diff --git a/frontend/__tests__/conversation-websocket-handler.test.tsx b/frontend/__tests__/conversation-websocket-handler.test.tsx
index f0d4e79486..b10dbbcc7b 100644
--- a/frontend/__tests__/conversation-websocket-handler.test.tsx
+++ b/frontend/__tests__/conversation-websocket-handler.test.tsx
@@ -15,10 +15,11 @@ import { MemoryRouter, Route, Routes } from "react-router";
 import { useOptimisticUserMessageStore } from "#/stores/optimistic-user-message-store";
 import { useBrowserStore } from "#/stores/browser-store";
 import { useCommandStore } from "#/stores/command-store";
+import { useErrorMessageStore } from "#/stores/error-message-store";
 import {
   createMockMessageEvent,
   createMockUserMessageEvent,
-  createMockAgentErrorEvent,
+  createMockConversationErrorEvent,
   createMockBrowserObservationEvent,
   createMockBrowserNavigateActionEvent,
   createMockExecuteBashActionEvent,
@@ -51,6 +52,9 @@ afterEach(() => {
   mswServer.resetHandlers();
   // Clean up any React components
   cleanup();
+  // Reset stores to prevent state leakage between tests
+  useErrorMessageStore.getState().removeErrorMessage();
+  useEventStore.getState().clearEvents();
 });
 
 afterAll(async () => {
@@ -277,16 +281,23 @@ describe("Conversation WebSocket Handler", () => {
 
   // 5. Error Handling Tests
   describe("Error Handling & Recovery", () => {
-    it("should update error message store on AgentErrorEvent", async () => {
-      // Create a mock AgentErrorEvent to send through WebSocket
-      const mockAgentErrorEvent = createMockAgentErrorEvent();
+    beforeEach(() => {
+      // Clear stores before each error handling test to prevent state leakage
+      useErrorMessageStore.getState().removeErrorMessage();
+      useEventStore.getState().clearEvents();
+    });
+
+    it("should update error message store on ConversationErrorEvent", async () => {
+      // ConversationErrorEvent represents infrastructure/authentication errors
+      // that should be shown as a banner to the user.
+      const mockConversationErrorEvent = createMockConversationErrorEvent();
 
       // Set up MSW to send the error event when connection is established
       mswServer.use(
         wsLink.addEventListener("connection", ({ client, server }) => {
           server.connect();
           // Send the mock error event after connection
-          client.send(JSON.stringify(mockAgentErrorEvent));
+          client.send(JSON.stringify(mockConversationErrorEvent));
         }),
       );
 
@@ -299,7 +310,7 @@ describe("Conversation WebSocket Handler", () => {
       // Wait for connection and error event processing
       await waitFor(() => {
         expect(screen.getByTestId("error-message")).toHaveTextContent(
-          "Failed to execute command: Permission denied",
+          "Your session has expired. Please log in again.",
         );
       });
     });
@@ -438,6 +449,60 @@ describe("Conversation WebSocket Handler", () => {
       );
     });
 
+    it("should clear error message when a successful event is received after a ConversationErrorEvent", async () => {
+      // This test verifies that error banners disappear when follow-up messages
+      // are sent and received. Only ConversationErrorEvent sets the error banner,
+      // and any non-error event should clear it.
+      const conversationId = "test-conversation-error-clear";
+
+      // Set up MSW to mock event count API and send events
+      mswServer.use(
+        http.get(
+          `http://localhost:3000/api/conversations/${conversationId}/events/count`,
+          () => HttpResponse.json(2),
+        ),
+        wsLink.addEventListener("connection", ({ client, server }) => {
+          server.connect();
+
+          // Send a ConversationErrorEvent first (this sets the error banner)
+          const mockConversationErrorEvent = createMockConversationErrorEvent();
+          client.send(JSON.stringify(mockConversationErrorEvent));
+
+          // Send a successful (non-error) event immediately after
+          // This simulates the user sending a follow-up message and receiving a response
+          const mockSuccessEvent = createMockMessageEvent({
+            id: "success-event-after-error",
+          });
+          client.send(JSON.stringify(mockSuccessEvent));
+        }),
+      );
+
+      // Verify error message store is initially empty
+      expect(useErrorMessageStore.getState().errorMessage).toBeNull();
+
+      // Render with WebSocket context (minimal component just to trigger connection)
+      renderWithWebSocketContext(
+        <ConnectionStatusComponent />,
+        conversationId,
+        `http://localhost:3000/api/conversations/${conversationId}`,
+      );
+
+      // Wait for connection
+      await waitFor(() => {
+        expect(screen.getByTestId("connection-state")).toHaveTextContent(
+          "OPEN",
+        );
+      });
+
+      // Wait for both events to be received and error to be cleared
+      // The error was set by the first event (ConversationErrorEvent),
+      // then cleared by the second successful event (MessageEvent).
+      await waitFor(() => {
+        expect(useEventStore.getState().events.length).toBe(2);
+        expect(useErrorMessageStore.getState().errorMessage).toBeNull();
+      });
+    });
+
     it("should not create duplicate events when WebSocket reconnects with resend_all=true", async () => {
       const conversationId = "test-conversation-reconnect";
       let connectionCount = 0;
diff --git a/frontend/src/contexts/conversation-websocket-context.tsx b/frontend/src/contexts/conversation-websocket-context.tsx
index 73bd2b365a..3e026db7eb 100644
--- a/frontend/src/contexts/conversation-websocket-context.tsx
+++ b/frontend/src/contexts/conversation-websocket-context.tsx
@@ -329,16 +329,17 @@ export function ConversationWebSocketProvider({
         if (isV1Event(event)) {
           addEvent(event);
 
