diff --git a/evaluation/integration_tests/run_infer.py b/evaluation/integration_tests/run_infer.py
index a530041f92..621a0fa91c 100644
--- a/evaluation/integration_tests/run_infer.py
+++ b/evaluation/integration_tests/run_infer.py
@@ -16,6 +16,7 @@ from evaluation.utils.shared import (
 )
 from openhands.controller.state.state import State
 from openhands.core.config import (
+    AgentConfig,
     AppConfig,
     SandboxConfig,
     get_llm_config_arg,
@@ -24,6 +25,7 @@ from openhands.core.config import (
 from openhands.core.logger import openhands_logger as logger
 from openhands.core.main import create_runtime, run_controller
 from openhands.events.action import MessageAction
+from openhands.events.serialization.event import event_to_dict
 from openhands.runtime.base import Runtime
 from openhands.utils.async_utils import call_async_from_sync
 
@@ -60,6 +62,12 @@ def get_config(
             f'{metadata.llm_config.log_completions_folder}'
         )
     config.set_llm_config(metadata.llm_config)
+    agent_config = AgentConfig(
+        codeact_enable_jupyter=True,
+        codeact_enable_browsing_delegate=True,
+        codeact_enable_llm_editor=False,
+    )
+    config.set_agent_config(agent_config)
     return config
 
 
@@ -122,7 +130,7 @@ def process_instance(
     # # result evaluation
     # # =============================================
 
-    histories = state.history.get_events()
+    histories = [event_to_dict(event) for event in state.history.get_events()]
     test_result: TestResult = test_class.verify_result(runtime, histories)
     metrics = state.metrics.get() if state.metrics else None
 
diff --git a/evaluation/swe_bench/run_infer.py b/evaluation/swe_bench/run_infer.py
index 9ac1e0cf66..8b8b45a463 100644
--- a/evaluation/swe_bench/run_infer.py
+++ b/evaluation/swe_bench/run_infer.py
@@ -23,6 +23,7 @@ from evaluation.utils.shared import (
 )
 from openhands.controller.state.state import State
 from openhands.core.config import (
+    AgentConfig,
     AppConfig,
     SandboxConfig,
     get_llm_config_arg,
@@ -45,11 +46,6 @@ AGENT_CLS_TO_FAKE_USER_RESPONSE_FN = {
     'CodeActSWEAgent': codeact_user_response,
 }
 
-AGENT_CLS_TO_INST_SUFFIX = {
-    'CodeActAgent': 'When you think you have fixed the issue through code changes, please run the following command: <execute_bash> exit </execute_bash>.\n',
-    'CodeActSWEAgent': 'When you think you have fixed the issue through code changes, please run the following command: <execute_bash> exit </execute_bash>.\n',
-}
-
 
 def _get_swebench_workspace_dir_name(instance: pd.Series) -> str:
     return f'{instance.repo}__{instance.version}'.replace('/', '__')
@@ -71,25 +67,27 @@ def get_instruction(instance: pd.Series, metadata: EvalMetadata):
             )
         instruction += CODEACT_SWE_PROMPT.format(workspace_dir_name=workspace_dir_name)
     else:
-        # Testing general agents
+        # Instruction based on Anthropic's official trajectory
+        # https://github.com/eschluntz/swe-bench-experiments/tree/main/evaluation/verified/20241022_tools_claude-3-5-sonnet-updated/trajs
         instruction = (
-            f'Please fix the following issue for the repository in /workspace/{workspace_dir_name}.\n'
-            'Environment has been set up for you to start working. You may assume all necessary tools are installed.\n\n'
-            '# Problem Statement\n'
-            f'{instance.problem_statement}\n\n'
+            '<uploaded_files>\n'
+            f'/workspace/{workspace_dir_name}\n'
+            '</uploaded_files>\n'
+            f"I've uploaded a python code repository in the directory {workspace_dir_name}. Consider the following PR description:\n\n"
+            f'<pr_description>\n'
+            f'{instance.problem_statement}\n'
+            '</pr_description>\n\n'
+            'Can you help me implement the necessary changes to the repository so that the requirements specified in the <pr_description> are met?\n'
+            "I've already taken care of all changes to any of the test files described in the <pr_description>. This means you DON'T have to modify the testing logic or any of the tests in any way!\n"
+            'Your task is to make the minimal changes to non-tests files in the /repo directory to ensure the <pr_description> is satisfied.\n'
+            'Follow these steps to resolve the issue:\n'
+            '1. As a first step, it might be a good idea to explore the repo to familiarize yourself with its structure.\n'
+            '2. Create a script to reproduce the error and execute it with `python <filename.py>` using the BashTool, to confirm the error\n'
+            '3. Edit the sourcecode of the repo to resolve the issue\n'
+            '4. Rerun your reproduce script and confirm that the error is fixed!\n'
+            '5. Think about edgecases and make sure your fix handles them as well\n'
+            "Your thinking should be thorough and so it's fine if it's very long.\n"
         )
-        if USE_HINT_TEXT and instance.hints_text:
-            instruction += f'# Hints\n{instance.hints_text}\n\n'
-        instruction += (
-            'IMPORTANT: You should ONLY interact with the environment provided to you AND NEVER ASK FOR HUMAN HELP.\n'
-            'You should NOT modify any existing test case files. You SHOULD add new test in a NEW file to reproduce the issue.\n'
-            'You should verify that the issue is resolved and any new tests you create pass successfully.\n'
-            'You should NEVER use web browsing or any other web-based tools.\n'
-            'You should ALWAYS use the default Python interpreter available in the <execute_bash> environment to run code related to the provided issue and/or repository.\n'
-        )
-
-    # NOTE: You can actually set slightly different instruction for different agents
-    instruction += AGENT_CLS_TO_INST_SUFFIX[metadata.agent_class]
     return instruction
 
 
@@ -153,6 +151,12 @@ def get_config(
             f'{metadata.llm_config.log_completions_folder}'
         )
     config.set_llm_config(metadata.llm_config)
+    agent_config = AgentConfig(
+        codeact_enable_jupyter=False,
+        codeact_enable_browsing_delegate=False,
+        codeact_enable_llm_editor=False,
+    )
+    config.set_agent_config(agent_config)
     return config
 
 
@@ -312,7 +316,7 @@ def complete_runtime(
     obs = runtime.run_action(action)
     logger.info(obs, extra={'msg_type': 'OBSERVATION'})
     assert_and_raise(
-        obs.exit_code == 0,
+        isinstance(obs, CmdOutputObservation) and obs.exit_code == 0,
         f'Failed to cd to /workspace/{workspace_dir_name}: {str(obs)}',
     )
 
@@ -322,7 +326,7 @@ def complete_runtime(
     obs = runtime.run_action(action)
     logger.info(obs, extra={'msg_type': 'OBSERVATION'})
     assert_and_raise(
-        obs.exit_code == 0,
+        isinstance(obs, CmdOutputObservation) and obs.exit_code == 0,
         f'Failed to git config --global core.pager "": {str(obs)}',
     )
 
@@ -331,7 +335,10 @@ def complete_runtime(
     logger.info(action, extra={'msg_type': 'ACTION'})
     obs = runtime.run_action(action)
     logger.info(obs, extra={'msg_type': 'OBSERVATION'})
-    assert_and_raise(obs.exit_code == 0, f'Failed to git add -A: {str(obs)}')
+    assert_and_raise(
+        isinstance(obs, CmdOutputObservation) and obs.exit_code == 0,
+        f'Failed to git add -A: {str(obs)}',
+    )
 
     n_retries = 0
     git_patch = None
@@ -404,6 +411,7 @@ def process_instance(
         if (
             state.last_error
             and 'fatal error during agent execution' in state.last_error
+            and 'stuck in a loop' not in state.last_error
         ):
             raise EvalException('Fatal error detected: ' + state.last_error)
 
@@ -488,6 +496,7 @@ if __name__ == '__main__':
     llm_config = None
     if args.llm_config:
         llm_config = get_llm_config_arg(args.llm_config)
+        llm_config.log_completions = True
 
     if llm_config is None:
         raise ValueError(f'Could not find LLM config: --llm_config {args.llm_config}')
diff --git a/evaluation/swe_bench/scripts/eval/convert_oh_folder_to_swebench_submission.sh b/evaluation/swe_bench/scripts/eval/convert_oh_folder_to_swebench_submission.sh
new file mode 100755
index 0000000000..8bbaa6ddce
--- /dev/null
+++ b/evaluation/swe_bench/scripts/eval/convert_oh_folder_to_swebench_submission.sh
@@ -0,0 +1,28 @@
+#!/bin/bash
+
+FOLDER_PATH=$1
+NEW_FOLDER_PATH=${FOLDER_PATH}.swebench_submission
+mkdir -p $NEW_FOLDER_PATH
+
+# Build all_preds.jsonl
+poetry run python evaluation/swe_bench/scripts/eval/convert_oh_output_to_swe_json.py $FOLDER_PATH/output.jsonl
+mv $FOLDER_PATH/output.swebench.jsonl $NEW_FOLDER_PATH/all_preds.jsonl
+
+# Build trajs/
+mkdir -p $NEW_FOLDER_PATH/trajs
+for instance_dir in $FOLDER_PATH/llm_completions/*/; do
+    instance_id=$(basename "$instance_dir")
+    latest_json=$(ls -t "$instance_dir"/*.json | head -n1)
+    if [ -n "$latest_json" ]; then
+        cat "$latest_json" | jq -r '.messages' > "$NEW_FOLDER_PATH/trajs/$instance_id.json"
+    fi
+done
+
+# Build logs/
+# check if $FOLDER_PATH/eval_outputs exists, if so copy over - else raise error
+if [ -d "$FOLDER_PATH/eval_outputs" ]; then
+    cp -r $FOLDER_PATH/eval_outputs $NEW_FOLDER_PATH/logs
+else
+    echo "Error: $FOLDER_PATH/eval_outputs does not exist. You should run the local docker eval_infer.sh first."
+    exit 1
+fi
diff --git a/evaluation/utils/shared.py b/evaluation/utils/shared.py
index d33658f339..b8d2ad281a 100644
--- a/evaluation/utils/shared.py
+++ b/evaluation/utils/shared.py
@@ -104,7 +104,7 @@ def codeact_user_response(
     )
     msg = (
         'Please continue working on the task on whatever approach you think is suitable.\n'
-        'If you think you have solved the task, please first send your answer to user through message and then <execute_bash> exit </execute_bash>.\n'
+        'If you think you have solved the task, please first send your answer to user through message and then finish the interaction.\n'
         f'{encaps_str}'
         'IMPORTANT: YOU SHOULD NEVER ASK FOR HUMAN HELP.\n'
     )
diff --git a/openhands/agenthub/codeact_agent/action_parser.py b/openhands/agenthub/codeact_agent/action_parser.py
index bf926a6739..893effd825 100644
--- a/openhands/agenthub/codeact_agent/action_parser.py
+++ b/openhands/agenthub/codeact_agent/action_parser.py
@@ -64,6 +64,23 @@ class CodeActResponseParser(ResponseParser):
                 return action_parser.parse(action_str)
         return self.default_parser.parse(action_str)
 
+    def action_to_str(self, action: Action) -> str:
+        if isinstance(action, CmdRunAction):
+            return (
+                f'{action.thought}\n<execute_bash>\n{action.command}\n</execute_bash>'
+            )
+        elif isinstance(action, IPythonRunCellAction):
+            return f'{action.thought}\n<execute_ipython>\n{action.code}\n</execute_ipython>'
+        elif isinstance(action, AgentDelegateAction):
+            return f'{action.thought}\n<execute_browse>\n{action.inputs["task"]}\n</execute_browse>'
+        elif isinstance(action, FileEditAction):
+            return f'{action.thought}\n<file_edit path={action.path}>\n{action.content}\n</file_edit>'
+        elif isinstance(action, MessageAction):
+            return action.content
+        elif isinstance(action, AgentFinishAction) and action.source == 'agent':
+            return action.thought
+        return ''
+
 
 class CodeActActionParserFinish(ActionParser):
     """Parser action:
diff --git a/openhands/agenthub/codeact_agent/codeact_agent.py b/openhands/agenthub/codeact_agent/codeact_agent.py
index c8342ca11f..997d424c51 100644
--- a/openhands/agenthub/codeact_agent/codeact_agent.py
+++ b/openhands/agenthub/codeact_agent/codeact_agent.py
@@ -1,10 +1,16 @@
+import json
 import os
+from collections import deque
 from itertools import islice
 
+from litellm import ModelResponse
+
+import openhands.agenthub.codeact_agent.function_calling as codeact_function_calling
 from openhands.agenthub.codeact_agent.action_parser import CodeActResponseParser
 from openhands.controller.agent import Agent
 from openhands.controller.state.state import State
 from openhands.core.config import AgentConfig
+from openhands.core.logger import openhands_logger as logger
 from openhands.core.message import ImageContent, Message, TextContent
 from openhands.events.action import (
     Action,
@@ -36,7 +42,7 @@ from openhands.utils.prompt import PromptManager
 
 
 class CodeActAgent(Agent):
-    VERSION = '2.0'
+    VERSION = '2.1'
     """
     The Code Act Agent is a minimalist agent.
     The agent works by passing the model a list of action-observation pairs and prompting the model to take the next step.
@@ -63,8 +69,7 @@ class CodeActAgent(Agent):
         AgentSkillsRequirement(),
         JupyterRequirement(),
     ]
-
-    action_parser = CodeActResponseParser()
+    obs_prefix = 'OBSERVATION:\n'
 
     def __init__(
         self,
@@ -88,66 +93,165 @@ class CodeActAgent(Agent):
             if config.micro_agent_name
             else None
         )
-
-        self.prompt_manager = PromptManager(
-            prompt_dir=os.path.join(os.path.dirname(__file__)),
-            agent_skills_docs=AgentSkillsRequirement.documentation,
-            micro_agent=self.micro_agent,
-        )
-
-    def action_to_str(self, action: Action) -> str:
-        if isinstance(action, CmdRunAction):
-            return (
-                f'{action.thought}\n<execute_bash>\n{action.command}\n</execute_bash>'
+        if (
+            self.config.function_calling
+            and not self.llm.config.supports_function_calling
+        ):
+            logger.warning(
+                f'Function calling not supported for model {self.llm.config.model}. '
+                'Disabling function calling.'
             )
-        elif isinstance(action, IPythonRunCellAction):
-            return f'{action.thought}\n<execute_ipython>\n{action.code}\n</execute_ipython>'
-        elif isinstance(action, AgentDelegateAction):
-            return f'{action.thought}\n<execute_browse>\n{action.inputs["task"]}\n</execute_browse>'
-        elif isinstance(action, FileEditAction):
-            return f'{action.thought}\n<file_edit path={action.path}>\n{action.content}\n</file_edit>'
-        elif isinstance(action, MessageAction):
-            return action.content
-        elif isinstance(action, AgentFinishAction) and action.source == 'agent':
-            return action.thought
-        return ''
+            self.config.function_calling = False
 
