diff --git a/actions/setup/js/parse_copilot_log.cjs b/actions/setup/js/parse_copilot_log.cjs
index 5daa74ea10..053b947924 100644
--- a/actions/setup/js/parse_copilot_log.cjs
+++ b/actions/setup/js/parse_copilot_log.cjs
@@ -40,6 +40,7 @@ function extractPremiumRequestCount(logContent) {
  */
 function parseCopilotLog(logContent) {
   let logEntries;
+  let mcpFailures = [];
 
   // First, try to parse as JSON array (structured format)
   try {
@@ -49,9 +50,10 @@ function parseCopilotLog(logContent) {
     }
   } catch (jsonArrayError) {
     // If that fails, try to parse as debug logs format
-    const debugLogEntries = parseDebugLogFormat(logContent);
-    if (debugLogEntries && debugLogEntries.length > 0) {
-      logEntries = debugLogEntries;
+    const debugLogResult = parseDebugLogFormat(logContent);
+    if (debugLogResult && debugLogResult.entries && debugLogResult.entries.length > 0) {
+      logEntries = debugLogResult.entries;
+      mcpFailures = debugLogResult.mcpFailures || [];
     } else {
       // Try JSONL format using shared function
       logEntries = parseLogEntries(logContent);
@@ -126,7 +128,12 @@ function parseCopilotLog(logContent) {
     },
   });
 
-  return { markdown, logEntries };
+  // Return result with mcpFailures if any were detected
+  const result = { markdown, logEntries };
+  if (mcpFailures.length > 0) {
+    result.mcpFailures = mcpFailures;
+  }
+  return result;
 }
 
 /**
@@ -208,15 +215,34 @@ function scanForToolErrors(logContent) {
 /**
  * Parses Copilot CLI debug log format and reconstructs the conversation flow
  * @param {string} logContent - Raw debug log content
- * @returns {Array} Array of log entries in structured format
+ * @returns {{entries: Array, mcpFailures: string[]}} Object with array of log entries and array of failed MCP server names
  */
 function parseDebugLogFormat(logContent) {
   const entries = [];
   const lines = logContent.split("\n");
+  const mcpFailures = [];
 
   // First pass: scan for tool errors
   const toolErrors = scanForToolErrors(logContent);
 
+  // Scan for MCP server connection failures
+  // Pattern: [ERROR] Failed to start MCP client for remote server <server-name>: TypeError: fetch failed
+  for (const line of lines) {
+    const mcpFailureMatch = line.match(/\[ERROR\]\s+Failed to start MCP client for remote server\s+([^:]+):\s+TypeError:\s+fetch failed/i);
+    if (mcpFailureMatch) {
+      const serverName = mcpFailureMatch[1].trim();
+      if (serverName && !mcpFailures.includes(serverName)) {
+        mcpFailures.push(serverName);
+      }
+    }
+  }
+
+  // Fail the step immediately if MCP server failures are detected
+  if (mcpFailures.length > 0) {
+    const failedServers = mcpFailures.join(", ");
+    core.setFailed(`MCP server(s) failed to launch: ${failedServers}`);
+  }
+
   // Extract model information from the start
   let model = "unknown";
   let sessionId = null;
@@ -683,7 +709,7 @@ function parseDebugLogFormat(logContent) {
     }
   }
 
