diff --git a/.changeset/tool-call-error-terminal.md b/.changeset/tool-call-error-terminal.md
new file mode 100644
index 000000000..fa07a07f8
--- /dev/null
+++ b/.changeset/tool-call-error-terminal.md
@@ -0,0 +1,17 @@
+---
+'@tanstack/ai-event-client': minor
+'@tanstack/ai-client': minor
+'@tanstack/ai': minor
+---
+
+Add an `'error'` terminal to `ToolCallState`. When a tool execution produces an output error, the StreamProcessor now transitions the `tool-call` part to `state: 'error'` instead of parking it at `'input-complete'`.
+
+Previously an errored tool call left the tool-call part at `'input-complete'` forever, so UIs that render lifecycle from the part's `state` could not distinguish "still executing" from "failed" without reverse-engineering the error-shaped `output` or the sibling `tool-result` part. The new terminal makes the tool-call state machine self-describing and symmetric with `ToolResultState` (which already has `'error'`):
+
+```ts
+if (part.type === 'tool-call' && part.state === 'error') {
+  // render failure — no more inferring from output shape
+}
+```
+
+The completion safety net (`RUN_FINISHED` / stream finalization) no longer downgrades a failed tool call back to `'input-complete'`, including when an `output-error` result arrives before `TOOL_CALL_END`.
diff --git a/packages/ai-client/src/chat-client.ts b/packages/ai-client/src/chat-client.ts
index 6ec7ce563..468dc7618 100644
--- a/packages/ai-client/src/chat-client.ts
+++ b/packages/ai-client/src/chat-client.ts
@@ -1218,11 +1218,19 @@ export class ChatClient<
       context,
     )
 
-    // Add result via processor
+    // Add result via processor. `result.state` is the authoritative error
+    // signal; `addToolResult` infers error-ness from the error message being
+    // truthy. Pass an error message ONLY for output-error results (falling back
+    // to a default so an empty message like `throw new Error()` still reaches
+    // the terminal 'error' state), and `undefined` otherwise — so error
+    // signalling derives solely from `result.state`, never from a stray
+    // `result.errorText` on a successful result.
     this.processor.addToolResult(
       result.toolCallId,
       result.output,
-      result.errorText,
+      result.state === 'output-error'
+        ? result.errorText || 'Tool execution failed'
+        : undefined,
     )
 
     // If stream is in progress, queue continuation check for after it ends
diff --git a/packages/ai-client/src/types.ts b/packages/ai-client/src/types.ts
index 5127a33de..fa00811d7 100644
--- a/packages/ai-client/src/types.ts
+++ b/packages/ai-client/src/types.ts
@@ -90,6 +90,7 @@ export type ToolCallState =
   | 'approval-requested' // Waiting for user approval
   | 'approval-responded' // User has approved/denied
   | 'complete' // Result is complete
+  | 'error' // Tool execution failed (terminal)
 
 /**
  * Tool result states - track the lifecycle of a tool result
diff --git a/packages/ai-client/tests/chat-client-context.test.ts b/packages/ai-client/tests/chat-client-context.test.ts
index d48dba51f..95dfe5a7b 100644
--- a/packages/ai-client/tests/chat-client-context.test.ts
+++ b/packages/ai-client/tests/chat-client-context.test.ts
@@ -309,7 +309,7 @@ describe('ChatClient runtime context', () => {
     expect(
       findToolCallPart(client, 'tc-invalid-executable-output'),
     ).toMatchObject({
-      state: 'input-complete',
+      state: 'error',
       output: {
         error: expect.stringContaining('expected object'),
       },
@@ -321,6 +321,54 @@ describe('ChatClient runtime context', () => {
     })
   })
 
