diff --git a/openhands-cli/openhands_cli/user_actions/settings_action.py b/openhands-cli/openhands_cli/user_actions/settings_action.py
index b2a0d85a37..e41e08bdb0 100644
--- a/openhands-cli/openhands_cli/user_actions/settings_action.py
+++ b/openhands-cli/openhands_cli/user_actions/settings_action.py
@@ -123,9 +123,15 @@ def prompt_api_key(
         validator = NonEmptyValueValidator()
 
     question = helper_text + step_counter.next_step(question)
-    return cli_text_input(
+    user_input = cli_text_input(
         question, escapable=escapable, validator=validator, is_password=True
     )
+    
+    # If user pressed ENTER with existing key (empty input), return the existing key
+    if existing_api_key and not user_input.strip():
+        return existing_api_key.get_secret_value()
+    
+    return user_input
 
 
 # Advanced settings functions
diff --git a/openhands-cli/tests/settings/test_api_key_preservation.py b/openhands-cli/tests/settings/test_api_key_preservation.py
new file mode 100644
index 0000000000..29fa3c405d
--- /dev/null
+++ b/openhands-cli/tests/settings/test_api_key_preservation.py
@@ -0,0 +1,56 @@
+"""Test for API key preservation bug when updating settings."""
+
+from unittest.mock import patch
+import pytest
+from pydantic import SecretStr
+
+from openhands_cli.user_actions.settings_action import prompt_api_key
+from openhands_cli.tui.utils import StepCounter
+
+
+def test_api_key_preservation_when_user_presses_enter():
+    """Test that API key is preserved when user presses ENTER to keep current key.
+    
+    This test replicates the bug where API keys disappear when updating settings.
+    When a user presses ENTER to keep the current API key, the function should
+    return the existing API key, not an empty string.
+    """
+    step_counter = StepCounter(1)
+    existing_api_key = SecretStr("sk-existing-key-123")
+    
+    # Mock cli_text_input to return empty string (simulating user pressing ENTER)
+    with patch('openhands_cli.user_actions.settings_action.cli_text_input', return_value=''):
+        result = prompt_api_key(
+            step_counter=step_counter,
+            provider='openai',
+            existing_api_key=existing_api_key,
+            escapable=True
+        )
+    
+    # The bug: result is empty string instead of the existing key
+    # This test will fail initially, demonstrating the bug
+    assert result == existing_api_key.get_secret_value(), (
+        f"Expected existing API key '{existing_api_key.get_secret_value()}' "
+        f"but got '{result}'. API key should be preserved when user presses ENTER."
+    )
+
+
+def test_api_key_update_when_user_enters_new_key():
+    """Test that API key is updated when user enters a new key."""
+    step_counter = StepCounter(1)
+    existing_api_key = SecretStr("sk-existing-key-123")
+    new_api_key = "sk-new-key-456"
+    
+    # Mock cli_text_input to return new API key
+    with patch('openhands_cli.user_actions.settings_action.cli_text_input', return_value=new_api_key):
+        result = prompt_api_key(
+            step_counter=step_counter,
+            provider='openai',
+            existing_api_key=existing_api_key,
+            escapable=True
+        )
+    
+    # Should return the new API key
+    assert result == new_api_key
+
+