diff --git a/frontend/lib/hooks/__tests__/useInteractiveTerminal.test.tsx b/frontend/lib/hooks/__tests__/useInteractiveTerminal.test.tsx
new file mode 100644
index 0000000..78887fb
--- /dev/null
+++ b/frontend/lib/hooks/__tests__/useInteractiveTerminal.test.tsx
@@ -0,0 +1,323 @@
+import { renderHook, act } from '@testing-library/react';
+import { useInteractiveTerminal } from '../useInteractiveTerminal';
+
+// Mock socket.io-client
+const mockSocket = {
+  on: jest.fn(),
+  emit: jest.fn(),
+  disconnect: jest.fn(),
+  connected: true,
+};
+
+jest.mock('socket.io-client', () => ({
+  io: jest.fn(() => mockSocket),
+}));
+
+// Mock xterm
+const mockTerminal = {
+  loadAddon: jest.fn(),
+  open: jest.fn(),
+  write: jest.fn(),
+  onData: jest.fn(),
+  dispose: jest.fn(),
+};
+
+const mockFitAddon = {
+  fit: jest.fn(),
+  proposeDimensions: jest.fn(() => ({ cols: 80, rows: 24 })),
+};
+
+jest.mock('@xterm/xterm', () => ({
+  Terminal: jest.fn(() => mockTerminal),
+}));
+
+jest.mock('@xterm/addon-fit', () => ({
+  FitAddon: jest.fn(() => mockFitAddon),
+}));
+
+// Mock API client
+jest.mock('@/lib/api', () => ({
+  apiClient: {
+    getToken: jest.fn(() => 'test-token'),
+  },
+  API_BASE_URL: 'http://localhost:3000',
+}));
+
+describe('useInteractiveTerminal', () => {
+  const defaultProps = {
+    open: true,
+    containerId: 'container123',
+    containerName: 'test-container',
+    isMobile: false,
+    onFallback: jest.fn(),
+  };
+
+  beforeEach(() => {
+    jest.clearAllMocks();
+    // Reset mock socket event handlers
+    mockSocket.on.mockClear();
+    mockSocket.emit.mockClear();
+    mockSocket.disconnect.mockClear();
+    mockTerminal.dispose.mockClear();
+  });
+
+  it('should return terminalRef and cleanup function', () => {
+    const { result } = renderHook(() =>
+      useInteractiveTerminal(defaultProps)
+    );
+
+    expect(result.current.terminalRef).toBeDefined();
+    expect(typeof result.current.cleanup).toBe('function');
+  });
+
+  it('should not initialize terminal when open is false', async () => {
+    const { io } = require('socket.io-client');
+
+    renderHook(() =>
+      useInteractiveTerminal({
+        ...defaultProps,
+        open: false,
+      })
+    );
+
+    // Wait for potential async operations
+    await act(async () => {
+      await new Promise(resolve => setTimeout(resolve, 100));
+    });
+
+    expect(io).not.toHaveBeenCalled();
+  });
+
+  describe('effect dependency stability', () => {
+    it('should re-initialize when onFallback reference changes (demonstrates the bug this fix prevents)', async () => {
+      const { io } = require('socket.io-client');
+
+      // Create a ref div for the terminal
+      const mockDiv = document.createElement('div');
+
+      const { rerender } = renderHook(
+        (props) => {
+          const hook = useInteractiveTerminal(props);
+          // Simulate ref being available
+          if (hook.terminalRef.current === null) {
+            (hook.terminalRef as any).current = mockDiv;
+          }
+          return hook;
+        },
+        {
+          initialProps: {
+            ...defaultProps,
+            onFallback: jest.fn(), // First callback instance
+          },
+        }
+      );
+
+      await act(async () => {
+        await new Promise(resolve => setTimeout(resolve, 200));
+      });
+
+      const initialCallCount = io.mock.calls.length;
+
+      // Rerender with a NEW function reference (simulating unstable callback)
+      // This WILL cause re-init because onFallback is in the dependency array
+      // The fix is in useTerminalModalState which now memoizes handleFallback
+      rerender({
+        ...defaultProps,
+        onFallback: jest.fn(), // New callback instance
+      });
+
+      await act(async () => {
+        await new Promise(resolve => setTimeout(resolve, 200));
+      });
+
+      const finalCallCount = io.mock.calls.length;
+
+      // This test DOCUMENTS that unstable onFallback causes re-initialization
+      // The actual fix ensures onFallback from useTerminalModalState is stable
+      expect(finalCallCount).toBeGreaterThan(initialCallCount);
+    });
+
+    it('should only re-initialize when open, containerId, or isMobile changes', async () => {
+      const { io } = require('socket.io-client');
+      const stableOnFallback = jest.fn();
+
+      const mockDiv = document.createElement('div');
+
+      const { rerender } = renderHook(
+        (props) => {
+          const hook = useInteractiveTerminal(props);
+          if (hook.terminalRef.current === null) {
+            (hook.terminalRef as any).current = mockDiv;
+          }
+          return hook;
+        },
+        {
+          initialProps: {
+            ...defaultProps,
+            onFallback: stableOnFallback,
+          },
+        }
+      );
+
+      await act(async () => {
+        await new Promise(resolve => setTimeout(resolve, 200));
+      });
+
+      const initialCallCount = io.mock.calls.length;
+
+      // Rerender with same props (stable reference)
+      rerender({
+        ...defaultProps,
+        onFallback: stableOnFallback, // Same reference
+      });
+
+      await act(async () => {
+        await new Promise(resolve => setTimeout(resolve, 200));
+      });
+
+      // Should NOT reinitialize with same props
+      expect(io.mock.calls.length).toBe(initialCallCount);
+    });
+
+    it('should re-initialize when containerId changes', async () => {
+      const { io } = require('socket.io-client');
+      const stableOnFallback = jest.fn();
+
+      const mockDiv = document.createElement('div');
+
+      const { rerender } = renderHook(
+        (props) => {
+          const hook = useInteractiveTerminal(props);
+          if (hook.terminalRef.current === null) {
+            (hook.terminalRef as any).current = mockDiv;
+          }
+          return hook;
+        },
+        {
+          initialProps: {
+            ...defaultProps,
+            onFallback: stableOnFallback,
+          },
+        }
+      );
+
+      await act(async () => {
+        await new Promise(resolve => setTimeout(resolve, 200));
+      });
+
+      const initialCallCount = io.mock.calls.length;
+
+      // Rerender with different containerId
+      rerender({
+        ...defaultProps,
+        containerId: 'different-container',
+        onFallback: stableOnFallback,
+      });
+
+      await act(async () => {
+        await new Promise(resolve => setTimeout(resolve, 200));
+      });
+
+      // SHOULD reinitialize with new containerId
+      expect(io.mock.calls.length).toBeGreaterThan(initialCallCount);
+    });
+  });
+
+  it('should cleanup on unmount', async () => {
+    const mockDiv = document.createElement('div');
+
+    const { unmount } = renderHook(
+      () => {
+        const hook = useInteractiveTerminal(defaultProps);
+        if (hook.terminalRef.current === null) {
+          (hook.terminalRef as any).current = mockDiv;
+        }
+        return hook;
+      }
+    );
+
+    await act(async () => {
+      await new Promise(resolve => setTimeout(resolve, 200));
+    });
+
+    unmount();
+
+    await act(async () => {
+      await new Promise(resolve => setTimeout(resolve, 100));
+    });
+
+    // Verify cleanup was called
+    expect(mockSocket.disconnect).toHaveBeenCalled();
+  });
+
+  it('should call cleanup function when invoked manually', () => {
+    const { result } = renderHook(() => useInteractiveTerminal(defaultProps));
+
+    act(() => {
+      result.current.cleanup();
+    });
+
+    // Manual cleanup should work without errors
+    expect(result.current.cleanup).toBeDefined();
+  });
+});
+
+describe('useInteractiveTerminal reconnection loop detection', () => {
+  const testProps = {
+    open: true,
+    containerId: 'container123',
+    containerName: 'test-container',
+    isMobile: false,
+    onFallback: jest.fn(),
+  };
+
+  beforeEach(() => {
+    jest.clearAllMocks();
+  });
+
+  it('should not create multiple connections in rapid succession with stable props', async () => {
+    const { io } = require('socket.io-client');
+    const mockDiv = document.createElement('div');
+
+    // Track connection timing
+    const connectionTimes: number[] = [];
+    io.mockImplementation(() => {
+      connectionTimes.push(Date.now());
+      return mockSocket;
+    });
+
+    const stableOnFallback = jest.fn();
+
+    const { rerender } = renderHook(
+      (props) => {
+        const hook = useInteractiveTerminal(props);
+        if (hook.terminalRef.current === null) {
+          (hook.terminalRef as any).current = mockDiv;
+        }
+        return hook;
+      },
+      {
+        initialProps: {
+          ...testProps,
+          onFallback: stableOnFallback,
+        },
+      }
+    );
+
+    // Simulate multiple rapid rerenders (like React Strict Mode or state updates)
+    for (let i = 0; i < 5; i++) {
+      rerender({
+        ...testProps,
+        onFallback: stableOnFallback,
+      });
+    }
+
+    await act(async () => {
+      await new Promise(resolve => setTimeout(resolve, 500));
+    });
+
+    // With stable props, should only have 1 connection (initial mount)
+    // A reconnection loop would show multiple connections
+    expect(connectionTimes.length).toBeLessThanOrEqual(2); // Allow for initial + StrictMode double-mount
+  });
+});
diff --git a/frontend/lib/hooks/__tests__/useTerminalModalState.test.tsx b/frontend/lib/hooks/__tests__/useTerminalModalState.test.tsx
index ff411cb..fb17b24 100644
--- a/frontend/lib/hooks/__tests__/useTerminalModalState.test.tsx
+++ b/frontend/lib/hooks/__tests__/useTerminalModalState.test.tsx
@@ -125,4 +125,72 @@ describe('useTerminalModalState', () => {
 