+  it('renders a client tool that throws an empty-message error as terminal "error" (issue #718)', async () => {
+    const firstChunks = createToolCallChunks([
+      {
+        id: 'tc-empty-error',
+        name: 'throwing_tool',
+        arguments: '{}',
+      },
+    ])
+    const secondChunks = createTextChunks('done', 'msg-empty-error')
+    let callIndex = 0
+
+    const adapter: ConnectConnectionAdapter = {
+      async *connect(_messages, _data, abortSignal) {
+        const chunks = callIndex === 0 ? firstChunks : secondChunks
+        callIndex++
+        for (const chunk of chunks) {
+          if (abortSignal?.aborted) {
+            return
+          }
+          yield chunk
+        }
+      },
+    }
+
+    const tool = toolDefinition({
+      name: 'throwing_tool',
+      description: 'Throws an error with no message',
+    }).client(() => {
+      // Empty message — error-ness must come from the output-error state, not
+      // from the truthiness of the message string.
+      throw new Error()
+    })
+
+    const client = new ChatClient({
+      connection: adapter,
+      tools: [tool],
+    })
+
+    await client.sendMessage('call throwing tool')
+
+    expect(findToolCallPart(client, 'tc-empty-error')).toMatchObject({
+      state: 'error',
+    })
+    expect(findToolResultPart(client, 'tc-empty-error')).toMatchObject({
+      state: 'error',
+    })
+  })
+
   it('validates manual client tool results against outputSchema', async () => {
     const tool = toolDefinition({
       name: 'manual_invalid_output_tool',
@@ -359,7 +407,7 @@ describe('ChatClient runtime context', () => {
     })
 
     expect(findToolCallPart(client, 'tc-manual-invalid-output')).toMatchObject({
-      state: 'input-complete',
+      state: 'error',
       output: {
         error: expect.stringContaining('expected number'),
       },
diff --git a/packages/ai-event-client/src/index.ts b/packages/ai-event-client/src/index.ts
index 1af14ca87..ede5544ee 100644
--- a/packages/ai-event-client/src/index.ts
+++ b/packages/ai-event-client/src/index.ts
@@ -254,6 +254,7 @@ export type ToolCallState =
   | 'approval-requested' // Waiting for user approval
   | 'approval-responded' // User has approved/denied
   | 'complete' // Result is complete
+  | 'error' // Tool execution failed (terminal)
 
 /**
  * Tool result states - track the lifecycle of a tool result
diff --git a/packages/ai/docs/chat-architecture.md b/packages/ai/docs/chat-architecture.md
index 687a0b50b..e23552fb3 100644
--- a/packages/ai/docs/chat-architecture.md
+++ b/packages/ai/docs/chat-architecture.md
@@ -354,11 +354,12 @@ Signals that the tool call's **input arguments** are finalized.
 ### With `result` (from TextEngine after execution)
 
 Signals that the tool has been **executed** and the result is available.
-- Still transitions state to `input-complete` (if not already).
+- Transitions the input state to `input-complete` (if not already).
 - Creates/updates two things:
   1. `updateToolCallWithOutput()` -- Sets `output` on the tool-call part (for UI rendering consistency).
   2. `updateToolResultPart()` -- Creates a `tool-result` part (for LLM conversation history).
 - The `result` field is a JSON string.
+- **On an `output-error` result**, the tool-call part transitions to the terminal `error` state (symmetric with the `tool-result` part's `error` state), so UIs can render failure from `part.state` without inspecting the error-shaped `output`. The completion safety net never downgrades an `error` part back to `input-complete`.
 
 ### This distinction is critical
 
diff --git a/packages/ai/src/activities/chat/messages.ts b/packages/ai/src/activities/chat/messages.ts
index cd0108fbb..8330b24fa 100644
--- a/packages/ai/src/activities/chat/messages.ts
+++ b/packages/ai/src/activities/chat/messages.ts
@@ -211,6 +211,7 @@ function isToolCallIncluded(part: ToolCallPart): boolean {
     part.state === 'input-complete' ||
     part.state === 'complete' ||
     part.state === 'approval-responded' ||
+    part.state === 'error' ||
     part.output !== undefined
   )
 }
diff --git a/packages/ai/src/activities/chat/stream/message-updaters.ts b/packages/ai/src/activities/chat/stream/message-updaters.ts
index 9cde9ffb5..ccb180d84 100644
--- a/packages/ai/src/activities/chat/stream/message-updaters.ts
+++ b/packages/ai/src/activities/chat/stream/message-updaters.ts
@@ -226,7 +226,7 @@ export function updateToolCallWithOutput(
       parts[index] = {
         ...toolCallPart,
         output: errorText ? { error: errorText } : output,
-        state: state ?? (errorText ? 'input-complete' : 'complete'),
+        state: state ?? (errorText ? 'error' : 'complete'),
       }
     }
 