-    def get_action_message(self, action: Action) -> Message | None:
+        if self.config.function_calling:
+            # Function calling mode
+            self.tools = codeact_function_calling.get_tools(
+                codeact_enable_browsing_delegate=self.config.codeact_enable_browsing_delegate,
+                codeact_enable_jupyter=self.config.codeact_enable_jupyter,
+                codeact_enable_llm_editor=self.config.codeact_enable_llm_editor,
+            )
+            logger.info(
+                f'TOOLS loaded for CodeActAgent: {json.dumps(self.tools, indent=2)}'
+            )
+            self.system_prompt = codeact_function_calling.SYSTEM_PROMPT
+            self.initial_user_message = None
+        else:
+            # Non-function-calling mode
+            self.action_parser = CodeActResponseParser()
+            self.prompt_manager = PromptManager(
+                prompt_dir=os.path.join(os.path.dirname(__file__)),
+                agent_skills_docs=AgentSkillsRequirement.documentation,
+                micro_agent=self.micro_agent,
+            )
+            self.system_prompt = self.prompt_manager.system_message
+            self.initial_user_message = self.prompt_manager.initial_user_message
+
+        self.pending_actions: deque[Action] = deque()
+
+    def get_action_message(
+        self,
+        action: Action,
+        pending_tool_call_action_messages: dict[str, Message],
+    ) -> list[Message]:
+        """Converts an action into a message format that can be sent to the LLM.
+
+        This method handles different types of actions and formats them appropriately:
+        1. For tool-based actions (AgentDelegate, CmdRun, IPythonRunCell, FileEdit) and agent-sourced AgentFinish:
+            - In function calling mode: Stores the LLM's response in pending_tool_call_action_messages
+            - In non-function calling mode: Creates a message with the action string
+        2. For MessageActions: Creates a message with the text content and optional image content
+
+        Args:
+            action (Action): The action to convert. Can be one of:
+                - AgentDelegateAction: For delegating tasks to other agents
+                - CmdRunAction: For executing bash commands
+                - IPythonRunCellAction: For running IPython code
+                - FileEditAction: For editing files
+                - AgentFinishAction: For ending the interaction
+                - MessageAction: For sending messages
+            pending_tool_call_action_messages (dict[str, Message]): Dictionary mapping response IDs
+                to their corresponding messages. Used in function calling mode to track tool calls
+                that are waiting for their results.
+
+        Returns:
+            list[Message]: A list containing the formatted message(s) for the action.
+                May be empty if the action is handled as a tool call in function calling mode.
+
+        Note:
+            In function calling mode, tool-based actions are stored in pending_tool_call_action_messages
+            rather than being returned immediately. They will be processed later when all corresponding
+            tool call results are available.
+        """
+        # create a regular message from an event
         if isinstance(
             action,
             (
                 AgentDelegateAction,
                 CmdRunAction,
                 IPythonRunCellAction,
-                MessageAction,
                 FileEditAction,
             ),
         ) or (isinstance(action, AgentFinishAction) and action.source == 'agent'):
-            content = [TextContent(text=self.action_to_str(action))]
+            if self.config.function_calling:
+                tool_metadata = action.tool_call_metadata
+                assert tool_metadata is not None, (
+                    'Tool call metadata should NOT be None when function calling is enabled. Action: '
+                    + str(action)
+                )
 
-            if (
-                self.llm.vision_is_active()
-                and isinstance(action, MessageAction)
-                and action.images_urls
-            ):
+                llm_response: ModelResponse = tool_metadata.model_response
+                assistant_msg = llm_response.choices[0].message
+                # Add the LLM message (assistant) that initiated the tool calls
+                # (overwrites any previous message with the same response_id)
+                pending_tool_call_action_messages[llm_response.id] = Message(
+                    role=assistant_msg.role,
+                    # tool call content SHOULD BE a string
+                    content=[TextContent(text=assistant_msg.content)]
+                    if assistant_msg.content is not None
+                    else [],
+                    tool_calls=assistant_msg.tool_calls,
+                )
+                return []
+            else:
+                content = [TextContent(text=self.action_parser.action_to_str(action))]
+                return [
+                    Message(
+                        role='user' if action.source == 'user' else 'assistant',
+                        content=content,
+                    )
+                ]
+        elif isinstance(action, MessageAction):
+            role = 'user' if action.source == 'user' else 'assistant'
+            content = [TextContent(text=action.content)]
+            if self.llm.vision_is_active() and action.images_urls:
                 content.append(ImageContent(image_urls=action.images_urls))
+            return [
+                Message(
+                    role=role,
+                    content=content,
+                )
+            ]
+        return []
 
-            return Message(
-                role='user' if action.source == 'user' else 'assistant', content=content
-            )
-        return None
+    def get_observation_message(
+        self,
+        obs: Observation,
+        tool_call_id_to_message: dict[str, Message],
+    ) -> list[Message]:
+        """Converts an observation into a message format that can be sent to the LLM.
 
-    def get_observation_message(self, obs: Observation) -> Message | None:
+        This method handles different types of observations and formats them appropriately:
+        - CmdOutputObservation: Formats command execution results with exit codes
+        - IPythonRunCellObservation: Formats IPython cell execution results, replacing base64 images
+        - FileEditObservation: Formats file editing results
+        - AgentDelegateObservation: Formats results from delegated agent tasks
+        - ErrorObservation: Formats error messages from failed actions
+        - UserRejectObservation: Formats user rejection messages
+
+        In function calling mode, observations with tool_call_metadata are stored in
+        tool_call_id_to_message for later processing instead of being returned immediately.
+
+        Args:
+            obs (Observation): The observation to convert
+            tool_call_id_to_message (dict[str, Message]): Dictionary mapping tool call IDs
+                to their corresponding messages (used in function calling mode)
+
+        Returns:
+            list[Message]: A list containing the formatted message(s) for the observation.
+                May be empty if the observation is handled as a tool response in function calling mode.
+
+        Raises:
+            ValueError: If the observation type is unknown
+        """
+        message: Message
         max_message_chars = self.llm.config.max_message_chars
         obs_prefix = 'OBSERVATION:\n'
         if isinstance(obs, CmdOutputObservation):
             text = obs_prefix + truncate_content(
                 obs.content + obs.interpreter_details, max_message_chars
             )
-            text += (
-                f'\n[Command {obs.command_id} finished with exit code {obs.exit_code}]'
-            )
-            return Message(role='user', content=[TextContent(text=text)])
+            text += f'\n[Command finished with exit code {obs.exit_code}]'
+            message = Message(role='user', content=[TextContent(text=text)])
         elif isinstance(obs, IPythonRunCellObservation):
             text = obs_prefix + obs.content
             # replace base64 images with a placeholder
@@ -159,29 +263,45 @@ class CodeActAgent(Agent):
                     )
             text = '\n'.join(splitted)
             text = truncate_content(text, max_message_chars)
-            return Message(role='user', content=[TextContent(text=text)])
+            message = Message(role='user', content=[TextContent(text=text)])
         elif isinstance(obs, FileEditObservation):
             text = obs_prefix + truncate_content(str(obs), max_message_chars)
-            return Message(role='user', content=[TextContent(text=text)])
+            message = Message(role='user', content=[TextContent(text=text)])
         elif isinstance(obs, AgentDelegateObservation):
             text = obs_prefix + truncate_content(
                 obs.outputs['content'] if 'content' in obs.outputs else '',
                 max_message_chars,
             )
-            return Message(role='user', content=[TextContent(text=text)])
+            message = Message(role='user', content=[TextContent(text=text)])
         elif isinstance(obs, ErrorObservation):
             text = obs_prefix + truncate_content(obs.content, max_message_chars)
             text += '\n[Error occurred in processing last action]'
-            return Message(role='user', content=[TextContent(text=text)])
+            message = Message(role='user', content=[TextContent(text=text)])
         elif isinstance(obs, UserRejectObservation):
             text = 'OBSERVATION:\n' + truncate_content(obs.content, max_message_chars)
             text += '\n[Last action has been rejected by the user]'
-            return Message(role='user', content=[TextContent(text=text)])
+            message = Message(role='user', content=[TextContent(text=text)])
         else:
             # If an observation message is not returned, it will cause an error
             # when the LLM tries to return the next message
             raise ValueError(f'Unknown observation type: {type(obs)}')
 
+        if self.config.function_calling:
+            # Update the message as tool response properly
+            if (tool_call_metadata := obs.tool_call_metadata) is not None:
+                tool_call_id_to_message[tool_call_metadata.tool_call_id] = Message(
+                    role='tool',
+                    content=message.content,
+                    tool_call_id=tool_call_metadata.tool_call_id,
+                    name=tool_call_metadata.function_name,
+                )
+                # No need to return the observation message
+                # because it will be added by get_action_message when all the corresponding
+                # tool calls in the SAME request are processed
+                return []
+
+        return [message]
+
     def reset(self) -> None:
         """Resets the CodeAct Agent."""
         super().reset()
@@ -200,6 +320,10 @@ class CodeActAgent(Agent):
         - MessageAction(content) - Message action to run (e.g. ask for clarification)
         - AgentFinishAction() - end the interaction
         """
+        # Continue with pending actions if any
+        if self.pending_actions:
+            return self.pending_actions.popleft()
+
         # if we're done, go back
         latest_user_message = state.history.get_last_user_message()
         if latest_user_message and latest_user_message.strip() == '/exit':
@@ -207,87 +331,172 @@ class CodeActAgent(Agent):
 
         # prepare what we want to send to the LLM
         messages = self._get_messages(state)
-        params = {
+        params: dict = {
             'messages': self.llm.format_messages_for_llm(messages),
-            'stop': [
+        }
+        if self.config.function_calling:
+            params['tools'] = self.tools
+        else:
+            params['stop'] = [
                 '</execute_ipython>',
                 '</execute_bash>',
                 '</execute_browse>',
                 '</file_edit>',
-            ],
-        }
-
+            ]
         response = self.llm.completion(**params)
 
-        return self.action_parser.parse(response)
+        if self.config.function_calling:
+            actions = codeact_function_calling.response_to_actions(response)
+            for action in actions:
+                self.pending_actions.append(action)
+            return self.pending_actions.popleft()
+        else:
+            return self.action_parser.parse(response)
 
     def _get_messages(self, state: State) -> list[Message]:
+        """Constructs the message history for the LLM conversation.
+
+        This method builds a structured conversation history by processing events from the state
+        and formatting them into messages that the LLM can understand. It handles both regular
+        message flow and function-calling scenarios.
+
+        The method performs the following steps:
+        1. Initializes with system prompt and optional initial user message
+        2. Processes events (Actions and Observations) into messages
+        3. Handles tool calls and their responses in function-calling mode
+        4. Manages message role alternation (user/assistant/tool)
+        5. Applies caching for specific LLM providers (e.g., Anthropic)
+        6. Adds environment reminders for non-function-calling mode
+
+        Args:
+            state (State): The current state object containing conversation history and other metadata
+
+        Returns:
+            list[Message]: A list of formatted messages ready for LLM consumption, including:
+                - System message with prompt
+                - Initial user message (if configured)
+                - Action messages (from both user and assistant)
+                - Observation messages (including tool responses)
+                - Environment reminders (in non-function-calling mode)
+
+        Note:
+            - In function-calling mode, tool calls and their responses are carefully tracked
+              to maintain proper conversation flow
+            - Messages from the same role are combined to prevent consecutive same-role messages
+            - For Anthropic models, specific messages are cached according to their documentation
+        """
         messages: list[Message] = [
             Message(
                 role='system',
                 content=[
                     TextContent(
-                        text=self.prompt_manager.system_message,
+                        text=self.system_prompt,
                         cache_prompt=self.llm.is_caching_prompt_active(),  # Cache system prompt
                     )
                 ],
-            ),
-            Message(
-                role='user',
-                content=[
-                    TextContent(
-                        text=self.prompt_manager.initial_user_message,
-                        cache_prompt=self.llm.is_caching_prompt_active(),  # if the user asks the same query,
-                    )
-                ],
-            ),
+            )
         ]
+        if self.initial_user_message:
+            messages.append(
+                Message(
+                    role='user',
+                    content=[TextContent(text=self.initial_user_message)],
+                )
+            )
 
-        for event in state.history.get_events():
+        pending_tool_call_action_messages: dict[str, Message] = {}
+        tool_call_id_to_message: dict[str, Message] = {}
+        events = list(state.history.get_events())
+        for event in events:
             # create a regular message from an event
             if isinstance(event, Action):
-                message = self.get_action_message(event)
+                messages_to_add = self.get_action_message(
+                    action=event,
+                    pending_tool_call_action_messages=pending_tool_call_action_messages,
+                )
             elif isinstance(event, Observation):
-                message = self.get_observation_message(event)
+                messages_to_add = self.get_observation_message(
+                    obs=event,
+                    tool_call_id_to_message=tool_call_id_to_message,
+                )
             else:
                 raise ValueError(f'Unknown event type: {type(event)}')
 
