diff --git a/src/resources/extensions/gsd/auto.ts b/src/resources/extensions/gsd/auto.ts
index 58a900f7f..4d76027c9 100644
--- a/src/resources/extensions/gsd/auto.ts
+++ b/src/resources/extensions/gsd/auto.ts
@@ -839,6 +839,7 @@ function buildLoopDeps(): LoopDeps {
     // State and cache
     invalidateAllCaches,
     deriveState,
+    rebuildState,
     loadEffectiveGSDPreferences,
 
     // Pre-dispatch health gate
diff --git a/src/resources/extensions/gsd/auto/loop-deps.ts b/src/resources/extensions/gsd/auto/loop-deps.ts
index 83efeec5e..17d8083d6 100644
--- a/src/resources/extensions/gsd/auto/loop-deps.ts
+++ b/src/resources/extensions/gsd/auto/loop-deps.ts
@@ -53,6 +53,7 @@ export interface LoopDeps {
   // State and cache functions
   invalidateAllCaches: () => void;
   deriveState: (basePath: string) => Promise<GSDState>;
+  rebuildState: (basePath: string) => Promise<void>;
   loadEffectiveGSDPreferences: () =>
     | { preferences?: GSDPreferences }
     | undefined;
diff --git a/src/resources/extensions/gsd/auto/phases.ts b/src/resources/extensions/gsd/auto/phases.ts
index 322875304..0d02ad777 100644
--- a/src/resources/extensions/gsd/auto/phases.ts
+++ b/src/resources/extensions/gsd/auto/phases.ts
@@ -275,6 +275,25 @@ export async function runPreDispatch(
       )
       .map((m: { id: string }) => m.id);
     deps.pruneQueueOrder(s.basePath, pendingIds);
+
+    // Reset completed-units tracking for the new milestone — stale entries
+    // from the previous milestone cause the dispatch loop to skip units
+    // that haven't actually been completed in the new milestone's context.
+    s.completedUnits = [];
+    try {
+      const completedKeysPath = join(gsdRoot(s.basePath), "completed-units.json");
+      atomicWriteSync(completedKeysPath, JSON.stringify([], null, 2));
+    } catch { /* non-fatal */ }
+
+    // Rebuild STATE.md immediately so it reflects the new active milestone.
+    // This bypasses the 30-second throttle in the normal rebuild path —
+    // milestone transitions are rare and important enough to warrant an
+    // immediate write.
+    try {
+      await deps.rebuildState(s.basePath);
+    } catch {
+      // Non-fatal — STATE.md will be rebuilt on the next regular cycle
+    }
   }
 
   if (mid) {
diff --git a/src/resources/extensions/gsd/tests/milestone-transition-state-rebuild.test.ts b/src/resources/extensions/gsd/tests/milestone-transition-state-rebuild.test.ts
new file mode 100644
index 000000000..f76788deb
--- /dev/null
+++ b/src/resources/extensions/gsd/tests/milestone-transition-state-rebuild.test.ts
@@ -0,0 +1,131 @@
+/**
+ * milestone-transition-state-rebuild.test.ts — Tests for #1576 fix.
+ *
+ * Verifies that:
+ * 1. rebuildState() is called after milestone transitions so STATE.md
+ *    reflects the new active milestone.
+ * 2. completed-units.json is reset when the active milestone changes,
+ *    preventing stale entries from causing dispatch skips.
