diff --git a/packages/extension/src/background.ts b/packages/extension/src/background.ts
index 5a33eaa87e70e..881e69c8d80dd 100644
--- a/packages/extension/src/background.ts
+++ b/packages/extension/src/background.ts
@@ -31,6 +31,8 @@ type PageMessage = {
   type: 'getConnectionStatus';
 } | {
   type: 'disconnect';
+} | {
+  type: 'rejectConnection';
 };
 
 const PLAYWRIGHT_GROUP_TITLE = 'Playwright';
@@ -110,8 +112,17 @@ class TabShareExtension {
           sendResponse({ success: false, error: error.message });
         }
         return true;
+      case 'rejectConnection': {
+        const selectorTabId = sender.tab?.id;
+        const pending = selectorTabId !== undefined ? this._pendingTabSelection.get(selectorTabId) : undefined;
+        if (pending) {
+          this._pendingTabSelection.delete(selectorTabId!);
+          pending.close('Rejected by user');
+        }
+        sendResponse({ success: true });
+        return true;
+      }
     }
-    return false;
   }
 
   private async _connectToRelay(selectorTabId: number, mcpRelayUrl: string, protocolVersion: number): Promise<void> {
diff --git a/packages/extension/src/ui/connect.tsx b/packages/extension/src/ui/connect.tsx
index 8c248328a8326..3094dab138fa1 100644
--- a/packages/extension/src/ui/connect.tsx
+++ b/packages/extension/src/ui/connect.tsx
@@ -115,6 +115,9 @@ const ConnectApp: React.FC = () => {
     setShowButtons(false);
     setShowTabList(false);
     setStatus({ type: 'error', message });
+    // Ask the background to close the pending MCP relay connection so the
+    // client daemon sees a disconnect and exits.
+    chrome.runtime.sendMessage({ type: 'rejectConnection' }).catch(() => {});
   }, []);
 
   const connectToMCPRelay = useCallback(async (mcpRelayUrl: string, protocolVersion: number) => {
diff --git a/packages/playwright-core/src/tools/cli-client/session.ts b/packages/playwright-core/src/tools/cli-client/session.ts
index 3aed7eee2e7e1..ce533cbe420cc 100644
--- a/packages/playwright-core/src/tools/cli-client/session.ts
+++ b/packages/playwright-core/src/tools/cli-client/session.ts
@@ -161,6 +161,8 @@ export class Session {
     process.on('SIGTERM', sigtermHandler);
 
     let outLog = '';
+    const rejectWithPid = (reject: (e: Error) => void, message: string) =>
+      reject(Object.assign(new Error(`Daemon pid=${child.pid}: ${message}`), { daemonPid: child.pid }));
     await new Promise<void>((resolve, reject) => {
       child.stdout!.on('data', data => {
         outLog += data.toString();
@@ -170,8 +172,7 @@ export class Session {
         const error = errorMatch ? errorMatch[1].trim() : undefined;
         if (error) {
           const errLogContent = fs.readFileSync(errLog, 'utf-8');
-          const message = error + (errLogContent ? '\n' + errLogContent : '');
-          reject(new Error(message));
+          rejectWithPid(reject, error + (errLogContent ? '\n' + errLogContent : ''));
         }
 
         const successMatch = outLog.match(/### Success\nDaemon listening on (.*)\n<EOF>/);
@@ -181,8 +182,7 @@ export class Session {
       child.on('close', code => {
         if (!signalled) {
           const errLogContent = fs.readFileSync(errLog, 'utf-8');
-          const message = `Daemon process exited with code ${code}` + (errLogContent ? '\n' + errLogContent : '');
-          reject(new Error(message));
+          rejectWithPid(reject, `Daemon process exited with code ${code}` + (errLogContent ? '\n' + errLogContent : ''));
         }
       });
     });
diff --git a/packages/playwright-core/src/tools/cli-daemon/program.ts b/packages/playwright-core/src/tools/cli-daemon/program.ts
index 4d06a661622b2..39c3e54d70caf 100644
--- a/packages/playwright-core/src/tools/cli-daemon/program.ts
+++ b/packages/playwright-core/src/tools/cli-daemon/program.ts
@@ -72,6 +72,10 @@ export function decorateProgram(program: Command) {
           const message = process.env.PWDEBUGIMPL ? (error as Error).stack || (error as Error).message : (error as Error).message;
           console.log(`### Error\n${message}`);
           console.log('<EOF>');
+          // The cli-client never destroys our stdout pipe on the error path,
+          // so the libuv handle would keep the daemon alive forever.
+          // eslint-disable-next-line no-restricted-properties
+          process.exit(1);
         }
       });
 }
diff --git a/packages/playwright-core/src/tools/mcp/extensionContextFactory.ts b/packages/playwright-core/src/tools/mcp/extensionContextFactory.ts
index a5d9e5696aac9..fb7d95b7a2f2a 100644
--- a/packages/playwright-core/src/tools/mcp/extensionContextFactory.ts
+++ b/packages/playwright-core/src/tools/mcp/extensionContextFactory.ts
@@ -34,6 +34,12 @@ export async function createExtensionBrowser(config: FullConfig, clientName: str
       config.browser.launchOptions.executablePath);
   debugLogger(`CDP relay server started, extension endpoint: ${relay.extensionEndpoint()}.`);
 