-            # add regular message
-            if message:
-                # handle error if the message is the SAME role as the previous message
-                # litellm.exceptions.BadRequestError: litellm.BadRequestError: OpenAIException - Error code: 400 - {'detail': 'Only supports u/a/u/a/u...'}
-                # there shouldn't be two consecutive messages from the same role
-                if messages and messages[-1].role == message.role:
-                    messages[-1].content.extend(message.content)
-                else:
-                    messages.append(message)
+            # Check pending tool call action messages and see if they are complete
+            _response_ids_to_remove = []
+            for (
+                response_id,
+                pending_message,
+            ) in pending_tool_call_action_messages.items():
+                assert pending_message.tool_calls is not None, (
+                    'Tool calls should NOT be None when function calling is enabled & the message is considered pending tool call. '
+                    f'Pending message: {pending_message}'
+                )
+                if all(
+                    tool_call.id in tool_call_id_to_message
+                    for tool_call in pending_message.tool_calls
+                ):
+                    # If complete:
+                    # -- 1. Add the message that **initiated** the tool calls
+                    messages_to_add.append(pending_message)
+                    # -- 2. Add the tool calls **results***
+                    for tool_call in pending_message.tool_calls:
+                        messages_to_add.append(tool_call_id_to_message[tool_call.id])
+                        tool_call_id_to_message.pop(tool_call.id)
+                    _response_ids_to_remove.append(response_id)
+            # Cleanup the processed pending tool messages
+            for response_id in _response_ids_to_remove:
+                pending_tool_call_action_messages.pop(response_id)
+
+            for message in messages_to_add:
+                # add regular message
+                if message:
+                    # handle error if the message is the SAME role as the previous message
+                    # litellm.exceptions.BadRequestError: litellm.BadRequestError: OpenAIException - Error code: 400 - {'detail': 'Only supports u/a/u/a/u...'}
+                    # there shouldn't be two consecutive messages from the same role
+                    # NOTE: we shouldn't combine tool messages because each of them has a different tool_call_id
+                    if (
+                        messages
+                        and messages[-1].role == message.role
+                        and message.role != 'tool'
+                    ):
+                        messages[-1].content.extend(message.content)
+                    else:
+                        messages.append(message)
 
-        # Add caching to the last 2 user messages
         if self.llm.is_caching_prompt_active():
-            user_turns_processed = 0
+            # NOTE: this is only needed for anthropic
+            # following logic here:
+            # https://github.com/anthropics/anthropic-quickstarts/blob/8f734fd08c425c6ec91ddd613af04ff87d70c5a0/computer-use-demo/computer_use_demo/loop.py#L241-L262
+            breakpoints_remaining = 3  # remaining 1 for system/tool
             for message in reversed(messages):
-                if message.role == 'user' and user_turns_processed < 2:
-                    message.content[
-                        -1
-                    ].cache_prompt = True  # Last item inside the message content
-                    user_turns_processed += 1
+                if message.role == 'user' or message.role == 'tool':
+                    if breakpoints_remaining > 0:
+                        message.content[
+                            -1
+                        ].cache_prompt = True  # Last item inside the message content
+                        breakpoints_remaining -= 1
+                    else:
+                        break
 
-        # The latest user message is important:
-        # we want to remind the agent of the environment constraints
-        latest_user_message = next(
-            islice(
-                (
-                    m
-                    for m in reversed(messages)
-                    if m.role == 'user'
-                    and any(isinstance(c, TextContent) for c in m.content)
+        if not self.config.function_calling:
+            # The latest user message is important:
+            # we want to remind the agent of the environment constraints
+            latest_user_message = next(
+                islice(
+                    (
+                        m
+                        for m in reversed(messages)
+                        if m.role == 'user'
+                        and any(isinstance(c, TextContent) for c in m.content)
+                    ),
+                    1,
                 ),
-                1,
-            ),
-            None,
-        )
-        if latest_user_message:
-            reminder_text = f'\n\nENVIRONMENT REMINDER: You have {state.max_iterations - state.iteration} turns left to complete the task. When finished reply with <finish></finish>.'
-            latest_user_message.content.append(TextContent(text=reminder_text))
+                None,
+            )
+            # do not add this for function calling
+            if latest_user_message:
+                reminder_text = f'\n\nENVIRONMENT REMINDER: You have {state.max_iterations - state.iteration} turns left to complete the task. When finished reply with <finish></finish>.'
+                latest_user_message.content.append(TextContent(text=reminder_text))
 
         return messages
diff --git a/openhands/agenthub/codeact_agent/function_calling.py b/openhands/agenthub/codeact_agent/function_calling.py
new file mode 100644
index 0000000000..f5519124ac
--- /dev/null
+++ b/openhands/agenthub/codeact_agent/function_calling.py
@@ -0,0 +1,397 @@
+"""This file contains the function calling implementation for different actions.
+
+This is similar to the functionality of `CodeActResponseParser`.
+"""
+
+import json
+
+from litellm import (
+    ChatCompletionToolParam,
+    ChatCompletionToolParamFunctionChunk,
+    ModelResponse,
+)
+
+from openhands.core.logger import openhands_logger as logger
+from openhands.events.action import (
+    Action,
+    AgentDelegateAction,
+    AgentFinishAction,
+    CmdRunAction,
+    FileEditAction,
+    IPythonRunCellAction,
+    MessageAction,
+)
+from openhands.events.tool import ToolCallMetadata
+
+SYSTEM_PROMPT = """You are a helpful assistant that can interact with a computer to solve tasks.
+<IMPORTANT>
+* If user provides a path, you should NOT assume it's relative to the current working directory. Instead, you should explore the file system to find the file before working on it.
+</IMPORTANT>
+"""
+
+_BASH_DESCRIPTION = """Execute a bash command in the terminal.
+* Long running commands: For commands that may run indefinitely, it should be run in the background and the output should be redirected to a file, e.g. command = `python3 app.py > server.log 2>&1 &`.
+* Interactive: If a bash command returns exit code `-1`, this means the process is not yet finished. The assistant must then send a second call to terminal with an empty `command` (which will retrieve any additional logs), or it can send additional text (set `command` to the text) to STDIN of the running process, or it can send command=`ctrl+c` to interrupt the process.
+* Timeout: If a command execution result says "Command timed out. Sending SIGINT to the process", the assistant should retry running the command in the background.
+"""
+
+CmdRunTool = ChatCompletionToolParam(
+    type='function',
+    function=ChatCompletionToolParamFunctionChunk(
+        name='execute_bash',
+        description=_BASH_DESCRIPTION,
+        parameters={
+            'type': 'object',
+            'properties': {
+                'command': {
+                    'type': 'string',
+                    'description': 'The bash command to execute. Can be empty to view additional logs when previous exit code is `-1`. Can be `ctrl+c` to interrupt the currently running process.',
+                },
+            },
+            'required': ['command'],
+        },
+    ),
+)
+
+_IPYTHON_DESCRIPTION = """Run a cell of Python code in an IPython environment.
+* The assistant should define variables and import packages before using them.
+* The variable defined in the IPython environment will not be available outside the IPython environment (e.g., in terminal).
+"""
+# We are not using agentskills's file_ops for viewing files now because StrReplaceEditorTool already supports viewing files
+# """* Apart from the standard Python library, the assistant can also use the following functions (already imported):
+# {AgentSkillsRequirement.documentation}"""
+
+IPythonTool = ChatCompletionToolParam(
+    type='function',
+    function=ChatCompletionToolParamFunctionChunk(
+        name='execute_ipython_cell',
+        description=_IPYTHON_DESCRIPTION,
+        parameters={
+            'type': 'object',
+            'properties': {
+                'code': {
+                    'type': 'string',
+                    'description': 'The Python code to execute. Supports magic commands like %pip.',
+                },
+            },
+            'required': ['code'],
+        },
+    ),
+)
+
+_FILE_EDIT_DESCRIPTION = """Edit a file.
+* The assistant can edit files by specifying the file path and providing a draft of the new file content.
+* The draft content doesn't need to be exactly the same as the existing file; the assistant may skip unchanged lines using comments like `# unchanged` to indicate unchanged sections.
+* IMPORTANT: For large files (e.g., > 300 lines), specify the range of lines to edit using `start` and `end` (1-indexed, inclusive). The range should be smaller than 300 lines.
+* To append to a file, set both `start` and `end` to `-1`.
+* If the file doesn't exist, a new file will be created with the provided content.
+
+**Example 1: general edit for short files**
+For example, given an existing file `/path/to/file.py` that looks like this:
+(this is the end of the file)
+1|class MyClass:
+2|    def __init__(self):
+3|        self.x = 1
+4|        self.y = 2
+5|        self.z = 3
+6|
+7|print(MyClass().z)
+8|print(MyClass().x)
+(this is the end of the file)
+
+The assistant wants to edit the file to look like this:
+(this is the end of the file)
+1|class MyClass:
+2|    def __init__(self):
+3|        self.x = 1
+4|        self.y = 2
+5|
+6|print(MyClass().y)
+(this is the end of the file)
+
+The assistant may produce an edit action like this:
+path="/path/to/file.txt" start=1 end=-1
+content=```
+class MyClass:
+    def __init__(self):
+        # no changes before
+        self.y = 2
+        # self.z is removed
+
+# MyClass().z is removed
+print(MyClass().y)
+```
+
+**Example 2: append to file for short files**
+For example, given an existing file `/path/to/file.py` that looks like this:
+(this is the end of the file)
+1|class MyClass:
+2|    def __init__(self):
+3|        self.x = 1
+4|        self.y = 2
+5|        self.z = 3
+6|
+7|print(MyClass().z)
+8|print(MyClass().x)
+(this is the end of the file)
+
+To append the following lines to the file:
+```python
+print(MyClass().y)
+```
+
+The assistant may produce an edit action like this:
+path="/path/to/file.txt" start=-1 end=-1
+content=```
+print(MyClass().y)
+```
+
+**Example 3: edit for long files**
+
+Given an existing file `/path/to/file.py` that looks like this:
+(1000 more lines above)
+1001|class MyClass:
+1002|    def __init__(self):
+1003|        self.x = 1
+1004|        self.y = 2
+1005|        self.z = 3
+1006|
+1007|print(MyClass().z)
+1008|print(MyClass().x)
+(2000 more lines below)
+
+The assistant wants to edit the file to look like this:
+
+(1000 more lines above)
+1001|class MyClass:
+1002|    def __init__(self):
+1003|        self.x = 1
+1004|        self.y = 2
+1005|
+1006|print(MyClass().y)
+(2000 more lines below)
+
+The assistant may produce an edit action like this:
+path="/path/to/file.txt" start=1001 end=1008
+content=```
+class MyClass:
+    def __init__(self):
+        # no changes before
+        self.y = 2
+        # self.z is removed
+
+# MyClass().z is removed
+print(MyClass().y)
+```
+"""
+
+LLMBasedFileEditTool = ChatCompletionToolParam(
+    type='function',
+    function=ChatCompletionToolParamFunctionChunk(
+        name='edit_file',
+        description=_FILE_EDIT_DESCRIPTION,
+        parameters={
+            'type': 'object',
+            'properties': {
+                'path': {
+                    'type': 'string',
+                    'description': 'The absolute path to the file to be edited.',
+                },
+                'new_content_draft': {
+                    'type': 'string',
+                    'description': 'A draft of the new content for the file being edited. Note that the assistant may skip unchanged lines.',
+                },
+                'start': {
+                    'type': 'integer',
+                    'description': 'The starting line number for the edit (1-indexed, inclusive). Default is 1.',
+                },
+                'end': {
+                    'type': 'integer',
+                    'description': 'The ending line number for the edit (1-indexed, inclusive). Default is -1 (end of file).',
+                },
+            },
+            'required': ['path', 'content'],
+        },
+    ),
+)
+
+_STR_REPLACE_EDITOR_DESCRIPTION = """Custom editing tool for viewing, creating and editing files
+* State is persistent across command calls and discussions with the user
+* If `path` is a file, `view` displays the result of applying `cat -n`. If `path` is a directory, `view` lists non-hidden files and directories up to 2 levels deep
+* The `create` command cannot be used if the specified `path` already exists as a file
+* If a `command` generates a long output, it will be truncated and marked with `<response clipped>`
+* The `undo_edit` command will revert the last edit made to the file at `path`
+
+Notes for using the `str_replace` command:
+* The `old_str` parameter should match EXACTLY one or more consecutive lines from the original file. Be mindful of whitespaces!
+* If the `old_str` parameter is not unique in the file, the replacement will not be performed. Make sure to include enough context in `old_str` to make it unique
+* The `new_str` parameter should contain the edited lines that should replace the `old_str`
+"""
+
+StrReplaceEditorTool = ChatCompletionToolParam(
+    type='function',
+    function=ChatCompletionToolParamFunctionChunk(
+        name='str_replace_editor',
+        description=_STR_REPLACE_EDITOR_DESCRIPTION,
+        parameters={
+            'type': 'object',
+            'properties': {
+                'command': {
+                    'description': 'The commands to run. Allowed options are: `view`, `create`, `str_replace`, `insert`, `undo_edit`.',
+                    'enum': ['view', 'create', 'str_replace', 'insert', 'undo_edit'],
+                    'type': 'string',
+                },
+                'path': {
+                    'description': 'Absolute path to file or directory, e.g. `/repo/file.py` or `/repo`.',
+                    'type': 'string',
+                },
+                'file_text': {
+                    'description': 'Required parameter of `create` command, with the content of the file to be created.',
+                    'type': 'string',
+                },
+                'old_str': {
+                    'description': 'Required parameter of `str_replace` command containing the string in `path` to replace.',
+                    'type': 'string',
+                },
+                'new_str': {
+                    'description': 'Optional parameter of `str_replace` command containing the new string (if not given, no string will be added). Required parameter of `insert` command containing the string to insert.',
+                    'type': 'string',
+                },
+                'insert_line': {
+                    'description': 'Required parameter of `insert` command. The `new_str` will be inserted AFTER the line `insert_line` of `path`.',
+                    'type': 'integer',
+                },
+                'view_range': {
+                    'description': 'Optional parameter of `view` command when `path` points to a file. If none is given, the full file is shown. If provided, the file will be shown in the indicated line number range, e.g. [11, 12] will show lines 11 and 12. Indexing at 1 to start. Setting `[start_line, -1]` shows all lines from `start_line` to the end of the file.',
+                    'items': {'type': 'integer'},
+                    'type': 'array',
+                },
+            },
+            'required': ['command', 'path'],
+        },
+    ),
+)
+
+_BROWSER_DELEGATION = """Delegate the task to another browsing agent.
+The assistant should delegate the task if it needs to browse the Internet.
+"""
+
+BrowserDelegationTool = ChatCompletionToolParam(
+    type='function',
+    function=ChatCompletionToolParamFunctionChunk(
+        name='delegate_to_browsing_agent',
+        description=_BROWSER_DELEGATION,
+        parameters={
+            'type': 'object',
+            'properties': {
+                'task': {
+                    'type': 'string',
+                    'description': 'The task for the browsing agent to execute. It should include all the necessary context and specify what information the browsing agent should return.',
+                },
+            },
+            'required': ['task'],
+        },
+    ),
+)
+
+_FINISH_DESCRIPTION = """Finish the interaction when the task is complete OR if the assistant cannot proceed further with the task."""
+
+FinishTool = ChatCompletionToolParam(
+    type='function',
+    function=ChatCompletionToolParamFunctionChunk(
+        name='finish',
+        description=_FINISH_DESCRIPTION,
+    ),
+)
+
+
+def combine_thought(action: Action, thought: str) -> Action:
+    if not hasattr(action, 'thought'):
+        return action
+    if thought:
+        action.thought = thought
+    return action
+
+
+def response_to_actions(response: ModelResponse) -> list[Action]:
+    actions: list[Action] = []
+    assert len(response.choices) == 1, 'Only one choice is supported for now'
+    assistant_msg = response.choices[0].message
+    if assistant_msg.tool_calls:
+        # Check if there's assistant_msg.content. If so, add it to the thought
+        thought = ''
+        if isinstance(assistant_msg.content, str):
+            thought = assistant_msg.content
+        elif isinstance(assistant_msg.content, list):
+            for msg in assistant_msg.content:
+                if msg['type'] == 'text':
+                    thought += msg['text']
+
+        # Process each tool call to OpenHands action
+        for i, tool_call in enumerate(assistant_msg.tool_calls):
+            action: Action
+            try:
+                arguments = json.loads(tool_call.function.arguments)
+            except json.decoder.JSONDecodeError as e:
+                raise RuntimeError(
+                    f'Failed to parse tool call arguments: {tool_call.function.arguments}'
+                ) from e
+            if tool_call.function.name == 'execute_bash':
+                action = CmdRunAction(**arguments)
+            elif tool_call.function.name == 'execute_ipython_cell':
+                action = IPythonRunCellAction(**arguments)
+            elif tool_call.function.name == 'delegate_to_browsing_agent':
+                action = AgentDelegateAction(
+                    agent='BrowsingAgent',
+                    inputs=arguments,
+                )
+            elif tool_call.function.name == 'finish':
+                action = AgentFinishAction()
+            elif tool_call.function.name == 'edit_file':
+                action = FileEditAction(**arguments)
+            elif tool_call.function.name == 'str_replace_editor':
+                # We implement this in agent_skills, which can be used via Jupyter
+                # convert tool_call.function.arguments to kwargs that can be passed to file_editor
+                code = f'print(file_editor(**{arguments}))'
+                logger.debug(
+                    f'TOOL CALL: str_replace_editor -> file_editor with code: {code}'
+                )
+                action = IPythonRunCellAction(code=code, include_extra=False)
+            else:
+                raise RuntimeError(f'Unknown tool call: {tool_call.function.name}')
+
+            # We only add thought to the first action
+            if i == 0:
+                action = combine_thought(action, thought)
+            # Add metadata for tool calling
+            action.tool_call_metadata = ToolCallMetadata(
+                tool_call_id=tool_call.id,
+                function_name=tool_call.function.name,
+                model_response=response,
+                total_calls_in_response=len(assistant_msg.tool_calls),
+            )
+            actions.append(action)
+    else:
+        actions.append(
+            MessageAction(content=assistant_msg.content, wait_for_response=True)
+        )
+
+    assert len(actions) >= 1
+    return actions
+
+
+def get_tools(
+    codeact_enable_browsing_delegate: bool = False,
+    codeact_enable_llm_editor: bool = False,
+    codeact_enable_jupyter: bool = False,
+) -> list[ChatCompletionToolParam]:
+    tools = [CmdRunTool, FinishTool]
+    if codeact_enable_browsing_delegate:
+        tools.append(BrowserDelegationTool)
+    if codeact_enable_jupyter:
+        tools.append(IPythonTool)
+    if codeact_enable_llm_editor:
+        tools.append(LLMBasedFileEditTool)
+    else:
+        tools.append(StrReplaceEditorTool)
+    return tools
diff --git a/openhands/controller/agent_controller.py b/openhands/controller/agent_controller.py
index 0660cd0309..7b7522e33a 100644
--- a/openhands/controller/agent_controller.py
+++ b/openhands/controller/agent_controller.py
@@ -453,6 +453,12 @@ class AgentController:
             # and send the underlying exception to the LLM for self-correction
             await self.report_error(str(e))
             return
+        # FIXME: more graceful handling of litellm.exceptions.ContextWindowExceededError
+        # e.g. try to condense the memory and try again
+        except litellm.exceptions.ContextWindowExceededError as e:
+            self.state.last_error = str(e)
+            await self.set_agent_state_to(AgentState.ERROR)
+            return
 