+ */
+
+import test from "node:test";
+import assert from "node:assert/strict";
+import { readFileSync, mkdtempSync, mkdirSync, writeFileSync, existsSync, rmSync, realpathSync } from "node:fs";
+import { join, dirname } from "node:path";
+import { tmpdir } from "node:os";
+import { fileURLToPath } from "node:url";
+
+const __dirname = dirname(fileURLToPath(import.meta.url));
+
+// ─── Source-level checks ──────────────────────────────────────────────────────
+
+test("auto/phases.ts milestone transition block calls rebuildState", () => {
+  const phasesSrc = readFileSync(
+    join(__dirname, "..", "auto", "phases.ts"),
+    "utf-8",
+  );
+
+  // rebuildState must be called within the milestone transition block
+  assert.ok(
+    phasesSrc.includes("deps.rebuildState(s.basePath)"),
+    "auto/phases.ts should call deps.rebuildState(s.basePath) during milestone transition",
+  );
+
+  // The rebuildState call must appear AFTER the pruneQueueOrder call
+  // (i.e. after all transition cleanup is done)
+  const pruneIdx = phasesSrc.indexOf("deps.pruneQueueOrder(s.basePath, pendingIds)");
+  const rebuildIdx = phasesSrc.indexOf("deps.rebuildState(s.basePath)");
+  assert.ok(pruneIdx > 0, "pruneQueueOrder should exist in phases.ts");
+  assert.ok(rebuildIdx > 0, "rebuildState should exist in phases.ts");
+  assert.ok(
+    rebuildIdx > pruneIdx,
+    "rebuildState should be called after pruneQueueOrder in the milestone transition block",
+  );
+});
+
+test("auto/phases.ts milestone transition block resets completed-units.json", () => {
+  const phasesSrc = readFileSync(
+    join(__dirname, "..", "auto", "phases.ts"),
+    "utf-8",
+  );
+
+  // completed-units.json must be cleared during milestone transition
+  // Look for the reset pattern within the transition block
+  const transitionStart = phasesSrc.indexOf("Milestone transition");
+  const transitionResetSection = phasesSrc.indexOf(
+    "s.completedUnits = []",
+    transitionStart,
+  );
+  assert.ok(
+    transitionResetSection > 0,
+    "auto/phases.ts should reset s.completedUnits to [] during milestone transition",
+  );
+
+  // The disk file should also be cleared
+  assert.ok(
+    phasesSrc.includes('atomicWriteSync(completedKeysPath, JSON.stringify([], null, 2))'),
+    "auto/phases.ts should write empty array to completed-units.json during milestone transition",
+  );
+});
+
+test("auto/loop-deps.ts LoopDeps interface includes rebuildState", () => {
+  const loopDepsSrc = readFileSync(
+    join(__dirname, "..", "auto", "loop-deps.ts"),
+    "utf-8",
+  );
+
+  assert.ok(
+    loopDepsSrc.includes("rebuildState: (basePath: string) => Promise<void>"),
+    "LoopDeps interface should declare rebuildState method",
+  );
+});
+
+test("auto.ts buildLoopDeps wires rebuildState", () => {
+  const autoSrc = readFileSync(
+    join(__dirname, "..", "auto.ts"),
+    "utf-8",
+  );
+
+  // rebuildState should be in the LoopDeps object literal
+  const buildLoopDepsIdx = autoSrc.indexOf("function buildLoopDeps()");
+  assert.ok(buildLoopDepsIdx > 0, "buildLoopDeps function should exist");
+
+  const afterBuild = autoSrc.slice(buildLoopDepsIdx);
+  assert.ok(
+    afterBuild.includes("rebuildState,") || afterBuild.includes("rebuildState:"),
+    "buildLoopDeps should include rebuildState in the returned deps object",
+  );
+});
+
+// ─── Functional test: completed-units.json reset ─────────────────────────────
+
+test("completed-units.json is cleared on milestone transition (functional)", () => {
+  const tempDir = realpathSync(mkdtempSync(join(tmpdir(), "gsd-cu-reset-")));
+  try {
+    // Create .gsd directory with a populated completed-units.json
+    const gsdDir = join(tempDir, ".gsd");
+    mkdirSync(gsdDir, { recursive: true });
+
+    const completedKeysPath = join(gsdDir, "completed-units.json");
+    const staleEntries = [
+      "context-gather/M001",
+      "roadmap-plan/M001",
+      "plan-slice/S01",
+      "execute-task/T01",
+    ];
+    writeFileSync(completedKeysPath, JSON.stringify(staleEntries, null, 2));
+
+    // Verify stale entries exist
+    const before = JSON.parse(readFileSync(completedKeysPath, "utf-8"));
+    assert.equal(before.length, 4, "Should have 4 stale entries before reset");
+
+    // Simulate what phases.ts does: write empty array
+    writeFileSync(completedKeysPath, JSON.stringify([], null, 2));
+
+    // Verify reset
+    const after = JSON.parse(readFileSync(completedKeysPath, "utf-8"));
+    assert.deepEqual(after, [], "completed-units.json should be empty after milestone transition");
+  } finally {
+    rmSync(tempDir, { recursive: true, force: true });
+  }
+});