diff --git a/src/resources/extensions/gsd/auto.ts b/src/resources/extensions/gsd/auto.ts
index 8d93cf3d8..cc925871b 100644
--- a/src/resources/extensions/gsd/auto.ts
+++ b/src/resources/extensions/gsd/auto.ts
@@ -1310,8 +1310,76 @@ async function dispatchNextUnit(
     unitDispatchCount.clear();
     unitRecoveryCount.clear();
     unitLifetimeDispatches.clear();
-    // Capture integration branch for the new milestone and update git service
-    captureIntegrationBranch(originalBasePath || basePath, mid, { commitDocs: loadEffectiveGSDPreferences()?.preferences?.git?.commit_docs });
+    // Clear completed-units.json for the finished milestone
+    try {
+      const file = completedKeysPath(basePath);
+      if (existsSync(file)) writeFileSync(file, JSON.stringify([]), "utf-8");
+      completedKeySet.clear();
+    } catch { /* non-fatal */ }
+
+    // ── Worktree lifecycle on milestone transition (#616) ──────────────
+    // When transitioning from M_old to M_new inside a worktree, we must:
+    // 1. Merge the completed milestone's worktree back to main
+    // 2. Re-derive state from the project root
+    // 3. Create a new worktree for the incoming milestone
+    // Without this, M_new runs inside M_old's worktree on the wrong branch,
+    // and artifact paths resolve against the wrong .gsd/ directory.
+    if (isInAutoWorktree(basePath) && originalBasePath && shouldUseWorktreeIsolation()) {
+      try {
+        const roadmapPath = resolveMilestoneFile(originalBasePath, currentMilestoneId, "ROADMAP");
+        if (roadmapPath) {
+          const roadmapContent = readFileSync(roadmapPath, "utf-8");
+          const mergeResult = mergeMilestoneToMain(originalBasePath, currentMilestoneId, roadmapContent);
+          ctx.ui.notify(
+            `Milestone ${currentMilestoneId} merged to main.${mergeResult.pushed ? " Pushed to remote." : ""}`,
+            "info",
+          );
+        } else {
+          // No roadmap found — teardown worktree without merge
+          teardownAutoWorktree(originalBasePath, currentMilestoneId);
+          ctx.ui.notify(`Exited worktree for ${currentMilestoneId} (no roadmap for merge).`, "info");
+        }
+      } catch (err) {
+        ctx.ui.notify(
+          `Milestone merge failed during transition: ${err instanceof Error ? err.message : String(err)}`,
+          "warning",
+        );
+        // Force cwd back to project root even if merge failed
+        if (originalBasePath) {
+          try { process.chdir(originalBasePath); } catch { /* best-effort */ }
+        }
+      }
+
+      // Update basePath to project root (mergeMilestoneToMain already chdir'd)
+      basePath = originalBasePath;
+      gitService = new GitServiceImpl(basePath, loadEffectiveGSDPreferences()?.preferences?.git ?? {});
+      invalidateAllCaches();
+
+      // Re-derive state from project root before creating new worktree
+      state = await deriveState(basePath);
+      mid = state.activeMilestone?.id;
+      midTitle = state.activeMilestone?.title;
+
+      // Create new worktree for the incoming milestone
+      if (mid) {
+        captureIntegrationBranch(basePath, mid, { commitDocs: loadEffectiveGSDPreferences()?.preferences?.git?.commit_docs });
+        try {
+          const wtPath = createAutoWorktree(basePath, mid);
+          basePath = wtPath;
+          gitService = new GitServiceImpl(basePath, loadEffectiveGSDPreferences()?.preferences?.git ?? {});
+          ctx.ui.notify(`Created auto-worktree for ${mid} at ${wtPath}`, "info");
+        } catch (err) {
+          ctx.ui.notify(
+            `Auto-worktree creation for ${mid} failed: ${err instanceof Error ? err.message : String(err)}. Continuing in project root.`,
+            "warning",
+          );
+        }
+      }
+    } else {
+      // Not in worktree — just capture integration branch for the new milestone
+      captureIntegrationBranch(originalBasePath || basePath, mid, { commitDocs: loadEffectiveGSDPreferences()?.preferences?.git?.commit_docs });
+    }
+
     // Prune completed milestone from queue order file
     const pendingIds = state.registry
       .filter(m => m.status !== "complete")
diff --git a/src/resources/extensions/gsd/tests/milestone-transition-worktree.test.ts b/src/resources/extensions/gsd/tests/milestone-transition-worktree.test.ts
new file mode 100644
index 000000000..514a0dc0c
--- /dev/null
+++ b/src/resources/extensions/gsd/tests/milestone-transition-worktree.test.ts
@@ -0,0 +1,144 @@
+/**
+ * milestone-transition-worktree.test.ts — Tests for #616 fix.
+ *
+ * Verifies that when auto-mode transitions between milestones, the
+ * worktree lifecycle is handled: old worktree merged, new worktree created.
+ *
+ * Uses source-level checks since the full auto-mode dispatch loop
+ * requires the @gsd/pi-coding-agent runtime.