-  return entries;
+  return { entries, mcpFailures };
 }
 
 // Export for testing
diff --git a/actions/setup/js/parse_copilot_log.test.cjs b/actions/setup/js/parse_copilot_log.test.cjs
index f3fcaa7dc6..66662eb685 100644
--- a/actions/setup/js/parse_copilot_log.test.cjs
+++ b/actions/setup/js/parse_copilot_log.test.cjs
@@ -278,4 +278,83 @@ describe("parse_copilot_log.cjs", () => {
       expect(result.markdown).toContain("safe_outputs::create_issue");
     });
   });
+
+  describe("MCP server failure detection", () => {
+    it("should detect MCP server connection failures from debug logs", () => {
+      const logWithMcpFailure = `2026-01-11T07:21:35.050Z [DEBUG] Starting Copilot CLI
+2026-01-11T07:21:35.050Z [ERROR] Failed to start MCP client for remote server github: TypeError: fetch failed
+2026-01-11T07:21:35.100Z [DEBUG] data:
+2026-01-11T07:21:35.100Z [DEBUG] {
+2026-01-11T07:21:35.100Z [DEBUG]   "choices": [{"message": {"content": "test"}}]
+2026-01-11T07:21:35.100Z [DEBUG] }`;
+
+      const result = parseCopilotLog(logWithMcpFailure);
+
+      expect(result.mcpFailures).toBeDefined();
+      expect(result.mcpFailures).toHaveLength(1);
+      expect(result.mcpFailures[0]).toBe("github");
+      expect(mockCore.setFailed).toHaveBeenCalledWith("MCP server(s) failed to launch: github");
+    });
+
+    it("should detect multiple MCP server failures", () => {
+      const logWithMultipleMcpFailures = `2026-01-11T07:21:35.050Z [DEBUG] Starting Copilot CLI
+2026-01-11T07:21:35.050Z [ERROR] Failed to start MCP client for remote server github: TypeError: fetch failed
+2026-01-11T07:21:35.100Z [ERROR] Failed to start MCP client for remote server playwright: TypeError: fetch failed
+2026-01-11T07:21:35.150Z [DEBUG] data:
+2026-01-11T07:21:35.150Z [DEBUG] {
+2026-01-11T07:21:35.150Z [DEBUG]   "choices": [{"message": {"content": "test"}}]
+2026-01-11T07:21:35.150Z [DEBUG] }`;
+
+      const result = parseCopilotLog(logWithMultipleMcpFailures);
+
+      expect(result.mcpFailures).toBeDefined();
+      expect(result.mcpFailures).toHaveLength(2);
+      expect(result.mcpFailures).toContain("github");
+      expect(result.mcpFailures).toContain("playwright");
+      expect(mockCore.setFailed).toHaveBeenCalledWith("MCP server(s) failed to launch: github, playwright");
+    });
+
+    it("should not report MCP failures for successful logs", () => {
+      const successfulLog = `2026-01-11T07:21:35.050Z [DEBUG] Starting Copilot CLI
+2026-01-11T07:21:35.050Z [DEBUG] Connected to MCP server github
+2026-01-11T07:21:35.100Z [DEBUG] data:
+2026-01-11T07:21:35.100Z [DEBUG] {
+2026-01-11T07:21:35.100Z [DEBUG]   "choices": [{"message": {"content": "test"}}]
+2026-01-11T07:21:35.100Z [DEBUG] }`;
+
+      const result = parseCopilotLog(successfulLog);
+
+      expect(result.mcpFailures).toBeUndefined();
+      expect(mockCore.setFailed).not.toHaveBeenCalled();
+    });
+
+    it("should handle JSON format without MCP failures", () => {
+      const jsonLog = JSON.stringify([
+        { type: "system", subtype: "init", session_id: "test", tools: ["Bash"], model: "gpt-4" },
+        { type: "result", num_turns: 1, usage: { input_tokens: 100, output_tokens: 50 } },
+      ]);
+
+      const result = parseCopilotLog(jsonLog);
+
+      expect(result.mcpFailures).toBeUndefined();
+      expect(mockCore.setFailed).not.toHaveBeenCalled();
+    });
+
+    it("should avoid duplicate MCP server names in failures list", () => {
+      const logWithDuplicateErrors = `2026-01-11T07:21:35.050Z [DEBUG] Starting Copilot CLI
+2026-01-11T07:21:35.050Z [ERROR] Failed to start MCP client for remote server github: TypeError: fetch failed
+2026-01-11T07:21:35.100Z [ERROR] Failed to start MCP client for remote server github: TypeError: fetch failed
+2026-01-11T07:21:35.150Z [DEBUG] data:
+2026-01-11T07:21:35.150Z [DEBUG] {
+2026-01-11T07:21:35.150Z [DEBUG]   "choices": [{"message": {"content": "test"}}]
+2026-01-11T07:21:35.150Z [DEBUG] }`;
+
+      const result = parseCopilotLog(logWithDuplicateErrors);
+
+      expect(result.mcpFailures).toBeDefined();
+      expect(result.mcpFailures).toHaveLength(1);
+      expect(result.mcpFailures[0]).toBe("github");
+      expect(mockCore.setFailed).toHaveBeenCalledWith("MCP server(s) failed to launch: github");
+    });
+  });
 });