === "\b") {
+			count++
+			pos++
+		}
+
+		// Trim output mathematically for consecutive backspaces
+		if (count > 0 && output.length > 0) {
+			output = output.substring(0, Math.max(0, output.length - count))
+		}
+
+		// Find next backspace
+		bsPos = input.indexOf("\b", pos)
+	}
+
+	// Add remaining content
+	if (pos < input.length) {
+		output += input.substring(pos)
+	}
+
+	return output
+}
+
 /**
  * Helper function to process a single line with carriage returns.
  * Handles the overwrite logic for a line that contains one or more carriage returns (\r).
diff --git a/src/integrations/terminal/Terminal.ts b/src/integrations/terminal/Terminal.ts
index 5f896c265d5..66eb6c68e17 100644
--- a/src/integrations/terminal/Terminal.ts
+++ b/src/integrations/terminal/Terminal.ts
@@ -1,7 +1,7 @@
 import * as vscode from "vscode"
 import pWaitFor from "p-wait-for"
 import { ExitCodeDetails, mergePromise, TerminalProcess, TerminalProcessResultPromise } from "./TerminalProcess"
-import { truncateOutput, applyRunLengthEncoding, processCarriageReturns } from "../misc/extract-text"
+import { truncateOutput, applyRunLengthEncoding, processCarriageReturns, processBackspaces } from "../misc/extract-text"
 // Import TerminalRegistry here to avoid circular dependencies
 const { TerminalRegistry } = require("./TerminalRegistry")
 
@@ -296,9 +296,11 @@ export class Terminal {
 	public static compressTerminalOutput(input: string, lineLimit: number): string {
 		// Apply carriage return processing if the feature is enabled
 		let processedInput = input
-		if (Terminal.compressProgressBar && input.includes("\r")) {
-			processedInput = processCarriageReturns(input)
+		if (Terminal.compressProgressBar) {
+			processedInput = processCarriageReturns(processedInput)
+			processedInput = processBackspaces(processedInput)
 		}
+
 		return truncateOutput(applyRunLengthEncoding(processedInput), lineLimit)
 	}