         if action.runnable:
             if self.state.confirmation_mode and (
diff --git a/openhands/core/config/agent_config.py b/openhands/core/config/agent_config.py
index 839d09277e..db6225be8c 100644
--- a/openhands/core/config/agent_config.py
+++ b/openhands/core/config/agent_config.py
@@ -8,12 +8,20 @@ class AgentConfig:
     """Configuration for the agent.
 
     Attributes:
+        function_calling: Whether function calling is enabled. Default is True.
+        codeact_enable_browsing_delegate: Whether browsing delegate is enabled in the action space. Default is False. Only works with function calling.
+        codeact_enable_llm_editor: Whether LLM editor is enabled in the action space. Default is False. Only works with function calling.
+        codeact_enable_jupyter: Whether Jupyter is enabled in the action space. Default is False.
         micro_agent_name: The name of the micro agent to use for this agent.
         memory_enabled: Whether long-term memory (embeddings) is enabled.
         memory_max_threads: The maximum number of threads indexing at the same time for embeddings.
         llm_config: The name of the llm config to use. If specified, this will override global llm config.
     """
 
+    function_calling: bool = True
+    codeact_enable_browsing_delegate: bool = False
+    codeact_enable_llm_editor: bool = False
+    codeact_enable_jupyter: bool = False
     micro_agent_name: str | None = None
     memory_enabled: bool = False
     memory_max_threads: int = 3
diff --git a/openhands/core/config/llm_config.py b/openhands/core/config/llm_config.py
index ac07b70e0b..7ad6476d7c 100644
--- a/openhands/core/config/llm_config.py
+++ b/openhands/core/config/llm_config.py
@@ -42,6 +42,7 @@ class LLMConfig:
         log_completions: Whether to log LLM completions to the state.
         log_completions_folder: The folder to log LLM completions to. Required if log_completions is True.
         draft_editor: A more efficient LLM to use for file editing. Introduced in [PR 3985](https://github.com/All-Hands-AI/OpenHands/pull/3985).
+        supports_function_calling: Whether the model supports function calling.
     """
 
     model: str = 'gpt-4o'
@@ -61,7 +62,7 @@ class LLMConfig:
     retry_min_wait: int = 15
     retry_max_wait: int = 120
     timeout: int | None = None
-    max_message_chars: int = 10_000  # maximum number of characters in an observation's content when sent to the llm
+    max_message_chars: int = 30_000  # maximum number of characters in an observation's content when sent to the llm
     temperature: float = 0.0
     top_p: float = 1.0
     custom_llm_provider: str | None = None
@@ -76,6 +77,7 @@ class LLMConfig:
     log_completions: bool = False
     log_completions_folder: str | None = None
     draft_editor: Optional['LLMConfig'] = None
+    supports_function_calling: bool = False
 
     def defaults_to_dict(self) -> dict:
         """Serialize fields to a dict for the frontend, including type hints, defaults, and whether it's optional."""
diff --git a/openhands/core/logger.py b/openhands/core/logger.py
index 13b91e451e..af3ba1e35f 100644
--- a/openhands/core/logger.py
+++ b/openhands/core/logger.py
@@ -12,6 +12,9 @@ LOG_LEVEL = os.getenv('LOG_LEVEL', 'INFO').upper()
 DEBUG = os.getenv('DEBUG', 'False').lower() in ['true', '1', 'yes']
 if DEBUG:
     LOG_LEVEL = 'DEBUG'
+    import litellm
+
+    litellm.set_verbose = True
 
 LOG_TO_FILE = os.getenv('LOG_TO_FILE', 'False').lower() in ['true', '1', 'yes']
 DISABLE_COLOR_PRINTING = False
@@ -70,11 +73,6 @@ class ColoredFormatter(logging.Formatter):
         return super().format(record)
 
 
-console_formatter = ColoredFormatter(
-    '\033[92m%(asctime)s - %(name)s:%(levelname)s\033[0m: %(filename)s:%(lineno)s - %(message)s',
-    datefmt='%H:%M:%S',
-)
-
 file_formatter = logging.Formatter(
     '%(asctime)s - %(name)s:%(levelname)s: %(filename)s:%(lineno)s - %(message)s',
     datefmt='%H:%M:%S',
@@ -123,10 +121,10 @@ def get_console_handler(log_level=logging.INFO, extra_info: str | None = None):
     """Returns a console handler for logging."""
     console_handler = logging.StreamHandler()
     console_handler.setLevel(log_level)
-    formatter_str = '%(asctime)s - %(levelname)s - %(message)s'
+    formatter_str = '\033[92m%(asctime)s - %(name)s:%(levelname)s\033[0m: %(filename)s:%(lineno)s - %(message)s'
     if extra_info:
         formatter_str = f'{extra_info} - ' + formatter_str
-    console_handler.setFormatter(logging.Formatter(formatter_str))
+    console_handler.setFormatter(ColoredFormatter(formatter_str, datefmt='%H:%M:%S'))
     return console_handler
 
 
diff --git a/openhands/core/message.py b/openhands/core/message.py
index 57fadabde7..042028498b 100644
--- a/openhands/core/message.py
+++ b/openhands/core/message.py
@@ -1,6 +1,7 @@
 from enum import Enum
 from typing import Literal
 
+from litellm import ChatCompletionMessageToolCall
 from pydantic import BaseModel, Field, model_serializer
 
 
@@ -48,10 +49,16 @@ class ImageContent(Content):
 
 
 class Message(BaseModel):
-    role: Literal['user', 'system', 'assistant']
-    content: list[TextContent | ImageContent] = Field(default=list)
+    role: Literal['user', 'system', 'assistant', 'tool']
+    content: list[TextContent | ImageContent] = Field(default_factory=list)
     cache_enabled: bool = False
     vision_enabled: bool = False
+    # function calling
+    # - tool calls (from LLM)
+    tool_calls: list[ChatCompletionMessageToolCall] | None = None
+    # - tool execution result (to LLM)
+    tool_call_id: str | None = None
+    name: str | None = None  # name of the tool
 
     @property
     def contains_image(self) -> bool:
@@ -59,23 +66,31 @@ class Message(BaseModel):
 
     @model_serializer
     def serialize_model(self) -> dict:
-        content: list[dict] | str
-        # two kinds of serializer:
-        # 1. vision serializer: when prompt caching or vision is enabled
-        # 2. single text serializer: for other cases
-        # remove this when liteLLM or providers support this format translation
-        if self.cache_enabled or self.vision_enabled:
-            # when prompt caching or vision is enabled, use vision serializer
-            content = []
-            for item in self.content:
-                if isinstance(item, TextContent):
-                    content.append(item.model_dump())
-                elif isinstance(item, ImageContent):
-                    content.extend(item.model_dump())
-        else:
-            # for other cases, concatenate all text content
-            # into a single string per message
-            content = '\n'.join(
-                item.text for item in self.content if isinstance(item, TextContent)
-            )
-        return {'content': content, 'role': self.role}
+        content: list[dict] = []
+        role_tool_with_prompt_caching = False
+        for item in self.content:
+            d = item.model_dump()
+            # We have to remove cache_prompt for tool content and move it up to the message level
+            # See discussion here for details: https://github.com/BerriAI/litellm/issues/6422#issuecomment-2438765472
+            if self.role == 'tool' and item.cache_prompt:
+                role_tool_with_prompt_caching = True
+                d.pop('cache_control')
+            if isinstance(item, TextContent):
+                content.append(d)
+            elif isinstance(item, ImageContent) and self.vision_enabled:
+                content.extend(d)
+
+        ret: dict = {'content': content, 'role': self.role}
+
+        if role_tool_with_prompt_caching:
+            ret['cache_control'] = {'type': 'ephemeral'}
+
+        if self.tool_call_id is not None:
+            assert (
+                self.name is not None
+            ), 'name is required when tool_call_id is not None'
+            ret['tool_call_id'] = self.tool_call_id
+            ret['name'] = self.name
+        if self.tool_calls:
+            ret['tool_calls'] = self.tool_calls
+        return ret
diff --git a/openhands/core/utils/json.py b/openhands/core/utils/json.py
index 859cab1450..c0b22740be 100644
--- a/openhands/core/utils/json.py
+++ b/openhands/core/utils/json.py
@@ -2,6 +2,7 @@ import json
 from datetime import datetime
 
 from json_repair import repair_json
+from litellm.types.utils import ModelResponse
 
 from openhands.core.exceptions import LLMResponseError
 from openhands.events.event import Event
@@ -17,6 +18,8 @@ def my_default_encoder(obj):
         return event_to_dict(obj)
     if isinstance(obj, Metrics):
         return obj.get()
+    if isinstance(obj, ModelResponse):
+        return obj.model_dump()
     return json.JSONEncoder().default(obj)
 
 
diff --git a/openhands/events/action/commands.py b/openhands/events/action/commands.py
index 5a7e1fef52..83dd19f9d1 100644
--- a/openhands/events/action/commands.py
+++ b/openhands/events/action/commands.py
@@ -47,6 +47,9 @@ class CmdRunAction(Action):
 class IPythonRunCellAction(Action):
     code: str
     thought: str = ''
+    include_extra: bool = (
+        True  # whether to include CWD & Python interpreter in the output
+    )
     action: str = ActionType.RUN_IPYTHON
     runnable: ClassVar[bool] = True
     confirmation_state: ActionConfirmationStatus = ActionConfirmationStatus.CONFIRMED
diff --git a/openhands/events/event.py b/openhands/events/event.py
index 43a8840671..6ec68acc55 100644
--- a/openhands/events/event.py
+++ b/openhands/events/event.py
@@ -2,6 +2,7 @@ from dataclasses import dataclass
 from datetime import datetime
 from enum import Enum
 
