diff --git a/backend/apps/settings/models.py b/backend/apps/settings/models.py
index f2ef9988..14d633d4 100644
--- a/backend/apps/settings/models.py
+++ b/backend/apps/settings/models.py
@@ -22,3 +22,4 @@ class AppSettings(BaseModel):
     anthropic_api_key: Optional[str] = None
     browser_homepage: str = "https://www.google.com"
     auto_select_mode_on_new_agent: bool = False
+    expand_new_chats_in_dashboard: bool = False
diff --git a/backend/apps/tools_lib/tools_lib.py b/backend/apps/tools_lib/tools_lib.py
index 274f077c..2d7c8bba 100644
--- a/backend/apps/tools_lib/tools_lib.py
+++ b/backend/apps/tools_lib/tools_lib.py
@@ -382,6 +382,7 @@ def derive_mcp_config(tool: ToolDefinition) -> Optional[dict]:
                 config["command"] = resolved
         env = config.setdefault("env", {})
         env.setdefault("PATH", _augmented_path())
+        env.setdefault("PYTHONPATH", "")
 
     return config
 
@@ -548,6 +549,7 @@ async def _discover_mcp_tools_stdio(command: str, args: list[str] | None = None,
         raise HTTPException(status_code=400, detail=f"Command '{command}' not found on PATH or common install locations")
 
     proc_env = {**os.environ, **(env or {}), "PATH": _augmented_path()}
+    proc_env.pop("PYTHONPATH", None)
 
     proc = await asyncio.create_subprocess_exec(
         cmd_path, *(args or []),
diff --git a/frontend/src/app/components/Layout/AppShell.tsx b/frontend/src/app/components/Layout/AppShell.tsx
index 2d4edc02..2e1ccb79 100644
--- a/frontend/src/app/components/Layout/AppShell.tsx
+++ b/frontend/src/app/components/Layout/AppShell.tsx
@@ -27,6 +27,9 @@ import ViewSidebarOutlinedIcon from '@mui/icons-material/ViewSidebarOutlined';
 import ArrowBackOutlinedIcon from '@mui/icons-material/ArrowBackOutlined';
 import ArrowForwardOutlinedIcon from '@mui/icons-material/ArrowForwardOutlined';
 import RestartAltIcon from '@mui/icons-material/RestartAlt';
+import SystemUpdateAltIcon from '@mui/icons-material/SystemUpdateAlt';
+import CloseIcon from '@mui/icons-material/Close';
+import LinearProgress from '@mui/material/LinearProgress';
 import Settings from '@/app/pages/Settings/Settings';
 import GlobalApprovalOverlay from '@/app/components/GlobalApprovalOverlay';
 import { useAppDispatch, useAppSelector } from '@/shared/hooks';
@@ -38,6 +41,7 @@ const SIDEBAR_MIN = 160;
 const SIDEBAR_MAX = 400;
 const SIDEBAR_DEFAULT = 220;
 const SIDEBAR_WIDTH_KEY = 'openswarm-sidebar-width';
+const UPDATE_DISMISS_KEY = 'openswarm-update-dismissed';
 
 const CUSTOMIZATION_ITEMS = [
   { label: 'Prompts', path: '/templates', icon: <DescriptionIcon /> },
@@ -75,10 +79,34 @@ const AppShell: React.FC = () => {
 
   const updateStatus = useAppSelector((state) => state.update.status);
   const availableVersion = useAppSelector((state) => state.update.availableVersion);
-  const [updateBannerDismissed, setUpdateBannerDismissed] = useState(false);
+  const downloadPercent = useAppSelector((state) => state.update.downloadPercent);
 