     expect(result.current.isMobile).toBe(false);
   });
+
+  describe('handler stability (useCallback memoization)', () => {
+    it('should return stable handleFallback reference across renders', () => {
+      const { result, rerender } = renderHook(() => useTerminalModalState());
+
+      const firstHandleFallback = result.current.handleFallback;
+
+      // Trigger a re-render
+      rerender();
+
+      const secondHandleFallback = result.current.handleFallback;
+
+      // Handler should be the same reference (memoized with useCallback)
+      expect(firstHandleFallback).toBe(secondHandleFallback);
+    });
+
+    it('should return stable handleModeChange reference across renders', () => {
+      const { result, rerender } = renderHook(() => useTerminalModalState());
+
+      const firstHandler = result.current.handleModeChange;
+
+      rerender();
+
+      const secondHandler = result.current.handleModeChange;
+
+      expect(firstHandler).toBe(secondHandler);
+    });
+
+    it('should return stable handleRetryInteractive reference across renders', () => {
+      const { result, rerender } = renderHook(() => useTerminalModalState());
+
+      const firstHandler = result.current.handleRetryInteractive;
+
+      rerender();
+
+      const secondHandler = result.current.handleRetryInteractive;
+
+      expect(firstHandler).toBe(secondHandler);
+    });
+
+    it('should return stable reset reference across renders', () => {
+      const { result, rerender } = renderHook(() => useTerminalModalState());
+
+      const firstHandler = result.current.reset;
+
+      rerender();
+
+      const secondHandler = result.current.reset;
+
+      expect(firstHandler).toBe(secondHandler);
+    });
+
+    it('should maintain handler stability even after state changes', () => {
+      const { result, rerender } = renderHook(() => useTerminalModalState());
+
+      const firstHandleFallback = result.current.handleFallback;
+
+      // Trigger state change
+      act(() => {
+        result.current.handleFallback('Test error');
+      });
+
+      rerender();
+
+      // Handler should still be the same reference
+      expect(result.current.handleFallback).toBe(firstHandleFallback);
+    });
+  });
 });
diff --git a/frontend/lib/hooks/useTerminalModalState.ts b/frontend/lib/hooks/useTerminalModalState.ts
index 7b8cf77..bc8c310 100644
--- a/frontend/lib/hooks/useTerminalModalState.ts
+++ b/frontend/lib/hooks/useTerminalModalState.ts
@@ -1,9 +1,13 @@
-import { useState } from 'react';
+import { useState, useCallback } from 'react';
 import { useMediaQuery, useTheme } from '@mui/material';
 