+from openhands.events.tool import ToolCallMetadata
 from openhands.llm.metrics import Metrics
 
 
@@ -71,3 +72,14 @@ class Event:
     @llm_metrics.setter
     def llm_metrics(self, value: Metrics) -> None:
         self._llm_metrics = value
+
+    # optional field
+    @property
+    def tool_call_metadata(self) -> ToolCallMetadata | None:
+        if hasattr(self, '_tool_call_metadata'):
+            return self._tool_call_metadata  # type: ignore[attr-defined]
+        return None
+
+    @tool_call_metadata.setter
+    def tool_call_metadata(self, value: ToolCallMetadata) -> None:
+        self._tool_call_metadata = value
diff --git a/openhands/events/serialization/event.py b/openhands/events/serialization/event.py
index ee15ab6955..f0430b4cdd 100644
--- a/openhands/events/serialization/event.py
+++ b/openhands/events/serialization/event.py
@@ -6,10 +6,20 @@ from openhands.events.observation.observation import Observation
 from openhands.events.serialization.action import action_from_dict
 from openhands.events.serialization.observation import observation_from_dict
 from openhands.events.serialization.utils import remove_fields
+from openhands.events.tool import ToolCallMetadata
 
 # TODO: move `content` into `extras`
-TOP_KEYS = ['id', 'timestamp', 'source', 'message', 'cause', 'action', 'observation']
-UNDERSCORE_KEYS = ['id', 'timestamp', 'source', 'cause']
+TOP_KEYS = [
+    'id',
+    'timestamp',
+    'source',
+    'message',
+    'cause',
+    'action',
+    'observation',
+    'tool_call_metadata',
+]
+UNDERSCORE_KEYS = ['id', 'timestamp', 'source', 'cause', 'tool_call_metadata']
 
 DELETE_FROM_TRAJECTORY_EXTRAS = {
     'screenshot',
@@ -40,6 +50,8 @@ def event_from_dict(data) -> 'Event':
                 value = value.isoformat()
             if key == 'source':
                 value = EventSource(value)
+            if key == 'tool_call_metadata':
+                value = ToolCallMetadata(**value)
             setattr(evt, '_' + key, value)
     return evt
 
@@ -59,6 +71,8 @@ def event_to_dict(event: 'Event') -> dict:
                 d['timestamp'] = d['timestamp'].isoformat()
         if key == 'source' and 'source' in d:
             d['source'] = d['source'].value
+        if key == 'tool_call_metadata' and 'tool_call_metadata' in d:
+            d['tool_call_metadata'] = d['tool_call_metadata'].model_dump()
         props.pop(key, None)
     if 'security_risk' in props and props['security_risk'] is None:
         props.pop('security_risk')
diff --git a/openhands/events/tool.py b/openhands/events/tool.py
new file mode 100644
index 0000000000..30e288dc2f
--- /dev/null
+++ b/openhands/events/tool.py
@@ -0,0 +1,11 @@
+from litellm import ModelResponse
+from pydantic import BaseModel
+
+
+class ToolCallMetadata(BaseModel):
+    # See https://docs.litellm.ai/docs/completion/function_call#step-3---second-litellmcompletion-call
+    function_name: str  # Name of the function that was called
+    tool_call_id: str  # ID of the tool call
+
+    model_response: ModelResponse
+    total_calls_in_response: int
diff --git a/openhands/llm/llm.py b/openhands/llm/llm.py
index 9eb3a08aa9..1696fd13b9 100644
--- a/openhands/llm/llm.py
+++ b/openhands/llm/llm.py
@@ -1,11 +1,12 @@
 import copy
-import json
 import os
 import time
 import warnings
 from functools import partial
 from typing import Any
 
+import requests
+
 from openhands.core.config import LLMConfig
 
 with warnings.catch_warnings():
@@ -81,16 +82,47 @@ class LLM(RetryMixin, DebugMixin):
 
         # litellm actually uses base Exception here for unknown model
         self.model_info: ModelInfo | None = None
-        try:
-            if self.config.model.startswith('openrouter'):
-                self.model_info = litellm.get_model_info(self.config.model)
-            else:
+
+        if self.config.model.startswith('openrouter'):
+            self.model_info = litellm.get_model_info(self.config.model)
+        elif self.config.model.startswith('litellm_proxy/'):
+            # IF we are using LiteLLM proxy, get model info from LiteLLM proxy
+            # GET {base_url}/v1/model/info with litellm_model_id as path param
+            response = requests.get(
+                f'{self.config.base_url}/v1/model/info',
+                headers={'Authorization': f'Bearer {self.config.api_key}'},
+            )
+            all_model_info = response.json()['data']
+            current_model_info = next(
+                (
+                    info
+                    for info in all_model_info
+                    if info['model_name']
+                    == self.config.model.removeprefix('litellm_proxy/')
+                ),
+                None,
+            )
+            if current_model_info:
+                self.model_info = current_model_info['model_info']
+
+        # Last two attempts to get model info from NAME
+        if not self.model_info:
+            try:
                 self.model_info = litellm.get_model_info(
                     self.config.model.split(':')[0]
                 )
-        # noinspection PyBroadException
-        except Exception as e:
-            logger.warning(f'Could not get model info for {config.model}:\n{e}')
+            # noinspection PyBroadException
+            except Exception:
+                pass
+        if not self.model_info:
+            try:
+                self.model_info = litellm.get_model_info(
+                    self.config.model.split('/')[-1]
+                )
+            # noinspection PyBroadException
+            except Exception:
+                pass
+        logger.info(f'Model info: {self.model_info}')
 
         if self.config.log_completions:
             if self.config.log_completions_folder is None:
@@ -126,6 +158,11 @@ class LLM(RetryMixin, DebugMixin):
                 ):
                     self.config.max_output_tokens = self.model_info['max_tokens']
 
+        self.config.supports_function_calling = (
+            self.model_info is not None
+            and self.model_info.get('supports_function_calling', False)
+        )
+
         self._completion = partial(
             litellm_completion,
             model=self.config.model,
@@ -144,6 +181,8 @@ class LLM(RetryMixin, DebugMixin):
             logger.debug('LLM: model has vision enabled')
         if self.is_caching_prompt_active():
             logger.debug('LLM: caching prompt enabled')
+        if self.config.supports_function_calling:
+            logger.debug('LLM: model supports function calling')
 
         completion_unwrapped = self._completion
 
@@ -195,26 +234,32 @@ class LLM(RetryMixin, DebugMixin):
             try:
                 # we don't support streaming here, thus we get a ModelResponse
                 resp: ModelResponse = completion_unwrapped(*args, **kwargs)
-
                 # log for evals or other scripts that need the raw completion
                 if self.config.log_completions:
                     assert self.config.log_completions_folder is not None
                     log_file = os.path.join(
                         self.config.log_completions_folder,
                         # use the metric model name (for draft editor)
-                        f'{self.metrics.model_name}-{time.time()}.json',
+                        f'{self.metrics.model_name.replace("/", "__")}-{time.time()}.json',
                     )
+                    from openhands.core.utils import json
+
                     with open(log_file, 'w') as f:
-                        json.dump(
-                            {
-                                'messages': messages,
-                                'response': resp,
-                                'args': args,
-                                'kwargs': kwargs,
-                                'timestamp': time.time(),
-                                'cost': self._completion_cost(resp),
-                            },
-                            f,
+                        f.write(
+                            json.dumps(
+                                {
+                                    'messages': messages,
+                                    'response': resp,
+                                    'args': args,
+                                    'kwargs': {
+                                        k: v
+                                        for k, v in kwargs.items()
+                                        if k != 'messages'
+                                    },
+                                    'timestamp': time.time(),
+                                    'cost': self._completion_cost(resp),
+                                },
+                            )
                         )
 
                 message_back: str = resp['choices'][0]['message']['content']
@@ -390,16 +435,18 @@ class LLM(RetryMixin, DebugMixin):
             logger.info(f'Using custom cost per token: {cost_per_token}')
             extra_kwargs['custom_cost_per_token'] = cost_per_token
 
-        if not self._is_local():
-            try:
+        try:
+            # try directly get response_cost from response
+            cost = getattr(response, '_hidden_params', {}).get('response_cost', None)
+            if cost is None:
                 cost = litellm_completion_cost(
                     completion_response=response, **extra_kwargs
                 )
-                self.metrics.add_cost(cost)
-                return cost
-            except Exception:
-                self.cost_metric_supported = False
-                logger.warning('Cost calculation not supported for this model.')
+            self.metrics.add_cost(cost)
+            return cost
+        except Exception:
+            self.cost_metric_supported = False
+            logger.warning('Cost calculation not supported for this model.')
         return 0.0
 
     def __str__(self):
diff --git a/openhands/runtime/action_execution_server.py b/openhands/runtime/action_execution_server.py
index 2da1372532..1cec1b7083 100644
--- a/openhands/runtime/action_execution_server.py
+++ b/openhands/runtime/action_execution_server.py
@@ -194,10 +194,11 @@ class ActionExecutor:
 
             obs: IPythonRunCellObservation = await _jupyter_plugin.run(action)
             obs.content = obs.content.rstrip()
-            obs.content += (
-                f'\n[Jupyter current working directory: {self.bash_session.pwd}]'
-            )
-            obs.content += f'\n[Jupyter Python interpreter: {_jupyter_plugin.python_interpreter_path}]'
+            if action.include_extra:
+                obs.content += (
+                    f'\n[Jupyter current working directory: {self.bash_session.pwd}]'
+                )
+                obs.content += f'\n[Jupyter Python interpreter: {_jupyter_plugin.python_interpreter_path}]'
             return obs
         else:
             raise RuntimeError(
diff --git a/openhands/runtime/base.py b/openhands/runtime/base.py
index 0d752d71be..81e0366665 100644
--- a/openhands/runtime/base.py
+++ b/openhands/runtime/base.py
@@ -127,8 +127,11 @@ class Runtime(FileEditRuntimeMixin):
             if event.timeout is None:
                 event.timeout = self.config.sandbox.timeout
             assert event.timeout is not None
-            observation = await call_sync_from_async(self.run_action, event)
+            observation: Observation = await call_sync_from_async(
+                self.run_action, event
+            )
             observation._cause = event.id  # type: ignore[attr-defined]
+            observation.tool_call_metadata = event.tool_call_metadata
             source = event.source if event.source else EventSource.AGENT
             await self.event_stream.async_add_event(observation, source)  # type: ignore[arg-type]
 
diff --git a/openhands/runtime/impl/eventstream/eventstream_runtime.py b/openhands/runtime/impl/eventstream/eventstream_runtime.py
index 1cf4096922..5121e9ede9 100644
--- a/openhands/runtime/impl/eventstream/eventstream_runtime.py
+++ b/openhands/runtime/impl/eventstream/eventstream_runtime.py
@@ -1,6 +1,7 @@
 import os
 import tempfile
 import threading
+import traceback
 from functools import lru_cache
 from typing import Callable
 from zipfile import ZipFile
@@ -496,7 +497,9 @@ class EventStreamRuntime(Runtime):
                 )
             except Exception as e:
                 logger.error(f'Error during action execution: {e}')
-                obs = FatalErrorObservation(f'Action execution failed: {str(e)}')
+                obs = FatalErrorObservation(
+                    f'Action execution failed: {str(e)}.\n{traceback.format_exc()}'
+                )
             self._refresh_logs()
             return obs
 
diff --git a/openhands/runtime/plugins/agent_skills/agentskills.py b/openhands/runtime/plugins/agent_skills/agentskills.py
index dd34e3878d..046f8af20c 100644
--- a/openhands/runtime/plugins/agent_skills/agentskills.py
+++ b/openhands/runtime/plugins/agent_skills/agentskills.py
@@ -23,3 +23,9 @@ for func_name in __all__:
 