-  const showUpdateDot = updateStatus === 'available' || updateStatus === 'downloaded';
-  const showUpdateBanner = updateStatus === 'downloaded' && !updateBannerDismissed;
+  const [dismissedVersion, setDismissedVersion] = useState<string | null>(() => {
+    try { return localStorage.getItem(UPDATE_DISMISS_KEY); } catch { return null; }
+  });
+  const [snackbarDismissed, setSnackbarDismissed] = useState(false);
+
+  const bannerDismissedForVersion = availableVersion != null && dismissedVersion === availableVersion;
+  const isUpdateActionable = updateStatus === 'available' || updateStatus === 'downloaded' || updateStatus === 'downloading';
+
+  const showUpdateDot = (updateStatus === 'available' || updateStatus === 'downloaded') && !bannerDismissedForVersion;
+  const showUpdateBanner = isUpdateActionable && !bannerDismissedForVersion;
+  const showUpdateSnackbar = (updateStatus === 'available' || updateStatus === 'downloaded') && !bannerDismissedForVersion && !snackbarDismissed;
+
+  const handleDismissBanner = useCallback(() => {
+    if (availableVersion) {
+      try { localStorage.setItem(UPDATE_DISMISS_KEY, availableVersion); } catch {}
+      setDismissedVersion(availableVersion);
+    }
+  }, [availableVersion]);
+
+  const handleDownloadUpdate = useCallback(async () => {
+    try { await (window as any).openswarm?.downloadUpdate(); } catch {}
+  }, []);
+
+  const handleInstallUpdate = useCallback(() => {
+    (window as any).openswarm?.installUpdate();
+  }, []);
 
   const dashboardItems = useAppSelector((state) => state.dashboards.items);
   const dashboardList = Object.values(dashboardItems).sort(
@@ -279,6 +307,98 @@ const AppShell: React.FC = () => {
         </Box>
       </Box>
 
+      {showUpdateBanner && (
+        <Box
+          sx={{
+            display: 'flex',
+            alignItems: 'center',
+            gap: 1.5,
+            px: 2,
+            py: 0.5,
+            bgcolor: `${c.accent.primary}14`,
+            borderBottom: `1px solid ${c.accent.primary}30`,
+            flexShrink: 0,
+          }}
+        >
+          <SystemUpdateAltIcon sx={{ fontSize: 16, color: c.accent.primary, flexShrink: 0 }} />
+          <Typography sx={{ fontSize: '0.8rem', color: c.text.secondary, flex: 1, whiteSpace: 'nowrap', overflow: 'hidden', textOverflow: 'ellipsis' }}>
+            {updateStatus === 'available' && `OpenSwarm ${availableVersion} is available`}
+            {updateStatus === 'downloading' && `Downloading OpenSwarm ${availableVersion}…`}
+            {updateStatus === 'downloaded' && `OpenSwarm ${availableVersion} is ready to install`}
+          </Typography>
+          {updateStatus === 'downloading' && (
+            <LinearProgress
+              variant="determinate"
+              value={downloadPercent}
+              sx={{
+                width: 120,
+                height: 3,
+                flexShrink: 0,
+                borderRadius: 2,
+                bgcolor: `${c.accent.primary}20`,
+                '& .MuiLinearProgress-bar': { bgcolor: c.accent.primary, borderRadius: 2 },
+              }}
+            />
+          )}
+          {updateStatus === 'downloading' && (
+            <Typography sx={{ fontSize: '0.72rem', color: c.text.tertiary, flexShrink: 0 }}>
+              {Math.round(downloadPercent)}%
+            </Typography>
+          )}
+          {updateStatus === 'available' && (
+            <Button
+              size="small"
+              variant="contained"
+              onClick={handleDownloadUpdate}
+              sx={{
+                bgcolor: c.accent.primary,
+                '&:hover': { bgcolor: c.accent.pressed },
+                textTransform: 'none',
+                fontSize: '0.75rem',
+                fontWeight: 600,
+                borderRadius: 1.5,
+                minWidth: 'auto',
+                py: 0.25,
+                px: 1.5,
+                lineHeight: 1.5,
+                flexShrink: 0,
+              }}
+            >
+              Download
+            </Button>
+          )}
+          {updateStatus === 'downloaded' && (
+            <Button
+              size="small"
+              variant="contained"
+              onClick={handleInstallUpdate}
+              sx={{
+                bgcolor: c.accent.primary,
+                '&:hover': { bgcolor: c.accent.pressed },
+                textTransform: 'none',
+                fontSize: '0.75rem',
+                fontWeight: 600,
+                borderRadius: 1.5,
+                minWidth: 'auto',
+                py: 0.25,
+                px: 1.5,
+                lineHeight: 1.5,
+                flexShrink: 0,
+              }}
+            >
+              Restart & Update
+            </Button>
+          )}
+          <IconButton
+            size="small"
+            onClick={handleDismissBanner}
+            sx={{ color: c.text.tertiary, p: 0.25, flexShrink: 0, '&:hover': { color: c.text.secondary } }}
+          >
+            <CloseIcon sx={{ fontSize: 14 }} />
+          </IconButton>
+        </Box>
+      )}
+
       <Box sx={{ display: 'flex', flex: 1, minHeight: 0 }}>
       {!sidebarCollapsed && (
       <>
@@ -735,36 +855,60 @@ const AppShell: React.FC = () => {
       <GlobalApprovalOverlay />
 