-  await relay.ensureExtensionConnectionForMCPContext(clientName);
-  return await playwright.chromium.connectOverCDP(relay.cdpEndpoint(), { isLocal: true, timeout: 0 });
+  try {
+    await relay.ensureExtensionConnectionForMCPContext(clientName);
+    return await playwright.chromium.connectOverCDP(relay.cdpEndpoint(), { isLocal: true, timeout: 0 });
+  } catch (error) {
+    relay.stop();
+    httpServer.close();
+    throw error;
+  }
 }
diff --git a/tests/extension/cli.spec.ts b/tests/extension/cli.spec.ts
index a90a54081274e..9bf4ba7b19056 100644
--- a/tests/extension/cli.spec.ts
+++ b/tests/extension/cli.spec.ts
@@ -15,36 +15,67 @@
  */
 
 import fs from 'fs/promises';
-import { test, expect, extensionId } from './extension-fixtures';
+import { test as base, expect, extensionId } from './extension-fixtures';
 
-test('attach <url> --extension', async ({ browserWithExtension, cli, server }, testInfo) => {
-  const browserContext = await browserWithExtension.launch();
+import type { CliResult } from './extension-fixtures';
+import type { Page } from 'playwright';
 
-  // Write config file with userDataDir
-  const configPath = testInfo.outputPath('cli-config.json');
-  await fs.writeFile(configPath, JSON.stringify({
-    browser: {
-      userDataDir: browserWithExtension.userDataDir,
-    }
-  }, null, 2));
+const test = base.extend<{
+  startAttach: () => Promise<{ confirmationPage: Page, cliPromise: Promise<CliResult> }>,
+}>({
+  startAttach: async ({ browserWithExtension, cli }, use, testInfo) => {
+    await use(async () => {
+      await fs.writeFile(testInfo.outputPath('cli-config.json'), JSON.stringify({
+        browser: {
+          userDataDir: browserWithExtension.userDataDir,
+        }
+      }, null, 2));
+      const browserContext = await browserWithExtension.launch();
+      const confirmationPagePromise = browserContext.waitForEvent('page', page =>
+        page.url().startsWith(`chrome-extension://${extensionId}/connect.html`)
+      );
+      const cliPromise = cli('attach', '--extension', `--config=cli-config.json`);
+      const confirmationPage = await confirmationPagePromise;
+      return { confirmationPage, cliPromise };
+    });
+  },
+});
 
-  const confirmationPagePromise = browserContext.waitForEvent('page', page => {
-    return page.url().startsWith(`chrome-extension://${extensionId}/connect.html`);
-  });
+function isAlive(pid: number): boolean {
+  try {
+    process.kill(pid, 0);
+    return true;
+  } catch {
+    return false;
+  }
+}
 
-  // Start the CLI command in the background
-  const cliPromise = cli('attach', '--extension', `--config=cli-config.json`);
+async function expectDaemonExited(cliPromise: Promise<CliResult>): Promise<void> {
+  const { error } = await cliPromise;
+  const pidMatch = error.match(/Daemon pid=(\d+)/);
+  expect(pidMatch, `expected daemon pid in cli error:\n${error}`).toBeTruthy();
+  const pid = parseInt(pidMatch![1], 10);
+  await expect.poll(() => isAlive(pid)).toBe(false);
+}
 
-  // Wait for the confirmation page to appear
-  const confirmationPage = await confirmationPagePromise;
+test('daemon exits when user rejects the extension connection', async ({ startAttach }) => {
+  const { confirmationPage, cliPromise } = await startAttach();
+  await confirmationPage.getByRole('button', { name: 'Reject' }).click();
+  await expectDaemonExited(cliPromise);
+});
+
+test('daemon exits when user closes the connect tab', async ({ startAttach }) => {
+  const { confirmationPage, cliPromise } = await startAttach();
+  await confirmationPage.close();
+  await expectDaemonExited(cliPromise);
+});
 
-  // Click the Connect button
+test('attach <url> --extension', async ({ startAttach, cli, server }) => {
+  const { confirmationPage, cliPromise } = await startAttach();
   await confirmationPage.locator('.tab-item', { hasText: 'Welcome' }).getByRole('button', { name: 'Allow & select' }).click();
 
   {
-    // Wait for the CLI command to complete
     const { output } = await cliPromise;
-    // Verify the output
     expect(output).toContain(`### Page`);
     expect(output).toContain(`- Page URL: chrome-extension://${extensionId}/connect.html?`);
     expect(output).toContain(`- Page Title: Welcome`);
@@ -52,7 +83,6 @@ test('attach <url> --extension', async ({ browserWithExtension, cli, server }, t
 
   {
     const { output } = await cli('goto', server.HELLO_WORLD);
-    // Verify the output
     expect(output).toContain(`### Page`);
     expect(output).toContain(`- Page URL: ${server.HELLO_WORLD}`);
     expect(output).toContain(`- Page Title: Title`);
diff --git a/tests/extension/extension-fixtures.ts b/tests/extension/extension-fixtures.ts
index 666c83cd1e40c..8231648895293 100644
--- a/tests/extension/extension-fixtures.ts
+++ b/tests/extension/extension-fixtures.ts
@@ -59,6 +59,8 @@ export const test = base.extend<TestFixtures, WorkerFixtures & ExtensionTestOpti
     // Default is 1.
     if (protocolVersion === 2)
       process.env.PLAYWRIGHT_EXTENSION_PROTOCOL = '2';
+    else
+      delete process.env.PLAYWRIGHT_EXTENSION_PROTOCOL;
     await use();
   }, { auto: true, scope: 'worker' }],