diff --git a/src/vs/platform/actions/common/actions.ts b/src/vs/platform/actions/common/actions.ts
index 09782cdf11673..b065ab2c13eb8 100644
--- a/src/vs/platform/actions/common/actions.ts
+++ b/src/vs/platform/actions/common/actions.ts
@@ -234,6 +234,7 @@ export class MenuId {
 	static readonly TerminalTabContext = new MenuId('TerminalTabContext');
 	static readonly TerminalTabEmptyAreaContext = new MenuId('TerminalTabEmptyAreaContext');
 	static readonly TerminalStickyScrollContext = new MenuId('TerminalStickyScrollContext');
+	static readonly TerminalSelectionContext = new MenuId('TerminalSelectionContext');
 	static readonly WebviewContext = new MenuId('WebviewContext');
 	static readonly InlineCompletionsActions = new MenuId('InlineCompletionsActions');
 	static readonly InlineEditsActions = new MenuId('InlineEditsActions');
diff --git a/src/vs/workbench/contrib/terminal/terminal.all.ts b/src/vs/workbench/contrib/terminal/terminal.all.ts
index 6f08c6293479b..feba214ee511a 100644
--- a/src/vs/workbench/contrib/terminal/terminal.all.ts
+++ b/src/vs/workbench/contrib/terminal/terminal.all.ts
@@ -28,6 +28,7 @@ import '../terminalContrib/zoom/browser/terminal.zoom.contribution.js';
 import '../terminalContrib/stickyScroll/browser/terminal.stickyScroll.contribution.js';
 import '../terminalContrib/quickAccess/browser/terminal.quickAccess.contribution.js';
 import '../terminalContrib/quickFix/browser/terminal.quickFix.contribution.js';
+import '../terminalContrib/selectionDecoration/browser/terminal.selectionDecoration.contribution.js';
 import '../terminalContrib/typeAhead/browser/terminal.typeAhead.contribution.js';
 import '../terminalContrib/resizeDimensionsOverlay/browser/terminal.resizeDimensionsOverlay.contribution.js';
 import '../terminalContrib/sendSequence/browser/terminal.sendSequence.contribution.js';
diff --git a/src/vs/workbench/contrib/terminalContrib/selectionDecoration/browser/media/terminalSelectionDecoration.css b/src/vs/workbench/contrib/terminalContrib/selectionDecoration/browser/media/terminalSelectionDecoration.css
new file mode 100644
index 0000000000000..2427af7f97db0
--- /dev/null
+++ b/src/vs/workbench/contrib/terminalContrib/selectionDecoration/browser/media/terminalSelectionDecoration.css
@@ -0,0 +1,27 @@
+/*---------------------------------------------------------------------------------------------
+ *  Copyright (c) Microsoft Corporation. All rights reserved.
+ *  Licensed under the MIT License. See License.txt in the project root for license information.
+ *--------------------------------------------------------------------------------------------*/
+
+.terminal-selection-decoration {
+	z-index: 10;
+	pointer-events: auto !important;
+}
+
+.terminal-selection-decoration .terminal-selection-action-bar {
+	display: inline-flex;
+	transform: translateY(-100%);
+	background-color: var(--vscode-editorWidget-background);
+	border: 1px solid var(--vscode-editorWidget-border);
+	border-radius: 4px;
+	padding: 2px;
+}
+
+.terminal-selection-decoration .terminal-selection-action-bar .monaco-action-bar {
+	background: transparent;
+}
+
+.terminal-selection-decoration .terminal-selection-action-bar .monaco-action-bar .action-item .action-label {
+	padding: 2px 4px;
+	border-radius: 2px;
+}
diff --git a/src/vs/workbench/contrib/terminalContrib/selectionDecoration/browser/terminal.selectionDecoration.contribution.ts b/src/vs/workbench/contrib/terminalContrib/selectionDecoration/browser/terminal.selectionDecoration.contribution.ts
new file mode 100644
index 0000000000000..ed0d9ac62fcee
--- /dev/null
+++ b/src/vs/workbench/contrib/terminalContrib/selectionDecoration/browser/terminal.selectionDecoration.contribution.ts
@@ -0,0 +1,191 @@
+/*---------------------------------------------------------------------------------------------
+ *  Copyright (c) Microsoft Corporation. All rights reserved.
+ *  Licensed under the MIT License. See License.txt in the project root for license information.