       <Snackbar
-        open={showUpdateBanner}
+        open={showUpdateSnackbar}
+        autoHideDuration={10000}
+        onClose={() => setSnackbarDismissed(true)}
         anchorOrigin={{ vertical: 'bottom', horizontal: 'center' }}
       >
         <Alert
           severity="info"
-          icon={<RestartAltIcon sx={{ fontSize: 18 }} />}
+          icon={updateStatus === 'downloaded'
+            ? <RestartAltIcon sx={{ fontSize: 18 }} />
+            : <SystemUpdateAltIcon sx={{ fontSize: 18 }} />
+          }
           action={
             <Box sx={{ display: 'flex', gap: 1, alignItems: 'center' }}>
               <Button
                 size="small"
-                onClick={() => setUpdateBannerDismissed(true)}
+                onClick={() => setSnackbarDismissed(true)}
                 sx={{ color: c.text.muted, textTransform: 'none', fontSize: '0.8rem', minWidth: 'auto' }}
               >
-                Later
-              </Button>
-              <Button
-                size="small"
-                variant="contained"
-                onClick={() => (window as any).openswarm?.installUpdate()}
-                sx={{
-                  bgcolor: c.accent.primary,
-                  '&:hover': { bgcolor: c.accent.pressed },
-                  textTransform: 'none',
-                  fontSize: '0.8rem',
-                  borderRadius: 1.5,
-                  minWidth: 'auto',
-                }}
-              >
-                Restart
+                Dismiss
               </Button>
+              {updateStatus === 'available' && (
+                <Button
+                  size="small"
+                  variant="contained"
+                  onClick={handleDownloadUpdate}
+                  sx={{
+                    bgcolor: c.accent.primary,
+                    '&:hover': { bgcolor: c.accent.pressed },
+                    textTransform: 'none',
+                    fontSize: '0.8rem',
+                    borderRadius: 1.5,
+                    minWidth: 'auto',
+                  }}
+                >
+                  Download
+                </Button>
+              )}
+              {updateStatus === 'downloaded' && (
+                <Button
+                  size="small"
+                  variant="contained"
+                  onClick={handleInstallUpdate}
+                  sx={{
+                    bgcolor: c.accent.primary,
+                    '&:hover': { bgcolor: c.accent.pressed },
+                    textTransform: 'none',
+                    fontSize: '0.8rem',
+                    borderRadius: 1.5,
+                    minWidth: 'auto',
+                  }}
+                >
+                  Restart & Update
+                </Button>
+              )}
             </Box>
           }
           sx={{
@@ -775,7 +919,8 @@ const AppShell: React.FC = () => {
             '& .MuiAlert-icon': { color: c.accent.primary },
           }}
         >
-          OpenSwarm {availableVersion} downloaded — restart to update
+          {updateStatus === 'available' && `OpenSwarm ${availableVersion} is available`}
+          {updateStatus === 'downloaded' && `OpenSwarm ${availableVersion} downloaded — restart to update`}
         </Alert>
       </Snackbar>
     </Box>
diff --git a/frontend/src/app/components/useDomElementSelector.ts b/frontend/src/app/components/useDomElementSelector.ts
index b4535e19..8115769b 100644
--- a/frontend/src/app/components/useDomElementSelector.ts
+++ b/frontend/src/app/components/useDomElementSelector.ts
@@ -120,6 +120,7 @@ export function useDomElementSelector(): DomSelectorState {
   const dragOriginRef = useRef<{ x: number; y: number } | null>(null);
   const isDraggingRef = useRef(false);
   const dragBoundsRef = useRef<{ left: number; top: number; right: number; bottom: number } | null>(null);
+  const preDragFocusRef = useRef<HTMLElement | null>(null);
 