     fn_signature = f'{func.__name__}' + str(signature(func))
     DOCUMENTATION += f'{fn_signature}:\n{cur_doc}\n\n'
+
+
+# Add file_editor (a function)
+from openhands.runtime.plugins.agent_skills.file_editor import file_editor  # noqa: E402
+
+__all__ += ['file_editor']
diff --git a/openhands/runtime/plugins/agent_skills/file_editor/README.md b/openhands/runtime/plugins/agent_skills/file_editor/README.md
new file mode 100644
index 0000000000..37c6c2818a
--- /dev/null
+++ b/openhands/runtime/plugins/agent_skills/file_editor/README.md
@@ -0,0 +1,3 @@
+# File Editor
+
+This file editor is largely based on Anthorpic released [`str_replace_editor`](https://github.com/anthropics/anthropic-quickstarts/tree/main/computer-use-demo/computer_use_demo/tools/edit.py). The original code was released under [MIT license](https://github.com/anthropics/anthropic-quickstarts/blob/e373524f07594d48c3f9563248ea282a4c306c0c/LICENSE).
diff --git a/openhands/runtime/plugins/agent_skills/file_editor/__init__.py b/openhands/runtime/plugins/agent_skills/file_editor/__init__.py
new file mode 100644
index 0000000000..f6d3eb39a0
--- /dev/null
+++ b/openhands/runtime/plugins/agent_skills/file_editor/__init__.py
@@ -0,0 +1,60 @@
+"""This file contains a global singleton of the `EditTool` class as well as raw functions that expose its __call__."""
+
+from .base import CLIResult, ToolError, ToolResult
+from .impl import Command, EditTool
+
+_GLOBAL_EDITOR = EditTool()
+
+
+def _make_api_tool_result(
+    result: ToolResult,
+) -> str:
+    """Convert an agent ToolResult to an API ToolResultBlockParam."""
+    tool_result_content: str = ''
+    is_error = False
+    if result.error:
+        is_error = True
+        tool_result_content = _maybe_prepend_system_tool_result(result, result.error)
+    else:
+        assert result.output, 'Expecting output in file_editor'
+        tool_result_content = _maybe_prepend_system_tool_result(result, result.output)
+        assert (
+            not result.base64_image
+        ), 'Not expecting base64_image as output in file_editor'
+    if is_error:
+        return f'ERROR:\n{tool_result_content}'
+    else:
+        return tool_result_content
+
+
+def _maybe_prepend_system_tool_result(result: ToolResult, result_text: str) -> str:
+    if result.system:
+        result_text = f'<system>{result.system}</system>\n{result_text}'
+    return result_text
+
+
+def file_editor(
+    command: Command,
+    path: str,
+    file_text: str | None = None,
+    view_range: list[int] | None = None,
+    old_str: str | None = None,
+    new_str: str | None = None,
+    insert_line: int | None = None,
+) -> str:
+    try:
+        result: CLIResult = _GLOBAL_EDITOR(
+            command=command,
+            path=path,
+            file_text=file_text,
+            view_range=view_range,
+            old_str=old_str,
+            new_str=new_str,
+            insert_line=insert_line,
+        )
+    except ToolError as e:
+        return _make_api_tool_result(ToolResult(error=e.message))
+    return _make_api_tool_result(result)
+
+
+__all__ = ['file_editor']
diff --git a/openhands/runtime/plugins/agent_skills/file_editor/base.py b/openhands/runtime/plugins/agent_skills/file_editor/base.py
new file mode 100644
index 0000000000..6ad2a4b5b6
--- /dev/null
+++ b/openhands/runtime/plugins/agent_skills/file_editor/base.py
@@ -0,0 +1,50 @@
+from dataclasses import dataclass, fields, replace
+
+
+@dataclass(kw_only=True, frozen=True)
+class ToolResult:
+    """Represents the result of a tool execution."""
+
+    output: str | None = None
+    error: str | None = None
+    base64_image: str | None = None
+    system: str | None = None
+
+    def __bool__(self):
+        return any(getattr(self, field.name) for field in fields(self))
+
+    def __add__(self, other: 'ToolResult'):
+        def combine_fields(
+            field: str | None, other_field: str | None, concatenate: bool = True
+        ):
+            if field and other_field:
+                if concatenate:
+                    return field + other_field
+                raise ValueError('Cannot combine tool results')
+            return field or other_field
+
+        return ToolResult(
+            output=combine_fields(self.output, other.output),
+            error=combine_fields(self.error, other.error),
+            base64_image=combine_fields(self.base64_image, other.base64_image, False),
+            system=combine_fields(self.system, other.system),
+        )
+
+    def replace(self, **kwargs):
+        """Returns a new ToolResult with the given fields replaced."""
+        return replace(self, **kwargs)
+
+
+class CLIResult(ToolResult):
+    """A ToolResult that can be rendered as a CLI output."""
+
+
+class ToolFailure(ToolResult):
+    """A ToolResult that represents a failure."""
+
+
+class ToolError(Exception):
+    """Raised when a tool encounters an error."""
+
+    def __init__(self, message):
+        self.message = message
diff --git a/openhands/runtime/plugins/agent_skills/file_editor/impl.py b/openhands/runtime/plugins/agent_skills/file_editor/impl.py
new file mode 100644
index 0000000000..e0944ab659
--- /dev/null
+++ b/openhands/runtime/plugins/agent_skills/file_editor/impl.py
@@ -0,0 +1,279 @@
+from collections import defaultdict
+from pathlib import Path
+from typing import Literal, get_args
+
+from .base import CLIResult, ToolError, ToolResult
+from .run import maybe_truncate, run
+
+Command = Literal[
+    'view',
+    'create',
+    'str_replace',
+    'insert',
+    'undo_edit',
+]
+SNIPPET_LINES: int = 4
+
+
+class EditTool:
+    """
+    An filesystem editor tool that allows the agent to view, create, and edit files.
+    The tool parameters are defined by Anthropic and are not editable.
+
+    Original implementation: https://github.com/anthropics/anthropic-quickstarts/blob/main/computer-use-demo/computer_use_demo/tools/edit.py
+    """
+
+    _file_history: dict[Path, list[str]]
+
+    def __init__(self):
+        self._file_history = defaultdict(list)
+        super().__init__()
+
+    def __call__(
+        self,
+        *,
+        command: Command,
+        path: str,
+        file_text: str | None = None,
+        view_range: list[int] | None = None,
+        old_str: str | None = None,
+        new_str: str | None = None,
+        insert_line: int | None = None,
+        **kwargs,
+    ):
+        _path = Path(path)
+        self.validate_path(command, _path)
+        if command == 'view':
+            return self.view(_path, view_range)
+        elif command == 'create':
+            if not file_text:
+                raise ToolError('Parameter `file_text` is required for command: create')
+            self.write_file(_path, file_text)
+            self._file_history[_path].append(file_text)
+            return ToolResult(output=f'File created successfully at: {_path}')
+        elif command == 'str_replace':
+            if not old_str:
+                raise ToolError(
+                    'Parameter `old_str` is required for command: str_replace'
+                )
+            return self.str_replace(_path, old_str, new_str)
+        elif command == 'insert':
+            if insert_line is None:
+                raise ToolError(
+                    'Parameter `insert_line` is required for command: insert'
+                )
+            if not new_str:
+                raise ToolError('Parameter `new_str` is required for command: insert')
+            return self.insert(_path, insert_line, new_str)
+        elif command == 'undo_edit':
+            return self.undo_edit(_path)
+        raise ToolError(
+            f'Unrecognized command {command}. The allowed commands for the {self.name} tool are: {", ".join(get_args(Command))}'
+        )
+
+    def validate_path(self, command: str, path: Path):
+        """
+        Check that the path/command combination is valid.
+        """
+        # Check if its an absolute path
+        if not path.is_absolute():
+            suggested_path = Path('') / path
+            raise ToolError(
+                f'The path {path} is not an absolute path, it should start with `/`. Maybe you meant {suggested_path}?'
+            )
+        # Check if path exists
+        if not path.exists() and command != 'create':
+            raise ToolError(
+                f'The path {path} does not exist. Please provide a valid path.'
+            )
+        if path.exists() and command == 'create':
+            raise ToolError(
+                f'File already exists at: {path}. Cannot overwrite files using command `create`.'
+            )
+        # Check if the path points to a directory
+        if path.is_dir():
+            if command != 'view':
+                raise ToolError(
+                    f'The path {path} is a directory and only the `view` command can be used on directories'
+                )
+
+    def view(self, path: Path, view_range: list[int] | None = None):
+        """Implement the view command"""
+        if path.is_dir():
+            if view_range:
+                raise ToolError(
+                    'The `view_range` parameter is not allowed when `path` points to a directory.'
+                )
+
+            _, stdout, stderr = run(rf"find {path} -maxdepth 2 -not -path '*/\.*'")
+            if not stderr:
+                stdout = f"Here's the files and directories up to 2 levels deep in {path}, excluding hidden items:\n{stdout}\n"
+            return CLIResult(output=stdout, error=stderr)
+
+        file_content = self.read_file(path)
+        init_line = 1
+        if view_range:
+            if len(view_range) != 2 or not all(isinstance(i, int) for i in view_range):
+                raise ToolError(
+                    'Invalid `view_range`. It should be a list of two integers.'
+                )
+            file_lines = file_content.split('\n')
+            n_lines_file = len(file_lines)
+            init_line, final_line = view_range
+            if init_line < 1 or init_line > n_lines_file:
+                raise ToolError(
+                    f"Invalid `view_range`: {view_range}. It's first element `{init_line}` should be within the range of lines of the file: {[1, n_lines_file]}"
+                )
+            if final_line > n_lines_file:
+                raise ToolError(
+                    f"Invalid `view_range`: {view_range}. It's second element `{final_line}` should be smaller than the number of lines in the file: `{n_lines_file}`"
+                )
+            if final_line != -1 and final_line < init_line:
+                raise ToolError(
+                    f"Invalid `view_range`: {view_range}. It's second element `{final_line}` should be larger or equal than its first `{init_line}`"
+                )
+
+            if final_line == -1:
+                file_content = '\n'.join(file_lines[init_line - 1 :])
+            else:
+                file_content = '\n'.join(file_lines[init_line - 1 : final_line])
+
+        return CLIResult(
+            output=self._make_output(file_content, str(path), init_line=init_line)
+        )
+
+    def str_replace(self, path: Path, old_str: str, new_str: str | None):
+        """Implement the str_replace command, which replaces old_str with new_str in the file content"""
+        # Read the file content
+        file_content = self.read_file(path).expandtabs()
+        old_str = old_str.expandtabs()
+        new_str = new_str.expandtabs() if new_str is not None else ''
+
+        # Check if old_str is unique in the file
+        occurrences = file_content.count(old_str)
+        if occurrences == 0:
+            raise ToolError(
+                f'No replacement was performed, old_str `{old_str}` did not appear verbatim in {path}.'
+            )
+        elif occurrences > 1:
+            file_content_lines = file_content.split('\n')
+            lines = [
+                idx + 1
+                for idx, line in enumerate(file_content_lines)
+                if old_str in line
+            ]
+            raise ToolError(
+                f'No replacement was performed. Multiple occurrences of old_str `{old_str}` in lines {lines}. Please ensure it is unique'
+            )
+
+        # Replace old_str with new_str
+        new_file_content = file_content.replace(old_str, new_str)
+
+        # Write the new content to the file
+        self.write_file(path, new_file_content)
+
+        # Save the content to history
+        self._file_history[path].append(file_content)
+
+        # Create a snippet of the edited section
+        replacement_line = file_content.split(old_str)[0].count('\n')
+        start_line = max(0, replacement_line - SNIPPET_LINES)
+        end_line = replacement_line + SNIPPET_LINES + new_str.count('\n')
+        snippet = '\n'.join(new_file_content.split('\n')[start_line : end_line + 1])
+
+        # Prepare the success message
+        success_msg = f'The file {path} has been edited. '
+        success_msg += self._make_output(
+            snippet, f'a snippet of {path}', start_line + 1
+        )
+        success_msg += 'Review the changes and make sure they are as expected. Edit the file again if necessary.'
+
+        return CLIResult(output=success_msg)
+
+    def insert(self, path: Path, insert_line: int, new_str: str):
+        """Implement the insert command, which inserts new_str at the specified line in the file content."""
+        file_text = self.read_file(path).expandtabs()
+        new_str = new_str.expandtabs()
+        file_text_lines = file_text.split('\n')
+        n_lines_file = len(file_text_lines)
+
+        if insert_line < 0 or insert_line > n_lines_file:
+            raise ToolError(
+                f'Invalid `insert_line` parameter: {insert_line}. It should be within the range of lines of the file: {[0, n_lines_file]}'
+            )
+
+        new_str_lines = new_str.split('\n')
+        new_file_text_lines = (
+            file_text_lines[:insert_line]
+            + new_str_lines
+            + file_text_lines[insert_line:]
+        )
+        snippet_lines = (
+            file_text_lines[max(0, insert_line - SNIPPET_LINES) : insert_line]
+            + new_str_lines
+            + file_text_lines[insert_line : insert_line + SNIPPET_LINES]
+        )
+
+        new_file_text = '\n'.join(new_file_text_lines)
+        snippet = '\n'.join(snippet_lines)
+
+        self.write_file(path, new_file_text)
+        self._file_history[path].append(file_text)
+
+        success_msg = f'The file {path} has been edited. '
+        success_msg += self._make_output(
+            snippet,
+            'a snippet of the edited file',
+            max(1, insert_line - SNIPPET_LINES + 1),
+        )
+        success_msg += 'Review the changes and make sure they are as expected (correct indentation, no duplicate lines, etc). Edit the file again if necessary.'
+        return CLIResult(output=success_msg)
+
+    def undo_edit(self, path: Path):
+        """Implement the undo_edit command."""
+        if not self._file_history[path]:
+            raise ToolError(f'No edit history found for {path}.')
+
+        old_text = self._file_history[path].pop()
+        self.write_file(path, old_text)
+
+        return CLIResult(
+            output=f'Last edit to {path} undone successfully. {self._make_output(old_text, str(path))}'
+        )
+
+    def read_file(self, path: Path):
+        """Read the content of a file from a given path; raise a ToolError if an error occurs."""
+        try:
+            return path.read_text()
+        except Exception as e:
+            raise ToolError(f'Ran into {e} while trying to read {path}') from None
+
+    def write_file(self, path: Path, file: str):
+        """Write the content of a file to a given path; raise a ToolError if an error occurs."""
+        try:
+            path.write_text(file)
+        except Exception as e:
+            raise ToolError(f'Ran into {e} while trying to write to {path}') from None
+
+    def _make_output(
+        self,
+        file_content: str,
+        file_descriptor: str,
+        init_line: int = 1,
+        expand_tabs: bool = True,
+    ):
+        """Generate output for the CLI based on the content of a file."""
+        file_content = maybe_truncate(file_content)
+        if expand_tabs:
+            file_content = file_content.expandtabs()
+        file_content = '\n'.join(
+            [
+                f'{i + init_line:6}\t{line}'
+                for i, line in enumerate(file_content.split('\n'))
+            ]
+        )
+        return (
+            f"Here's the result of running `cat -n` on {file_descriptor}:\n"
+            + file_content
+            + '\n'
+        )
diff --git a/openhands/runtime/plugins/agent_skills/file_editor/run.py b/openhands/runtime/plugins/agent_skills/file_editor/run.py
new file mode 100644
index 0000000000..29c604256f
--- /dev/null
+++ b/openhands/runtime/plugins/agent_skills/file_editor/run.py
@@ -0,0 +1,44 @@
+"""Utility to run shell commands asynchronously with a timeout."""
+
+import subprocess
+import time
+
+TRUNCATED_MESSAGE: str = '<response clipped><NOTE>To save on context only part of this file has been shown to you. You should retry this tool after you have searched inside the file with `grep -n` in order to find the line numbers of what you are looking for.</NOTE>'
+MAX_RESPONSE_LEN: int = 16000
+
+
+def maybe_truncate(content: str, truncate_after: int | None = MAX_RESPONSE_LEN):
+    """Truncate content and append a notice if content exceeds the specified length."""
+    return (
+        content
+        if not truncate_after or len(content) <= truncate_after
+        else content[:truncate_after] + TRUNCATED_MESSAGE
+    )
+
+
+def run(
+    cmd: str,
+    timeout: float | None = 120.0,  # seconds
+    truncate_after: int | None = MAX_RESPONSE_LEN,
+):
+    """Run a shell command synchronously with a timeout."""
+    start_time = time.time()
+
+    try:
+        process = subprocess.Popen(
+            cmd, shell=True, stdout=subprocess.PIPE, stderr=subprocess.PIPE, text=True
+        )
+
+        stdout, stderr = process.communicate(timeout=timeout)
+
+        return (
+            process.returncode or 0,
+            maybe_truncate(stdout, truncate_after=truncate_after),
+            maybe_truncate(stderr, truncate_after=truncate_after),
+        )
+    except subprocess.TimeoutExpired:
+        process.kill()
+        elapsed_time = time.time() - start_time
+        raise TimeoutError(
+            f"Command '{cmd}' timed out after {elapsed_time:.2f} seconds"
+        )
diff --git a/poetry.lock b/poetry.lock
index 20316ac24f..6ef4a43322 100644
--- a/poetry.lock
+++ b/poetry.lock
@@ -1,4 +1,4 @@
-# This file is automatically @generated by Poetry 1.8.3 and should not be changed by hand.
+# This file is automatically @generated by Poetry 1.8.2 and should not be changed by hand.
 