-          // Handle ConversationErrorEvent specifically
+          // Handle ConversationErrorEvent specifically - show error banner
+          // AgentErrorEvent errors are displayed inline in the chat, not as banners
           if (isConversationErrorEvent(event)) {
             setErrorMessage(event.detail);
+          } else {
+            // Clear error message on any non-ConversationErrorEvent
+            removeErrorMessage();
           }
 
-          // Handle AgentErrorEvent specifically
+          // Track credit limit reached if AgentErrorEvent has budget-related error
           if (isAgentErrorEvent(event)) {
-            setErrorMessage(event.error);
-
-            // Track credit limit reached if the error is budget-related
             if (isBudgetOrCreditError(event.error)) {
               trackCreditLimitReached({
                 conversationId: conversationId || "unknown",
@@ -417,6 +418,7 @@ export function ConversationWebSocketProvider({
       isLoadingHistoryMain,
       expectedEventCountMain,
       setErrorMessage,
+      removeErrorMessage,
       removeOptimisticUserMessage,
       queryClient,
       conversationId,
@@ -424,6 +426,7 @@ export function ConversationWebSocketProvider({
       appendInput,
       appendOutput,
       updateMetricsFromStats,
+      trackCreditLimitReached,
     ],
   );
 
diff --git a/frontend/src/mocks/mock-ws-helpers.ts b/frontend/src/mocks/mock-ws-helpers.ts
index ae4e214943..84bfb33989 100644
--- a/frontend/src/mocks/mock-ws-helpers.ts
+++ b/frontend/src/mocks/mock-ws-helpers.ts
@@ -7,6 +7,7 @@ import {
 import { AgentStateChangeObservation } from "#/types/core/observations";
 import { MessageEvent } from "#/types/v1/core";
 import { AgentErrorEvent } from "#/types/v1/core/events/observation-event";
+import { ConversationErrorEvent } from "#/types/v1/core/events/conversation-state-event";
 import { MockSessionMessaage } from "./session-history.mock";
 
 export const generateAgentStateChangeObservation = (
@@ -236,3 +237,19 @@ export const createMockBrowserNavigateActionEvent = (
   llm_response_id: "llm-response-789",
   security_risk: { level: "low" },
 });
+
+/**
+ * Creates a mock ConversationErrorEvent for testing conversation-level error handling
+ * These are infrastructure/authentication errors that should show error banners
+ */
+export const createMockConversationErrorEvent = (
+  overrides: Partial<ConversationErrorEvent> = {},
+): ConversationErrorEvent => ({
+  id: "conversation-error-123",
+  timestamp: new Date().toISOString(),
+  source: "environment",
+  kind: "ConversationErrorEvent",
+  code: "AuthenticationError",
+  detail: "Your session has expired. Please log in again.",
+  ...overrides,
+});
diff --git a/frontend/src/types/v1/core/events/conversation-state-event.ts b/frontend/src/types/v1/core/events/conversation-state-event.ts
index 93679d6671..38105f0ade 100644
--- a/frontend/src/types/v1/core/events/conversation-state-event.ts
+++ b/frontend/src/types/v1/core/events/conversation-state-event.ts
@@ -62,6 +62,11 @@ export interface ConversationState {
 }
 
 interface ConversationStateUpdateEventBase extends BaseEvent {
+  /**
+   * Discriminator field for type guards
+   */
+  kind: "ConversationStateUpdateEvent";
+
   /**
    * The source is always "environment" for conversation state update events
    */
@@ -105,6 +110,11 @@ export type ConversationStateUpdateEvent =
 
 // Conversation error event - contains error information
 export interface ConversationErrorEvent extends BaseEvent {
+  /**
+   * Discriminator field for type guards
+   */
+  kind: "ConversationErrorEvent";
+
   /**
    * The source is always "environment" for conversation error events
    */