diff --git a/src/resources/extensions/gsd/bootstrap/register-extension.ts b/src/resources/extensions/gsd/bootstrap/register-extension.ts
index 3368b75eb..024d4a72d 100644
--- a/src/resources/extensions/gsd/bootstrap/register-extension.ts
+++ b/src/resources/extensions/gsd/bootstrap/register-extension.ts
@@ -36,7 +36,10 @@ function installEpipeGuard(): void {
       if (handleRecoverableExtensionProcessError(err)) {
         return;
       }
-      throw err;
+      // Log unhandled errors instead of re-throwing — throwing inside an
+      // uncaughtException handler is a fatal double-fault in Node.js (#3163).
+      process.stderr.write(`[gsd] uncaught extension error (non-fatal): ${err.message}\n`);
+      if (err.stack) process.stderr.write(`${err.stack}\n`);
     };
     process.on("uncaughtException", _gsdEpipeGuard);
   }
diff --git a/src/resources/extensions/gsd/bootstrap/register-hooks.ts b/src/resources/extensions/gsd/bootstrap/register-hooks.ts
index 58cef8c50..7d82b956f 100644
--- a/src/resources/extensions/gsd/bootstrap/register-hooks.ts
+++ b/src/resources/extensions/gsd/bootstrap/register-hooks.ts
@@ -108,7 +108,10 @@ export function registerHooks(pi: ExtensionAPI): void {
   });
 
   pi.on("session_before_compact", async () => {
-    if (isAutoActive() || isAutoPaused()) {
+    // Only cancel compaction while auto-mode is actively running.
+    // Paused auto-mode should allow compaction — the user may be doing
+    // interactive work (#3165).
+    if (isAutoActive()) {
       return { cancel: true };
     }
     const basePath = process.cwd();
diff --git a/src/resources/extensions/gsd/prompts/complete-milestone.md b/src/resources/extensions/gsd/prompts/complete-milestone.md
index 21c35a39a..82aea198c 100644
--- a/src/resources/extensions/gsd/prompts/complete-milestone.md
+++ b/src/resources/extensions/gsd/prompts/complete-milestone.md
@@ -28,7 +28,7 @@ Then:
 
 ### Verification Gate — STOP if verification failed
 
-**If ANY verification failure was recorded in steps 3, 4, or 5, you MUST follow the failure path below. Do NOT proceed to step 9.**
+**If ANY verification failure was recorded in steps 3, 4, or 5, you MUST follow the failure path below. Do NOT proceed to step 10.**
 
 **Failure path** (verification failed):
 - Do NOT call `gsd_complete_milestone` — the milestone must not be marked as complete.
@@ -39,7 +39,8 @@ Then:
 
 **Success path** (all verifications passed — continue with steps 9–13):
 
-9. **Persist completion through `gsd_complete_milestone`.** Call it with the parameters below. The tool updates the milestone status in the DB, renders `{{milestoneSummaryPath}}`, and validates all slices are complete before proceeding.
+9. For each requirement whose status changed in step 8, call `gsd_requirement_update` with the requirement ID and updated `status` and `validation` fields — the tool regenerates `.gsd/REQUIREMENTS.md` automatically. Do this BEFORE completing the milestone so requirement updates are persisted.
+10. **Persist completion through `gsd_complete_milestone`.** Call it with the parameters below. The tool updates the milestone status in the DB, renders `{{milestoneSummaryPath}}`, and validates all slices are complete before proceeding.
 