diff --git a/packages/ai/src/activities/chat/stream/processor.ts b/packages/ai/src/activities/chat/stream/processor.ts
index 78c93fdb0..46535b88b 100644
--- a/packages/ai/src/activities/chat/stream/processor.ts
+++ b/packages/ai/src/activities/chat/stream/processor.ts
@@ -317,7 +317,7 @@ export class StreamProcessor {
       this.messages,
       toolCallId,
       output,
-      error ? 'input-complete' : undefined,
+      error ? 'error' : undefined,
       error,
     )
 
@@ -1184,7 +1184,7 @@ export class StreamProcessor {
         this.messages,
         chunk.toolCallId,
         output,
-        chunk.state === 'output-error' ? 'input-complete' : undefined,
+        chunk.state === 'output-error' ? 'error' : undefined,
       )
 
       // Step 2: Create/update the tool-result part (for LLM conversation history)
@@ -1240,7 +1240,7 @@ export class StreamProcessor {
       this.messages,
       chunk.toolCallId,
       output,
-      chunk.state === 'output-error' ? 'input-complete' : undefined,
+      chunk.state === 'output-error' ? 'error' : undefined,
     )
 
     // Step 2: Create/update the tool-result part
@@ -1690,11 +1690,22 @@ export class StreamProcessor {
     _index: number,
     toolCall: InternalToolCallState,
   ): void {
+    // Finalize the internal bookkeeping: the call's input arguments ARE
+    // complete regardless of whether execution later failed, so the call still
+    // counts as a completed tool call in getCompletedToolCalls()/getState().
     toolCall.state = 'input-complete'
 
     // Try final parse
     toolCall.parsedArguments = this.jsonParser.parse(toolCall.arguments)
 
+    // Don't downgrade the rendered part of a call that already reached the
+    // terminal 'error' state (e.g. an output-error TOOL_CALL_RESULT arrived
+    // without a preceding TOOL_CALL_END). The RUN_FINISHED / finalizeStream
+    // safety net must not clobber a failed call back to 'input-complete'.
+    if (this.isToolCallPartErrored(toolCall.id)) {
+      return
+    }
+
     // Update UIMessage
     this.messages = updateToolCallPart(this.messages, messageId, {
       id: toolCall.id,
@@ -1714,6 +1725,22 @@ export class StreamProcessor {
     )
   }
 
+  /**
+   * Whether the rendered tool-call part for the given id has reached the
+   * terminal 'error' state. Used to prevent the completion safety net from
+   * downgrading a failed call back to 'input-complete'.
+   */
+  private isToolCallPartErrored(toolCallId: string): boolean {
+    return this.messages.some((msg) =>
+      msg.parts.some(
+        (part) =>
+          part.type === 'tool-call' &&
+          part.id === toolCallId &&
+          part.state === 'error',
+      ),
+    )
+  }
+
   /**
    * Emit pending text update for a specific message.
    *
diff --git a/packages/ai/src/types.ts b/packages/ai/src/types.ts
index 6034e83ca..798b381b4 100644
--- a/packages/ai/src/types.ts
+++ b/packages/ai/src/types.ts
@@ -51,6 +51,7 @@ export type ToolCallState =
   | 'approval-requested' // Waiting for user approval
   | 'approval-responded' // User has approved/denied
   | 'complete' // Result is complete
+  | 'error' // Tool execution failed (terminal)
 
