diff --git a/server/src/app.rs b/server/src/app.rs
index 5d4749f..f53fdc3 100644
--- a/server/src/app.rs
+++ b/server/src/app.rs
@@ -35,7 +35,10 @@ impl App {
                 .set_port(store.port_settings().await?.service_port);
         }
         let assets = PromptAssets::embedded()?;
-        let compiler = PromptCompiler::new(assets);
+        let compiler = PromptCompiler::with_compaction_prompt_path(
+            assets,
+            crate::config::compaction_prompt_path()?,
+        );
         let provider = std::sync::Arc::new(ProviderRouter::new(
             store.clone(),
             config.provider_request_timeout,
diff --git a/server/src/config.rs b/server/src/config.rs
index ba82881..c3afeae 100644
--- a/server/src/config.rs
+++ b/server/src/config.rs
@@ -9,6 +9,7 @@ const DATA_DIR_NAME: &str = ".cursor-byok-v3";
 const DATABASE_FILE_NAME: &str = "cursor-byok.db";
 const V0049_DATA_DIR_NAME: &str = ".cursor-local-assistant-v2";
 const V0049_CONFIG_FILE_NAME: &str = "config.yaml";
+const COMPACTION_PROMPT_PATH: &str = "prompts/compaction.md";
 
 pub fn managed_data_dir() -> Result<PathBuf> {
     let home_dir = dirs::home_dir()
@@ -28,6 +29,26 @@ pub fn v0049_config_path() -> Result<PathBuf> {
         .join(V0049_CONFIG_FILE_NAME))
 }
 
+pub fn compaction_prompt_path() -> Result<PathBuf> {
+    Ok(managed_data_dir()?.join(COMPACTION_PROMPT_PATH))
+}
+
+pub fn compaction_prompt_override() -> Result<Option<String>> {
+    compaction_prompt_override_at(&compaction_prompt_path()?)
+}
+
+pub(crate) fn compaction_prompt_override_at(path: &std::path::Path) -> Result<Option<String>> {
+    match fs::read_to_string(path) {
+        Ok(prompt) if prompt.trim().is_empty() => Ok(None),
+        Ok(prompt) => Ok(Some(prompt)),
+        Err(error) if error.kind() == std::io::ErrorKind::NotFound => Ok(None),
+        Err(error) => Err(Error::Config(format!(
+            "cannot read compaction prompt at {}: {error}",
+            path.display()
+        ))),
+    }
+}
+
 #[derive(Clone, Debug, PartialEq, Eq)]
 pub enum ProviderKind {
     OpenAiChat,
@@ -156,6 +177,21 @@ fn database_url_for_dir(data_dir: &std::path::Path) -> Result<String> {
 mod tests {
     use super::*;
 
+    #[test]
+    fn compaction_prompt_override_is_optional_and_reloaded() {
+        let directory = tempfile::tempdir().unwrap();
+        let path = directory.path().join("compaction.md");
+
+        assert_eq!(compaction_prompt_override_at(&path).unwrap(), None);
+        fs::write(&path, "  \n").unwrap();
+        assert_eq!(compaction_prompt_override_at(&path).unwrap(), None);
+        fs::write(&path, "custom prompt").unwrap();
+        assert_eq!(
+            compaction_prompt_override_at(&path).unwrap().as_deref(),
+            Some("custom prompt")
+        );
+    }
+
     #[tokio::test]
     async fn managed_database_supports_home_paths_with_spaces() {
         let directory = tempfile::tempdir().unwrap();
diff --git a/server/src/cursor/prompting/compiler.rs b/server/src/cursor/prompting/compiler.rs
index ec4e7b9..96145a1 100644
--- a/server/src/cursor/prompting/compiler.rs
+++ b/server/src/cursor/prompting/compiler.rs
@@ -1,4 +1,4 @@
-use std::collections::BTreeMap;
+use std::{collections::BTreeMap, path::PathBuf};
 
 use crate::{
     model::{ModelSpec, PromptSpec, ToolDefinition},
@@ -10,11 +10,22 @@ use super::{assets::runtime_expression, Mode, PromptAssets};
 #[derive(Clone)]
 pub struct PromptCompiler {
     assets: PromptAssets,
+    compaction_prompt_path: Option<PathBuf>,
 }
 
 impl PromptCompiler {
     pub fn new(assets: PromptAssets) -> Self {
-        Self { assets }
+        Self {
+            assets,
+            compaction_prompt_path: None,
+        }
+    }
+
+    pub fn with_compaction_prompt_path(assets: PromptAssets, path: PathBuf) -> Self {
+        Self {
+            assets,
+            compaction_prompt_path: Some(path),
+        }
     }
 
     pub fn runtime_message(&self, mode: Mode, values: &BTreeMap<&str, String>) -> Result<String> {
@@ -39,12 +50,13 @@ impl PromptCompiler {
             .display_name
             .as_deref()
             .unwrap_or(model.model_id.as_str());
+        let prompt = match (mode, &self.compaction_prompt_path) {
+            (Mode::Compaction, Some(path)) => crate::config::compaction_prompt_override_at(path)?
+                .unwrap_or_else(|| self.assets.mode(mode).prompt.clone()),
+            _ => self.assets.mode(mode).prompt.clone(),
+        };
         Ok(PromptSpec {
-            instructions: self
-                .assets
-                .mode(mode)
-                .prompt
-                .replace("{{FAKE_MODEL_NAME}}", fake_model_name),
+            instructions: prompt.replace("{{FAKE_MODEL_NAME}}", fake_model_name),
             tools,
         })
     }
diff --git a/server/src/run/engine.rs b/server/src/run/engine.rs
index 296309f..73deef1 100644
--- a/server/src/run/engine.rs
+++ b/server/src/run/engine.rs
@@ -541,6 +541,9 @@ impl RunEngine {
         model.max_output_tokens = Some(COMPACTION_OUTPUT_TOKENS);
         model.reasoning.enabled = false;
         model.reasoning.effort = None;
+        let instructions = crate::config::compaction_prompt_override()
+            .map_err(|error| RunOutcome::Failed(error.into()))?
+            .unwrap_or_else(|| COMPACTION_INSTRUCTIONS.into());
         let invocation = crate::model::ModelInvocation {
             call_id: format!("{}:{provider_call_index}", prepared.run_id),
             run_id: prepared.run_id.to_string(),
@@ -548,7 +551,7 @@ impl RunEngine {
             provider_call_index,
             request: crate::model::ModelRequest {
                 prompt: crate::model::PromptSpec {
-                    instructions: COMPACTION_INSTRUCTIONS.into(),
+                    instructions,
                     tools: Vec::new(),
                 },
                 model,