    **Required parameters:**
    - `milestoneId` (string) — Milestone ID (e.g. M001)
@@ -57,7 +58,6 @@ Then:
    **Optional parameters:**
    - `followUps` (string) — Follow-up items for future milestones
    - `deviations` (string) — Deviations from the original plan
-10. For each requirement whose status changed in step 8, call `gsd_requirement_update` with the requirement ID and updated `status` and `validation` fields — the tool regenerates `.gsd/REQUIREMENTS.md` automatically.
 11. Update `.gsd/PROJECT.md`: use the `write` tool with `path: ".gsd/PROJECT.md"` and `content` containing the full updated document reflecting milestone completion and current project state. Do NOT use the `edit` tool for this — PROJECT.md is a full-document refresh.
 12. Review all slice summaries for cross-cutting lessons, patterns, or gotchas that emerged during this milestone. Append any non-obvious, reusable insights to `.gsd/KNOWLEDGE.md`.
 13. Do not commit manually — the system auto-commits your changes after this unit completes.
diff --git a/src/resources/extensions/gsd/prompts/complete-slice.md b/src/resources/extensions/gsd/prompts/complete-slice.md
index 2a3d0ca7b..2779ebc5d 100644
--- a/src/resources/extensions/gsd/prompts/complete-slice.md
+++ b/src/resources/extensions/gsd/prompts/complete-slice.md
@@ -24,7 +24,7 @@ Then:
 3. Run all slice-level verification checks defined in the slice plan. All must pass before marking the slice done. If any fail, fix them first.
 4. If the slice plan includes observability/diagnostic surfaces, confirm they work. Skip this for simple slices that don't have observability sections.
 5. If the slice involved runtime behavior, fill the **Operational Readiness** section (Q8) in the slice summary: health signal, failure signal, recovery procedure, and monitoring gaps. Omit entirely for simple slices with no runtime concerns.
-6. If this slice produced evidence that a requirement changed status (Active → Validated, Active → Deferred, etc.), call `gsd_save_decision` with scope="requirement", decision="{requirement-id}", choice="{new-status}", rationale="{evidence}". Do NOT write `.gsd/REQUIREMENTS.md` directly — the engine renders it from the database.
+6. If this slice produced evidence that a requirement changed status (Active → Validated, Active → Deferred, etc.), call `gsd_requirement_update` with the requirement ID, updated `status`, and `validation` evidence. Do NOT write `.gsd/REQUIREMENTS.md` directly — the engine renders it from the database.
 7. Write `{{sliceSummaryPath}}` (compress all task summaries).
 8. Write `{{sliceUatPath}}` — a concrete UAT script with real test cases derived from the slice plan and task summaries. Include preconditions, numbered steps with expected outcomes, and edge cases. This must NOT be a placeholder or generic template — tailor every test case to what this slice actually built.
 9. Review task summaries for `key_decisions`. Append any significant decisions to `.gsd/DECISIONS.md` if missing.
diff --git a/src/resources/extensions/gsd/tests/prompt-step-ordering.test.ts b/src/resources/extensions/gsd/tests/prompt-step-ordering.test.ts
new file mode 100644
index 000000000..9be886664
--- /dev/null
+++ b/src/resources/extensions/gsd/tests/prompt-step-ordering.test.ts
@@ -0,0 +1,85 @@
+/**
+ * Regression test for #3696 — prompt step ordering and runtime fixes
+ *
+ * 1. complete-milestone.md: gsd_requirement_update (step 9) before
+ *    gsd_complete_milestone (step 10)
+ * 2. complete-slice.md: uses gsd_requirement_update
+ * 3. register-extension.ts: _gsdEpipeGuard logs instead of re-throwing
+ * 4. register-hooks.ts: session_before_compact only checks isAutoActive
+ */
+
+import { describe, test } from 'node:test';
+import assert from 'node:assert/strict';
+import { readFileSync } from 'node:fs';
+import { fileURLToPath } from 'node:url';
+import { dirname, join } from 'node:path';
+
+const __filename = fileURLToPath(import.meta.url);
+const __dirname = dirname(__filename);
+
+const completeMilestoneMd = readFileSync(
+  join(__dirname, '..', 'prompts', 'complete-milestone.md'),
+  'utf-8',
+);
+const completeSliceMd = readFileSync(
+  join(__dirname, '..', 'prompts', 'complete-slice.md'),
+  'utf-8',
+);
+const registerExtSrc = readFileSync(
+  join(__dirname, '..', 'bootstrap', 'register-extension.ts'),
+  'utf-8',
+);
+const registerHooksSrc = readFileSync(
+  join(__dirname, '..', 'bootstrap', 'register-hooks.ts'),
+  'utf-8',
+);
+
+describe('prompt step ordering (#3696)', () => {
+  test('gsd_requirement_update step appears before gsd_complete_milestone step', () => {
+    // Search for the numbered step definitions, not early "Do NOT call" warnings
+    const reqUpdateMatch = completeMilestoneMd.match(/^\d+\.\s.*gsd_requirement_update/m);
+    const completeMilestoneMatch = completeMilestoneMd.match(/^\d+\.\s.*gsd_complete_milestone/m);
+    assert.ok(reqUpdateMatch, 'gsd_requirement_update should appear in a numbered step');
+    assert.ok(completeMilestoneMatch, 'gsd_complete_milestone should appear in a numbered step');
+    const reqUpdateIdx = completeMilestoneMd.indexOf(reqUpdateMatch![0]);
+    const completeMilestoneIdx = completeMilestoneMd.indexOf(completeMilestoneMatch![0]);
+    assert.ok(
+      reqUpdateIdx < completeMilestoneIdx,
+      'gsd_requirement_update step must come before gsd_complete_milestone step',
+    );
+  });
+
+  test('complete-slice.md uses gsd_requirement_update', () => {
+    assert.match(completeSliceMd, /gsd_requirement_update/,
+      'complete-slice.md should reference gsd_requirement_update');
+  });
+});
+
+describe('register-extension _gsdEpipeGuard (#3696)', () => {
+  test('_gsdEpipeGuard exists and does not re-throw', () => {
+    assert.match(registerExtSrc, /_gsdEpipeGuard/,
+      '_gsdEpipeGuard should be defined in register-extension.ts');
+    // After the fix, the handler logs instead of throwing
+    assert.ok(
+      !registerExtSrc.includes('throw err'),
+      '_gsdEpipeGuard should NOT contain "throw err"',
+    );
+  });
+});
+
+describe('register-hooks session_before_compact (#3696)', () => {
+  test('session_before_compact only checks isAutoActive', () => {
+    // Extract the session_before_compact handler
+    const compactIdx = registerHooksSrc.indexOf('session_before_compact');
+    assert.ok(compactIdx > -1, 'session_before_compact hook should exist');
+    // The first check in the handler should be isAutoActive(), not isAutoPaused()
+    const afterCompact = registerHooksSrc.slice(compactIdx, compactIdx + 300);
+    assert.match(afterCompact, /isAutoActive\(\)/,
+      'session_before_compact should check isAutoActive()');
+    // Should NOT block compaction when paused
+    assert.ok(
+      !afterCompact.includes('isAutoPaused()'),
+      'session_before_compact should not check isAutoPaused',
+    );
+  });
+});