+ */
+
+import test from "node:test";
+import assert from "node:assert/strict";
+import { mkdtempSync, mkdirSync, rmSync, writeFileSync, existsSync, realpathSync, readFileSync } from "node:fs";
+import { join } from "node:path";
+import { tmpdir } from "node:os";
+import { execSync } from "node:child_process";
+
+import { dirname } from "node:path";
+import { fileURLToPath } from "node:url";
+
+import {
+  createAutoWorktree,
+  teardownAutoWorktree,
+  isInAutoWorktree,
+  getAutoWorktreeOriginalBase,
+  mergeMilestoneToMain,
+} from "../auto-worktree.ts";
+
+const __dirname = dirname(fileURLToPath(import.meta.url));
+
+function run(command: string, cwd: string): string {
+  return execSync(command, { cwd, stdio: ["ignore", "pipe", "pipe"], encoding: "utf-8" }).trim();
+}
+
+function createTempRepo(): string {
+  const dir = realpathSync(mkdtempSync(join(tmpdir(), "gsd-mt-wt-test-")));
+  run("git init", dir);
+  run("git config user.email test@test.com", dir);
+  run("git config user.name Test", dir);
+  writeFileSync(join(dir, "README.md"), "# test\n");
+  run("git add .", dir);
+  run("git commit -m init", dir);
+  run("git branch -M main", dir);
+  return dir;
+}
+
+function createMilestoneArtifacts(dir: string, mid: string): void {
+  const msDir = join(dir, ".gsd", "milestones", mid);
+  mkdirSync(msDir, { recursive: true });
+  writeFileSync(join(msDir, "CONTEXT.md"), `# ${mid} Context\n`);
+  const roadmap = [
+    `# ${mid}: Test Milestone`,
+    "**Vision**: testing",
+    "## Success Criteria",
+    "- It works",
+    "## Slices",
+    "- [x] S01 — First slice",
+  ].join("\n");
+  writeFileSync(join(msDir, `${mid}-ROADMAP.md`), roadmap);
+}
+
+// ─── Milestone transition: worktree swap ─────────────────────────────────────
+
+test("worktree swap on milestone transition: merge old, create new", () => {
+  const savedCwd = process.cwd();
+  let tempDir = "";
+
+  try {
+    tempDir = createTempRepo();
+
+    // Set up M001 and M002 milestone artifacts
+    createMilestoneArtifacts(tempDir, "M001");
+    createMilestoneArtifacts(tempDir, "M002");
+    run("git add .", tempDir);
+    run("git commit -m \"add milestones\"", tempDir);
+
+    // Phase 1: Create worktree for M001 (simulates auto-mode start)
+    const wt1 = createAutoWorktree(tempDir, "M001");
+    assert.equal(process.cwd(), wt1, "cwd should be in M001 worktree");
+    assert.ok(isInAutoWorktree(tempDir), "should be in auto-worktree");
+    assert.equal(getAutoWorktreeOriginalBase(), tempDir, "original base preserved");
+
+    // Add a commit in M001 worktree to simulate work
+    writeFileSync(join(wt1, "feature-m001.txt"), "M001 work\n");
+    run("git add .", wt1);
+    run("git commit -m \"feat(M001): add feature\"", wt1);
+
+    // Phase 2: Simulate milestone transition — merge M001, exit worktree
+    const roadmapPath = join(tempDir, ".gsd", "milestones", "M001", "M001-ROADMAP.md");
+    const roadmapContent = readFileSync(roadmapPath, "utf-8");
+    mergeMilestoneToMain(tempDir, "M001", roadmapContent);
+
+    // After merge: cwd should be back at project root
+    assert.equal(process.cwd(), tempDir, "cwd restored to project root after merge");
+    assert.ok(!isInAutoWorktree(tempDir), "no longer in auto-worktree after merge");
+
+    // Verify M001 work was merged to main
+    const mainLog = run("git log --oneline -3", tempDir);
+    assert.ok(mainLog.includes("M001"), "M001 squash commit should be on main");
+
+    // Phase 3: Create new worktree for M002 (simulates new milestone)
+    const wt2 = createAutoWorktree(tempDir, "M002");
+    assert.equal(process.cwd(), wt2, "cwd should be in M002 worktree");
+    assert.ok(isInAutoWorktree(tempDir), "should be in M002 auto-worktree");
+
+    // The new worktree should have the M001 feature file (merged to main)
+    assert.ok(existsSync(join(wt2, "feature-m001.txt")), "M002 worktree inherits M001 merged work");
+
+    // Verify branch is correct
+    const branch = run("git branch --show-current", wt2);
+    assert.equal(branch, "milestone/M002", "M002 worktree on correct branch");
+
+    // Cleanup
+    teardownAutoWorktree(tempDir, "M002");
+  } finally {
+    process.chdir(savedCwd);
+    if (tempDir && existsSync(tempDir)) {
+      rmSync(tempDir, { recursive: true, force: true });
+    }
+  }
+});
+
+// ─── Verify the transition code path exists in auto.ts ──────────────────────
+
+test("auto.ts milestone transition block contains worktree lifecycle", () => {
+  const autoSrc = readFileSync(
+    join(__dirname, "..", "auto.ts"),
+    "utf-8",
+  );
+
+  // The fix adds worktree merge + create inside the milestone transition block
+  assert.ok(
+    autoSrc.includes("Worktree lifecycle on milestone transition"),
+    "auto.ts should contain the worktree lifecycle comment marker",
+  );
+  assert.ok(
+    autoSrc.includes("mergeMilestoneToMain") && autoSrc.includes("mid !== currentMilestoneId"),
+    "auto.ts should call mergeMilestoneToMain during milestone transition",
+  );
+  assert.ok(
+    autoSrc.includes("createAutoWorktree") && autoSrc.includes("Created auto-worktree for"),
+    "auto.ts should create new worktree for incoming milestone",
+  );
+});