 [[package]]
 name = "aenum"
@@ -3901,22 +3901,20 @@ name = "litellm"
 version = "1.50.4"
 description = "Library to easily interface with LLM API providers"
 optional = false
-python-versions = "!=2.7.*,!=3.0.*,!=3.1.*,!=3.2.*,!=3.3.*,!=3.4.*,!=3.5.*,!=3.6.*,!=3.7.*,>=3.8"
-files = [
-    {file = "litellm-1.50.4-py3-none-any.whl", hash = "sha256:cc6992275e24a0bbb4a3b377e6842d45a8510fc85d7f255930a64bb872980a36"},
-    {file = "litellm-1.50.4.tar.gz", hash = "sha256:a7e68ef614f631b58969c2c7a5154a565ba5974558d437c8cd6c8623654880ea"},
-]
+python-versions = ">=3.8.1,<4.0, !=3.9.7"
+files = []
+develop = false
 
 [package.dependencies]
 aiohttp = "*"
 click = "*"
 importlib-metadata = ">=6.8.0"
-jinja2 = ">=3.1.2,<4.0.0"
-jsonschema = ">=4.22.0,<5.0.0"
+jinja2 = "^3.1.2"
+jsonschema = "^4.22.0"
 openai = ">=1.52.0"
-pydantic = ">=2.0.0,<3.0.0"
+pydantic = "^2.0.0"
 python-dotenv = ">=0.2.0"
-requests = ">=2.31.0,<3.0.0"
+requests = "^2.31.0"
 tiktoken = ">=0.7.0"
 tokenizers = "*"
 
@@ -3924,6 +3922,12 @@ tokenizers = "*"
 extra-proxy = ["azure-identity (>=1.15.0,<2.0.0)", "azure-keyvault-secrets (>=4.8.0,<5.0.0)", "google-cloud-kms (>=2.21.3,<3.0.0)", "prisma (==0.11.0)", "resend (>=0.8.0,<0.9.0)"]
 proxy = ["PyJWT (>=2.8.0,<3.0.0)", "apscheduler (>=3.10.4,<4.0.0)", "backoff", "cryptography (>=42.0.5,<43.0.0)", "fastapi (>=0.111.0,<0.112.0)", "fastapi-sso (>=0.10.0,<0.11.0)", "gunicorn (>=22.0.0,<23.0.0)", "orjson (>=3.9.7,<4.0.0)", "pynacl (>=1.5.0,<2.0.0)", "python-multipart (>=0.0.9,<0.0.10)", "pyyaml (>=6.0.1,<7.0.0)", "rq", "uvicorn (>=0.22.0,<0.23.0)"]
 
+[package.source]
+type = "git"
+url = "https://github.com/BerriAI/litellm.git"
+reference = "58fe6610601297c5a90367fd4583469e2df3fcf9"
+resolved_reference = "58fe6610601297c5a90367fd4583469e2df3fcf9"
+
 [[package]]
 name = "llama-index"
 version = "0.10.45.post1"
@@ -10095,4 +10099,4 @@ testing = ["coverage[toml]", "zope.event", "zope.testing"]
 [metadata]
 lock-version = "2.0"
 python-versions = "^3.12"
-content-hash = "aeb09e429a789c3f8ced605e7e1a5932fd6cce7f7f4ce30a960da77fba18b9a3"
+content-hash = "880b0251ec1ac83a7a8f6b1637b0860f75553d1f9c7c67313af9f3bb686c166a"
diff --git a/pyproject.toml b/pyproject.toml
index 393bab9594..a7daebd37d 100644
--- a/pyproject.toml
+++ b/pyproject.toml
@@ -14,7 +14,7 @@ packages = [
 python = "^3.12"
 datasets = "*"
 pandas = "*"
-litellm = "*"
+litellm = { git = "https://github.com/BerriAI/litellm.git", rev = "58fe6610601297c5a90367fd4583469e2df3fcf9" }
 google-generativeai = "*" # To use litellm with Gemini Pro API
 termcolor = "*"
 seaborn = "*"
@@ -89,6 +89,7 @@ reportlab = "*"
 [tool.coverage.run]
 concurrency = ["gevent"]
 
+
 [tool.poetry.group.runtime.dependencies]
 jupyterlab = "*"
 notebook = "*"
@@ -119,6 +120,7 @@ ignore = ["D1"]
 [tool.ruff.lint.pydocstyle]
 convention = "google"
 
+
 [tool.poetry.group.evaluation.dependencies]
 streamlit = "*"
 whatthepatch = "*"
diff --git a/tests/unit/test_agent_skill.py b/tests/unit/test_agent_skill.py
index 63745f4dd2..f619bc00bf 100644
--- a/tests/unit/test_agent_skill.py
+++ b/tests/unit/test_agent_skill.py
@@ -5,6 +5,7 @@ import sys
 import docx
 import pytest
 
+from openhands.runtime.plugins.agent_skills.agentskills import file_editor
 from openhands.runtime.plugins.agent_skills.file_ops.file_ops import (
     WINDOW,
     _print_window,
@@ -715,3 +716,302 @@ def test_parse_pptx(tmp_path):
         'Hello, this is the second test PPTX slide.\n\n'
     )
     assert output == expected_output, f'Expected output does not match. Got: {output}'
+
+
+# =============================================================================
+
+
+def test_file_editor_view(tmp_path):
+    # generate a random directory
+    random_dir = tmp_path / 'dir_1'
+    random_dir.mkdir()
+    # create a file in the directory
+    random_file = random_dir / 'a.txt'
+    random_file.write_text('Line 1\nLine 2\nLine 3\nLine 4\nLine 5')
+    random_dir_2 = tmp_path / 'dir_2'
+    random_dir_2.mkdir()
+    random_file_2 = random_dir_2 / 'b.txt'
+    random_file_2.write_text('Line 1\nLine 2\nLine 3\nLine 4\nLine 5')
+
+    from openhands.runtime.plugins.agent_skills.agentskills import file_editor
+
+    # view the file
+    result = file_editor(command='view', path=str(random_file))
+    print('\n', result)
+    assert result is not None
+    assert (
+        result.split('\n')
+        == f"""Here's the result of running `cat -n` on {random_file}:
+     1\tLine 1
+     2\tLine 2
+     3\tLine 3
+     4\tLine 4
+     5\tLine 5
+""".split('\n')
+    )
+
+    # view the directory
+    result = file_editor(command='view', path=str(tmp_path))
+    print('\n', result)
+    assert result is not None
+    assert (
+        result.strip().split('\n')
+        == f"""Here's the files and directories up to 2 levels deep in {tmp_path}, excluding hidden items:
+{tmp_path}
+{tmp_path}/dir_2
+{tmp_path}/dir_2/b.txt
+{tmp_path}/dir_1
+{tmp_path}/dir_1/a.txt
+""".strip().split('\n')
+    )
+
+
+def test_file_editor_create(tmp_path):
+    # generate a random directory
+    random_dir = tmp_path / 'dir_1'
+    random_dir.mkdir()
+    # create a file in the directory
+    random_file = random_dir / 'a.txt'
+
+    from openhands.runtime.plugins.agent_skills.agentskills import file_editor
+
+    # view an unexist file
+    result = file_editor(command='view', path=str(random_file))
+    print(result)
+    assert result is not None
+    assert (
+        result
+        == f'ERROR:\nThe path {random_file} does not exist. Please provide a valid path.'
+    )
+
+    # create a file
+    result = file_editor(command='create', path=str(random_file), file_text='Line 6')
+    print(result)
+    assert result is not None
+    assert result == f'File created successfully at: {random_file}'
+
+    # view again
+    result = file_editor(command='view', path=str(random_file))
+    print(result)
+    assert result is not None
+    assert (
+        result.strip().split('\n')
+        == f"""Here's the result of running `cat -n` on {random_file}:
+     1\tLine 6
+""".strip().split('\n')
+    )
+
+
+@pytest.fixture
+def setup_file(tmp_path):
+    random_dir = tmp_path / 'dir_1'
+    random_dir.mkdir()
+    random_file = random_dir / 'a.txt'
+    return random_file
+
+
+def test_file_editor_create_and_view(setup_file):
+    random_file = setup_file
+
+    # Test create command
+    result = file_editor(
+        command='create', path=str(random_file), file_text='Line 1\nLine 2\nLine 3'
+    )
+    print(result)
+    assert result == f'File created successfully at: {random_file}'
+
+    # Test view command for file
+    result = file_editor(command='view', path=str(random_file))
+    print(result)
+    assert (
+        result.strip().split('\n')
+        == f"""Here's the result of running `cat -n` on {random_file}:
+     1\tLine 1
+     2\tLine 2
+     3\tLine 3
+""".strip().split('\n')
+    )
+
+    # Test view command for directory
+    result = file_editor(command='view', path=str(random_file.parent))
+    assert f'{random_file.parent}' in result
+    assert f'{random_file.name}' in result
+
+
+def test_file_editor_view_nonexistent(setup_file):
+    random_file = setup_file
+
+    # Test view command for non-existent file
+    result = file_editor(command='view', path=str(random_file))
+    assert (
+        result
+        == f'ERROR:\nThe path {random_file} does not exist. Please provide a valid path.'
+    )
+
+
+def test_file_editor_str_replace(setup_file):
+    random_file = setup_file
+    file_editor(
+        command='create', path=str(random_file), file_text='Line 1\nLine 2\nLine 3'
+    )
+
+    # Test str_replace command
+    result = file_editor(
+        command='str_replace',
+        path=str(random_file),
+        old_str='Line 2',
+        new_str='New Line 2',
+    )
+    print(result)
+    assert (
+        result
+        == f"""The file {random_file} has been edited. Here's the result of running `cat -n` on a snippet of {random_file}:
+     1\tLine 1
+     2\tNew Line 2
+     3\tLine 3
+Review the changes and make sure they are as expected. Edit the file again if necessary."""
+    )
+
+    # View the file after str_replace
+    result = file_editor(command='view', path=str(random_file))
+    print(result)
+    assert (
+        result.strip().split('\n')
+        == f"""Here's the result of running `cat -n` on {random_file}:
+     1\tLine 1
+     2\tNew Line 2
+     3\tLine 3
+""".strip().split('\n')
+    )
+
+
+def test_file_editor_str_replace_non_existent(setup_file):
+    random_file = setup_file
+    file_editor(
+        command='create', path=str(random_file), file_text='Line 1\nLine 2\nLine 3'
+    )
+
+    # Test str_replace with non-existent string
+    result = file_editor(
+        command='str_replace',
+        path=str(random_file),
+        old_str='Non-existent Line',
+        new_str='New Line',
+    )
+    print(result)
+    assert (
+        result
+        == f'ERROR:\nNo replacement was performed, old_str `Non-existent Line` did not appear verbatim in {random_file}.'
+    )
+
+
+def test_file_editor_insert(setup_file):
+    random_file = setup_file
+    file_editor(
+        command='create', path=str(random_file), file_text='Line 1\nLine 2\nLine 3'
+    )
+
+    # Test insert command
+    result = file_editor(
+        command='insert', path=str(random_file), insert_line=2, new_str='Inserted Line'
+    )
+    print(result)
+    assert (
+        result
+        == f"""The file {random_file} has been edited. Here's the result of running `cat -n` on a snippet of the edited file:
+     1\tLine 1
+     2\tLine 2
+     3\tInserted Line
+     4\tLine 3
+Review the changes and make sure they are as expected (correct indentation, no duplicate lines, etc). Edit the file again if necessary."""
+    )
+
+    # View the file after insert
+    result = file_editor(command='view', path=str(random_file))
+    assert (
+        result.strip().split('\n')
+        == f"""Here's the result of running `cat -n` on {random_file}:
+     1\tLine 1
+     2\tLine 2
+     3\tInserted Line
+     4\tLine 3
+""".strip().split('\n')
+    )
+
+
+def test_file_editor_insert_invalid_line(setup_file):
+    random_file = setup_file
+    file_editor(
+        command='create', path=str(random_file), file_text='Line 1\nLine 2\nLine 3'
+    )
+
+    # Test insert with invalid line number
+    result = file_editor(
+        command='insert',
+        path=str(random_file),
+        insert_line=10,
+        new_str='Invalid Insert',
+    )
+    assert (
+        result
+        == 'ERROR:\nInvalid `insert_line` parameter: 10. It should be within the range of lines of the file: [0, 3]'
+    )
+
+
+def test_file_editor_undo_edit(setup_file):
+    random_file = setup_file
+    result = file_editor(
+        command='create', path=str(random_file), file_text='Line 1\nLine 2\nLine 3'
+    )
+    print(result)
+    assert result == f"""File created successfully at: {random_file}"""
+
+    # Make an edit
+    result = file_editor(
+        command='str_replace',
+        path=str(random_file),
+        old_str='Line 2',
+        new_str='New Line 2',
+    )
+    print(result)
+    assert (
+        result
+        == f"""The file {random_file} has been edited. Here's the result of running `cat -n` on a snippet of {random_file}:
+     1\tLine 1
+     2\tNew Line 2
+     3\tLine 3
+Review the changes and make sure they are as expected. Edit the file again if necessary."""
+    )
+
+    # Test undo_edit command
+    result = file_editor(command='undo_edit', path=str(random_file))
+    print(result)
+    assert (
+        result
+        == f"""Last edit to {random_file} undone successfully. Here's the result of running `cat -n` on {random_file}:
+     1\tLine 1
+     2\tLine 2
+     3\tLine 3
+"""
+    )
+
+    # View the file after undo_edit
+    result = file_editor(command='view', path=str(random_file))
+    assert (
+        result.strip().split('\n')
+        == f"""Here's the result of running `cat -n` on {random_file}:
+     1\tLine 1
+     2\tLine 2
+     3\tLine 3
+""".strip().split('\n')
+    )
+
+
+def test_file_editor_undo_edit_no_edits(tmp_path):
+    random_file = tmp_path / 'a.txt'
+    random_file.touch()
+
+    # Test undo_edit when no edits have been made
+    result = file_editor(command='undo_edit', path=str(random_file))
+    print(result)
+    assert result == f'ERROR:\nNo edit history found for {random_file}.'
diff --git a/tests/unit/test_codeact_agent.py b/tests/unit/test_codeact_agent.py
index 55dfa3feb7..9e3dda6c2c 100644
--- a/tests/unit/test_codeact_agent.py
+++ b/tests/unit/test_codeact_agent.py
@@ -24,29 +24,35 @@ def agent() -> CodeActAgent:
 