 /**
  * Tool result states - track the lifecycle of a tool result
diff --git a/packages/ai/tests/message-updaters.test.ts b/packages/ai/tests/message-updaters.test.ts
index 8f85fabae..070eefa2d 100644
--- a/packages/ai/tests/message-updaters.test.ts
+++ b/packages/ai/tests/message-updaters.test.ts
@@ -629,7 +629,9 @@ describe('message-updaters', () => {
 
       const part = result[0]?.parts[0] as ToolCallPart | undefined
       expect(part?.output).toEqual({ error: 'Tool execution failed' })
-      expect(part?.state).toBe('input-complete')
+      // An error output drives the tool-call part to the terminal 'error'
+      // state (issue #718).
+      expect(part?.state).toBe('error')
     })
 
     it('should search across all messages', () => {
diff --git a/packages/ai/tests/stream-processor.test.ts b/packages/ai/tests/stream-processor.test.ts
index bc6580520..c690fc604 100644
--- a/packages/ai/tests/stream-processor.test.ts
+++ b/packages/ai/tests/stream-processor.test.ts
@@ -1022,7 +1022,7 @@ describe('StreamProcessor', () => {
         .getMessages()[0]!
         .parts.find((p) => p.type === 'tool-call') as ToolCallPart
       expect((toolCallPart as any).output).toEqual({ error: 'Network error' })
-      expect(toolCallPart.state).toBe('input-complete')
+      expect(toolCallPart.state).toBe('error')
 
       const toolResultPart = processor
         .getMessages()[0]!
@@ -3392,7 +3392,9 @@ describe('StreamProcessor', () => {
         (p) => p.type === 'tool-call',
       ) as ToolCallPart
       expect(toolCallPart.output).toEqual({ error: 'boom' })
-      expect(toolCallPart.state).toBe('input-complete')
+      // The tool-call part reaches the terminal 'error' state, symmetric with
+      // its sibling tool-result part (see issue #718).
+      expect(toolCallPart.state).toBe('error')
 
       const toolResultPart = messages[0]?.parts.find(
         (p) => p.type === 'tool-result',
@@ -3400,6 +3402,41 @@ describe('StreamProcessor', () => {
       expect(toolResultPart.state).toBe('error')
       expect(toolResultPart.error).toBe('boom')
     })
+
+    it('keeps the tool-call part terminal at "error" through RUN_FINISHED even when output-error arrives before TOOL_CALL_END', () => {
+      const processor = new StreamProcessor()
+
+      processor.processChunk(ev.runStarted())
+      processor.processChunk(ev.textStart())
+      processor.processChunk(ev.toolStart('tc-1', 'get_weather'))
+      // output-error result arrives WITHOUT a preceding TOOL_CALL_END
+      processor.processChunk(
+        chunk(EventType.TOOL_CALL_RESULT, {
+          messageId: 'tool-result-1',
+          toolCallId: 'tc-1',
+          content: '{"error":"boom"}',
+          role: 'tool',
+          state: 'output-error',
+        }),
+      )
+      // RUN_FINISHED runs the completeAllToolCalls safety net
+      processor.processChunk(ev.runFinished())
+
+      const messages = processor.getMessages()
+      const toolCallPart = messages[0]?.parts.find(
+        (p) => p.type === 'tool-call',
+      ) as ToolCallPart
+      // Safety net must NOT downgrade the rendered failed call back to
+      // 'input-complete'
+      expect(toolCallPart.state).toBe('error')
+
+      // ...but the internal bookkeeping must still finalize the call so it is
+      // surfaced by getCompletedToolCalls()/getState() — consistent with the
+      // END-first ordering and unchanged from before the #718 fix.
+      expect(processor.getState().toolCalls.get('tc-1')?.state).toBe(
+        'input-complete',
+      )
+    })
   })
 
   describe('Structured output parts', () => {
diff --git a/testing/e2e/tests/tool-error.spec.ts b/testing/e2e/tests/tool-error.spec.ts
index 8fb1a3065..f7ce11136 100644
--- a/testing/e2e/tests/tool-error.spec.ts
+++ b/testing/e2e/tests/tool-error.spec.ts
@@ -29,5 +29,9 @@ test.describe('Tool Error Handling', () => {
       (tc: { name: string }) => tc.name === 'failing_tool',
     )
     expect(failingCall).toBeDefined()
+    // The failed tool-call part reaches the terminal 'error' state, so UIs can
+    // distinguish "failed" from "still executing" without reverse-engineering
+    // the output shape (issue #718).
+    expect(failingCall?.state).toBe('error')
   })
 })