diff --git a/.claude/settings.local.json b/.claude/settings.local.json
deleted file mode 100644
index 31dc750..0000000
--- a/.claude/settings.local.json
+++ /dev/null
@@ -1,15 +0,0 @@
-{
-  "permissions": {
-    "allow": [
-      "Bash(npm update:*)",
-      "WebFetch(domain:ai-sdk.dev)",
-      "mcp__ide__getDiagnostics",
-      "Bash(npx tsc:*)",
-      "WebFetch(domain:sdk.vercel.ai)",
-      "Bash(npm run build:*)",
-      "Bash(npm outdated:*)"
-    ],
-    "deny": [],
-    "ask": []
-  }
-}
diff --git a/app/api/chat/route.ts b/app/api/chat/route.ts
index d074d80..5183e9b 100644
--- a/app/api/chat/route.ts
+++ b/app/api/chat/route.ts
@@ -72,7 +72,10 @@ When using edit_diagram tool:
 - Example GOOD edit: {"search": "  <mxCell id=\"2\" value=\"Old Text\">", "replace": "  <mxCell id=\"2\" value=\"New Text\">"}
 - Example BAD edit: Including 10+ unchanged lines just to change one attribute
 - For multiple changes, use separate edits: [{"search": "line1", "replace": "new1"}, {"search": "line2", "replace": "new2"}]
-- CRITICAL: If edit_diagram fails because the search pattern cannot be found, fall back to using display_diagram to regenerate the entire diagram with your changes. Do NOT keep trying edit_diagram with different search patterns.
+- RETRY POLICY: If edit_diagram fails because the search pattern cannot be found:
+  * You may retry edit_diagram up to 3 times with adjusted search patterns
+  * After 3 failed attempts, you MUST fall back to using display_diagram to regenerate the entire diagram
+  * The error message will indicate how many retries remain
 `;
 
     const lastMessage = messages[messages.length - 1];
diff --git a/components/chat-panel.tsx b/components/chat-panel.tsx
index aa8693f..78f60da 100644
--- a/components/chat-panel.tsx
+++ b/components/chat-panel.tsx
@@ -98,10 +98,18 @@ export default function ChatPanel() {
 
                         const errorMessage = error instanceof Error ? error.message : String(error);
 
+                        // Provide detailed error with current diagram XML
                         addToolResult({
                             tool: "edit_diagram",
                             toolCallId: toolCall.toolCallId,
-                            output: `Failed to edit diagram: ${errorMessage}`,
+                            output: `Edit failed: ${errorMessage}
+
+Current diagram XML:
+\`\`\`xml
+${currentXml}
+\`\`\`
+
+Please retry with an adjusted search pattern or use display_diagram if retries are exhausted.`,
                         });
                     }
                 }