   const excludeIdRef = useRef<string | null>(null);
   useEffect(() => {
@@ -245,8 +246,11 @@ export function useDomElementSelector(): DomSelectorState {
     if (e.button !== 0) return;
     if (e.metaKey || e.ctrlKey) return;
     const target = e.target as Element;
-    // Only start drag on "empty" canvas areas (not on selectable elements)
-    if (target && findSelectableAncestor(target, excludeIdRef.current)) return;
+    if (target && findSelectableAncestor(target, excludeIdRef.current)) {
+      e.preventDefault();
+      return;
+    }
+    preDragFocusRef.current = document.activeElement instanceof HTMLElement ? document.activeElement : null;
     dragOriginRef.current = { x: e.clientX, y: e.clientY };
     isDraggingRef.current = false;
   }, []);
@@ -291,12 +295,17 @@ export function useDomElementSelector(): DomSelectorState {
       });
     }
 
+    const wasDragging = isDraggingRef.current;
     dragOriginRef.current = null;
     isDraggingRef.current = false;
     dragBoundsRef.current = null;
     setDragRect(EMPTY_DRAG);
     setDragPreview([]);
     if (dragPreviewRafRef.current) cancelAnimationFrame(dragPreviewRafRef.current);
+    if (wasDragging && preDragFocusRef.current) {
+      preDragFocusRef.current.focus();
+    }
+    preDragFocusRef.current = null;
   }, [ctx]);
 
   const handleClick = useCallback((e: MouseEvent) => {
@@ -327,6 +336,7 @@ export function useDomElementSelector(): DomSelectorState {
       dragOriginRef.current = null;
       dragBoundsRef.current = null;
       isDraggingRef.current = false;
+      preDragFocusRef.current = null;
       return;
     }
 
@@ -353,6 +363,7 @@ export function useDomElementSelector(): DomSelectorState {
       dragOriginRef.current = null;
       dragBoundsRef.current = null;
       isDraggingRef.current = false;
+      preDragFocusRef.current = null;
     };
   }, [ctx?.selectMode, handleMouseMove, handleMouseDown, handleMouseUp, handleClick]);
 
diff --git a/frontend/src/app/pages/AgentChat/ChatInput.tsx b/frontend/src/app/pages/AgentChat/ChatInput.tsx
index ff028b5d..525bd254 100644
--- a/frontend/src/app/pages/AgentChat/ChatInput.tsx
+++ b/frontend/src/app/pages/AgentChat/ChatInput.tsx
@@ -981,6 +981,7 @@ const ChatInput = forwardRef<ChatInputHandle, Props>(({ onSend, disabled, mode,
           <Tooltip title={elementSelection.selectMode ? 'Exit select mode' : 'Select UI element'}>
             <IconButton
               size="small"
+              onMouseDown={(e) => e.preventDefault()}
               onClick={() => {
                 if (!elementSelection.selectMode && sessionId) {
                   elementSelection.setExcludeSelectId(sessionId);
diff --git a/frontend/src/app/pages/Dashboard/Dashboard.tsx b/frontend/src/app/pages/Dashboard/Dashboard.tsx
index 79c62974..9d597b05 100644
--- a/frontend/src/app/pages/Dashboard/Dashboard.tsx
+++ b/frontend/src/app/pages/Dashboard/Dashboard.tsx
@@ -84,6 +84,7 @@ const DashboardInner: React.FC = () => {
   const zoomSensitivity = useAppSelector((state) => state.settings.data.zoom_sensitivity);
   const newAgentShortcut = useAppSelector((state) => state.settings.data.new_agent_shortcut);
   const browserHomepage = useAppSelector((state) => state.settings.data.browser_homepage);
+  const expandNewChats = useAppSelector((state) => state.settings.data.expand_new_chats_in_dashboard);
   const outputs = useAppSelector((state) => state.outputs.items);
   const sessionList = Object.values(sessions);
 