 /**
  * Comprehensive hook for managing TerminalModal state
  * Handles mode switching, fallback logic, and UI state
+ *
+ * IMPORTANT: All handlers are memoized with useCallback to prevent
+ * unnecessary re-renders in dependent hooks (e.g., useInteractiveTerminal)
+ * which would cause WebSocket reconnection loops.
  */
 export function useTerminalModalState() {
   const theme = useTheme();
@@ -14,40 +18,40 @@ export function useTerminalModalState() {
   const [fallbackReason, setFallbackReason] = useState('');
   const [showFallbackNotification, setShowFallbackNotification] = useState(false);
 
-  const handleFallback = (reason: string) => {
+  const handleFallback = useCallback((reason: string) => {
     console.warn('Falling back to simple mode:', reason);
     setInteractiveFailed(true);
     setFallbackReason(reason);
     setMode('simple');
     setShowFallbackNotification(false);
-  };
+  }, []);
 
-  const handleModeChange = (
+  const handleModeChange = useCallback((
     event: React.MouseEvent<HTMLElement>,
     newMode: 'simple' | 'interactive' | null,
   ) => {
     if (newMode !== null) {
-      if (newMode === 'interactive' && interactiveFailed) {
+      if (newMode === 'interactive') {
         setInteractiveFailed(false);
         setFallbackReason('');
       }
       setMode(newMode);
     }
-  };
+  }, []);
 
-  const handleRetryInteractive = () => {
+  const handleRetryInteractive = useCallback(() => {
     setInteractiveFailed(false);
     setFallbackReason('');
     setShowFallbackNotification(false);
     setMode('interactive');
-  };
+  }, []);
 
-  const reset = () => {
+  const reset = useCallback(() => {
     setMode('interactive');
     setInteractiveFailed(false);
     setFallbackReason('');
     setShowFallbackNotification(false);
-  };
+  }, []);
 
   return {
     isMobile,