 
 def test_cmd_output_observation_message(agent: CodeActAgent):
+    agent.config.function_calling = False
     obs = CmdOutputObservation(
         command='echo hello', content='Command output', command_id=1, exit_code=0
     )
 
-    result = agent.get_observation_message(obs)
+    results = agent.get_observation_message(obs, tool_call_id_to_message={})
+    assert len(results) == 1
 
+    result = results[0]
     assert result is not None
     assert result.role == 'user'
     assert len(result.content) == 1
     assert isinstance(result.content[0], TextContent)
     assert 'OBSERVATION:' in result.content[0].text
     assert 'Command output' in result.content[0].text
-    assert 'Command 1 finished with exit code 0' in result.content[0].text
+    assert 'Command finished with exit code 0' in result.content[0].text
 
 
 def test_ipython_run_cell_observation_message(agent: CodeActAgent):
+    agent.config.function_calling = False
     obs = IPythonRunCellObservation(
         code='plt.plot()',
         content='IPython output\n![image](data:image/png;base64,ABC123)',
     )
 
-    result = agent.get_observation_message(obs)
+    results = agent.get_observation_message(obs, tool_call_id_to_message={})
+    assert len(results) == 1
 
+    result = results[0]
     assert result is not None
     assert result.role == 'user'
     assert len(result.content) == 1
@@ -61,12 +67,15 @@ def test_ipython_run_cell_observation_message(agent: CodeActAgent):
 
 
 def test_agent_delegate_observation_message(agent: CodeActAgent):
+    agent.config.function_calling = False
     obs = AgentDelegateObservation(
         content='Content', outputs={'content': 'Delegated agent output'}
     )
 
-    result = agent.get_observation_message(obs)
+    results = agent.get_observation_message(obs, tool_call_id_to_message={})
+    assert len(results) == 1
 
+    result = results[0]
     assert result is not None
     assert result.role == 'user'
     assert len(result.content) == 1
@@ -76,10 +85,13 @@ def test_agent_delegate_observation_message(agent: CodeActAgent):
 
 
 def test_error_observation_message(agent: CodeActAgent):
+    agent.config.function_calling = False
     obs = ErrorObservation('Error message')
 
-    result = agent.get_observation_message(obs)
+    results = agent.get_observation_message(obs, tool_call_id_to_message={})
+    assert len(results) == 1
 
+    result = results[0]
     assert result is not None
     assert result.role == 'user'
     assert len(result.content) == 1
@@ -93,4 +105,4 @@ def test_unknown_observation_message(agent: CodeActAgent):
     obs = Mock()
 
     with pytest.raises(ValueError, match='Unknown observation type:'):
-        agent.get_observation_message(obs)
+        agent.get_observation_message(obs, tool_call_id_to_message={})
diff --git a/tests/unit/test_message_serialization.py b/tests/unit/test_message_serialization.py
index 16035f0aed..aac1f8d014 100644
--- a/tests/unit/test_message_serialization.py
+++ b/tests/unit/test_message_serialization.py
@@ -78,7 +78,10 @@ def test_message_with_only_text_content_and_vision_disabled():
 
     expected_serialized_message = {
         'role': 'user',
-        'content': 'This is a text message\nThis is another text message',
+        'content': [
+            {'type': 'text', 'text': 'This is a text message'},
+            {'type': 'text', 'text': 'This is another text message'},
+        ],
     }
 
     assert serialized_message == expected_serialized_message
@@ -107,7 +110,10 @@ def test_message_with_mixed_content_and_vision_disabled():
     # Expected serialization ignores images and concatenates text
     expected_serialized_message = {
         'role': 'user',
-        'content': 'This is a text message\nThis is another text message',
+        'content': [
+            {'type': 'text', 'text': 'This is a text message'},
+            {'type': 'text', 'text': 'This is another text message'},
+        ],
     }
 
     # Assert serialized message matches expectation
diff --git a/tests/unit/test_prompt_caching.py b/tests/unit/test_prompt_caching.py
index 41dc756187..d038f18d9c 100644
--- a/tests/unit/test_prompt_caching.py
+++ b/tests/unit/test_prompt_caching.py
@@ -25,12 +25,38 @@ def mock_event_stream(tmp_path):
     return EventStream('test_session', file_store)
 
 
-@pytest.fixture
-def codeact_agent(mock_llm):
+@pytest.fixture(params=[False, True])
+def codeact_agent(mock_llm, request):
     config = AgentConfig()
+    config.function_calling = request.param
     return CodeActAgent(mock_llm, config)
 
 
+def response_mock(content: str):
+    class MockModelResponse:
+        def __init__(self, content):
+            self.choices = [
+                {
+                    'message': {
+                        'content': content,
+                        'tool_calls': [
+                            {
+                                'function': {
+                                    'name': 'execute_bash',
+                                    'arguments': '{}',
+                                }
+                            }
+                        ],
+                    }
+                }
+            ]
+
+        def model_dump(self):
+            return {'choices': self.choices}
+
+    return MockModelResponse(content)
+
+
 def test_get_messages_with_reminder(codeact_agent, mock_event_stream):
     # Add some events to the stream
     mock_event_stream.add_event(MessageAction('Initial user message'), EventSource.USER)
@@ -49,9 +75,13 @@ def test_get_messages_with_reminder(codeact_agent, mock_event_stream):
     )  # System, initial user + user message, agent message, last user message
     assert messages[0].content[0].cache_prompt  # system message
     assert messages[1].role == 'user'
-    assert messages[1].content[0].text.endswith("LET'S START!")
-    assert messages[1].content[1].text.endswith('Initial user message')
-    assert messages[1].content[0].cache_prompt
+    if not codeact_agent.config.function_calling:
+        assert messages[1].content[0].text.endswith("LET'S START!")
+        assert messages[1].content[1].text.endswith('Initial user message')
+    else:
+        assert messages[1].content[0].text.endswith('Initial user message')
+    # we add cache breakpoint to the last 3 user messages
+    assert messages[1].content[-1].cache_prompt
 
     assert messages[3].role == 'user'
     assert messages[3].content[0].text == ('Hello, agent!')
@@ -62,13 +92,14 @@ def test_get_messages_with_reminder(codeact_agent, mock_event_stream):
     assert messages[5].role == 'user'
     assert messages[5].content[0].text.startswith('Laaaaaaaast!')
     assert messages[5].content[0].cache_prompt
-    assert (
-        messages[5]
-        .content[1]
-        .text.endswith(
-            'ENVIRONMENT REMINDER: You have 5 turns left to complete the task. When finished reply with <finish></finish>.'
+    if not codeact_agent.config.function_calling:
+        assert (
+            messages[5]
+            .content[1]
+            .text.endswith(
+                'ENVIRONMENT REMINDER: You have 5 turns left to complete the task. When finished reply with <finish></finish>.'
+            )
         )
-    )
 
 
 def test_get_messages_prompt_caching(codeact_agent, mock_event_stream):
@@ -97,9 +128,10 @@ def test_get_messages_prompt_caching(codeact_agent, mock_event_stream):
     )  # Including the initial system+user + 2 last user message
 
     # Verify that these are indeed the last two user messages (from start)
-    assert (
-        cached_user_messages[0].content[0].text.startswith('A chat between')
-    )  # system message
+    if not codeact_agent.config.function_calling:
+        assert (
+            cached_user_messages[0].content[0].text.startswith('A chat between')
+        )  # system message
     assert cached_user_messages[2].content[0].text.startswith('User message 1')
     assert cached_user_messages[3].content[0].text.startswith('User message 1')
 
@@ -144,14 +176,15 @@ def test_get_messages_with_cmd_action(codeact_agent, mock_event_stream):
     # Assert the presence of key elements in the messages
     assert (
         messages[1]
-        .content[1]
+        .content[-1]
         .text.startswith("Let's list the contents of the current directory.")
     )  # user, included in the initial message
-    assert any(
-        'List files in current directory\n<execute_bash>\nls -l\n</execute_bash>'
-        in msg.content[0].text
-        for msg in messages
-    )  # agent
+    if not codeact_agent.config.function_calling:
+        assert any(
+            'List files in current directory\n<execute_bash>\nls -l\n</execute_bash>'
+            in msg.content[0].text
+            for msg in messages
+        )  # agent
     assert any(
         'total 0\n-rw-r--r-- 1 user group 0 Jan 1 00:00 file1.txt\n-rw-r--r-- 1 user group 0 Jan 1 00:00 file2.txt'
         in msg.content[0].text
@@ -160,7 +193,8 @@ def test_get_messages_with_cmd_action(codeact_agent, mock_event_stream):
     assert any(
         "Now, let's create a new directory." in msg.content[0].text for msg in messages
     )  # agent
-    assert messages[4].content[1].text.startswith('Create a new directory')  # agent
+    if not codeact_agent.config.function_calling:
+        assert messages[4].content[1].text.startswith('Create a new directory')  # agent
     assert any(
         'finished with exit code 0' in msg.content[0].text for msg in messages
     )  # user, observation
@@ -171,16 +205,20 @@ def test_get_messages_with_cmd_action(codeact_agent, mock_event_stream):
     # prompt cache is added to the system message
     assert messages[0].content[0].cache_prompt
     # and the first initial user message
-    assert messages[1].content[0].cache_prompt
+    assert messages[1].content[-1].cache_prompt
     # and to the last two user messages
     assert messages[3].content[0].cache_prompt
     assert messages[5].content[0].cache_prompt
 
     # reminder is added to the last user message
-    assert 'ENVIRONMENT REMINDER: You have 5 turns' in messages[5].content[1].text
+    if not codeact_agent.config.function_calling:
+        assert 'ENVIRONMENT REMINDER: You have 5 turns' in messages[5].content[1].text
 
 
 def test_prompt_caching_headers(codeact_agent, mock_event_stream):
+    if codeact_agent.config.function_calling:
+        pytest.skip('Skipping this test for function calling')
+
     # Setup
     mock_event_stream.add_event(MessageAction('Hello, agent!'), EventSource.USER)
     mock_event_stream.add_event(MessageAction('Hello, user!'), EventSource.AGENT)
diff --git a/tests/unit/test_security.py b/tests/unit/test_security.py
index 4f0aa4dc39..771ccc206d 100644
--- a/tests/unit/test_security.py
+++ b/tests/unit/test_security.py
@@ -221,8 +221,9 @@ def test_unsafe_bash_command(temp_dir: str):
                         name=ActionType.RUN_IPYTHON,
                         arguments={
                             'code': "print('hello')",
-                            'kernel_init_code': '',
+                            'include_extra': True,
                             'confirmation_state': ActionConfirmationStatus.CONFIRMED,
+                            'kernel_init_code': '',
                         },
                     ),
                 ),