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The catch-all on_receive_dispatch handler was applying respond_with_error to *every* Dispatch variant, including Response. For Response variants, that call routes the error to the ResponseRouter for the *outgoing* request — silently overwriting the real reply from Zed with "Internal error: not implemented yet". Every ACP roundtrip we issue (fs/read_text_file, fs/write_text_file, session/request_permission, terminal/*) was therefore returning an error to the tool runner regardless of what Zed actually responded. The model saw uniformly-failing tools, gave up, and confabulated plausible explanations. Fix: pattern-match the Dispatch. Response → forward to its router via respond_with_result. Request / Notification → keep the "not implemented yet" error response as before. Found via debug logs showing WARN helexa_acp::agent: unhandled ACP message method="fs/read_text_file" right before every tool failure. Co-Authored-By: Claude Opus 4.7 (1M context) <noreply@anthropic.com>