@@ -420,7 +421,7 @@ const DashboardInner: React.FC = () => {
           contextPaths: contextPaths?.map((cp) => ({ path: cp.path, type: cp.type })),
           forcedTools,
           attachedSkills,
-          expand: false,
+          expand: expandNewChats,
         }),
       ).then((action) => {
         if (launchAndSendFirstMessage.fulfilled.match(action)) {
@@ -452,7 +453,7 @@ const DashboardInner: React.FC = () => {
         }
       });
     },
-    [canvas.viewportRef, dispatch, dashboardId],
+    [canvas.viewportRef, dispatch, dashboardId, expandNewChats],
   );
 
   const handleAddView = useCallback((outputId: string) => {
diff --git a/frontend/src/app/pages/Settings/Settings.tsx b/frontend/src/app/pages/Settings/Settings.tsx
index 58d71b10..bae49d38 100644
--- a/frontend/src/app/pages/Settings/Settings.tsx
+++ b/frontend/src/app/pages/Settings/Settings.tsx
@@ -554,7 +554,7 @@ const Settings: React.FC = () => {
           </Box>
         </Box>
 
-        <Box sx={inlineRowLastSx}>
+        <Box sx={inlineRowSx}>
           <Box sx={{ mr: 3 }}>
             <Typography sx={labelSx}>Auto-enable element selection</Typography>
             <Typography sx={descSx}>Automatically enter element selection mode when creating a new agent.</Typography>
@@ -569,6 +569,21 @@ const Settings: React.FC = () => {
           />
         </Box>
 
+        <Box sx={inlineRowLastSx}>
+          <Box sx={{ mr: 3 }}>
+            <Typography sx={labelSx}>Default agent spawn state in dashboard</Typography>
+            <Typography sx={descSx}>When enabled, new agents spawn expanded instead of collapsed.</Typography>
+          </Box>
+          <Switch
+            checked={form.expand_new_chats_in_dashboard}
+            onChange={(e) => setForm({ ...form, expand_new_chats_in_dashboard: e.target.checked })}
+            sx={{
+              '& .MuiSwitch-switchBase.Mui-checked': { color: c.accent.primary },
+              '& .MuiSwitch-switchBase.Mui-checked + .MuiSwitch-track': { bgcolor: c.accent.primary },
+            }}
+          />
+        </Box>
+
         {/* ── Browser ── */}
         <Typography sx={{ ...sectionSx, mt: 3 }}>Browser</Typography>
 
diff --git a/frontend/src/shared/state/settingsSlice.ts b/frontend/src/shared/state/settingsSlice.ts
index 4530871c..0d7acce8 100644
--- a/frontend/src/shared/state/settingsSlice.ts
+++ b/frontend/src/shared/state/settingsSlice.ts
@@ -23,6 +23,7 @@ export interface AppSettings {
   anthropic_api_key: string | null;
   browser_homepage: string;
   auto_select_mode_on_new_agent: boolean;
+  expand_new_chats_in_dashboard: boolean;
 }
 
 export interface BrowseResult {
@@ -52,6 +53,7 @@ const initialState: SettingsState = {
     anthropic_api_key: null,
     browser_homepage: 'https://www.google.com',
     auto_select_mode_on_new_agent: false,
+    expand_new_chats_in_dashboard: false,
   },
   loading: false,
   loaded: false,