+ *--------------------------------------------------------------------------------------------*/
+
+import type { IDecoration, Terminal as RawXtermTerminal } from '@xterm/xterm';
+import * as dom from '../../../../../base/browser/dom.js';
+import { Codicon } from '../../../../../base/common/codicons.js';
+import { Disposable, DisposableStore, MutableDisposable } from '../../../../../base/common/lifecycle.js';
+import { localize, localize2 } from '../../../../../nls.js';
+import { ITerminalContribution, ITerminalInstance, IXtermTerminal } from '../../../terminal/browser/terminal.js';
+import { registerTerminalContribution, type IDetachedCompatibleTerminalContributionContext, type ITerminalContributionContext } from '../../../terminal/browser/terminalExtensions.js';
+import { RunOnceScheduler } from '../../../../../base/common/async.js';
+import { MenuId } from '../../../../../platform/actions/common/actions.js';
+import { registerActiveXtermAction } from '../../../terminal/browser/terminalActions.js';
+import { TerminalContextKeys } from '../../../terminal/common/terminalContextKey.js';
+import { IChatWidgetService } from '../../../chat/browser/chat.js';
+import { ChatAgentLocation } from '../../../chat/common/constants.js';
+import { IChatRequestStringVariableEntry } from '../../../chat/common/attachments/chatVariableEntries.js';
+import { URI } from '../../../../../base/common/uri.js';
+import { IInstantiationService } from '../../../../../platform/instantiation/common/instantiation.js';
+import { MenuWorkbenchToolBar } from '../../../../../platform/actions/browser/toolbar.js';
+import './media/terminalSelectionDecoration.css';
+
+// #region Terminal Contribution
+
+class TerminalSelectionDecorationContribution extends Disposable implements ITerminalContribution {
+	static readonly ID = 'terminal.selectionDecoration';
+
+	static get(instance: ITerminalInstance): TerminalSelectionDecorationContribution | null {
+		return instance.getContribution<TerminalSelectionDecorationContribution>(TerminalSelectionDecorationContribution.ID);
+	}
+
+	private _xterm: IXtermTerminal & { raw: RawXtermTerminal } | undefined;
+	private readonly _decoration = this._register(new MutableDisposable<IDecoration>());
+	private readonly _decorationListeners = this._register(new DisposableStore());
+	private readonly _showDecorationScheduler: RunOnceScheduler;
+
+	constructor(
+		_ctx: ITerminalContributionContext | IDetachedCompatibleTerminalContributionContext,
+		@IInstantiationService private readonly _instantiationService: IInstantiationService,
+	) {
+		super();
+		this._showDecorationScheduler = this._register(new RunOnceScheduler(() => this._showDecoration(), 200));
+	}
+
+	xtermReady(xterm: IXtermTerminal & { raw: RawXtermTerminal }): void {
+		this._xterm = xterm;
+		this._register(xterm.raw.onSelectionChange(() => this._onSelectionChange()));
+	}
+
+	private _onSelectionChange(): void {
+		// TODO: Show decoration in intuitive position regardless of where it starts
+		// TODO: Upstream to allow listening while selection is in progress
+		// Clear decoration immediately when selection changes
+		this._decoration.clear();
+		this._decorationListeners.clear();
+
+		// Only schedule showing the decoration if there's a selection
+		if (this._xterm?.raw.hasSelection()) {
+			this._showDecorationScheduler.schedule();
+		} else {
+			this._showDecorationScheduler.cancel();
+		}
+	}
+
+	private _showDecoration(): void {
+		if (!this._xterm) {
+			return;
+		}
+
+		// Only show if there's a selection
+		if (!this._xterm.raw.hasSelection()) {
+			return;
+		}
+
+		const selectionPosition = this._xterm.raw.getSelectionPosition();
+		if (!selectionPosition) {
+			return;
+		}
+
+		// Create a marker at the start of the selection
+		const marker = this._xterm.raw.registerMarker(selectionPosition.start.y - (this._xterm.raw.buffer.active.baseY + this._xterm.raw.buffer.active.cursorY));
+		if (!marker) {
+			return;
+		}
+
+		// Register the decoration
+		const decoration = this._xterm.raw.registerDecoration({
+			marker,
+			x: selectionPosition.start.x,
+			layer: 'top'
+		});
+
+		if (!decoration) {
+			marker.dispose();
+			return;
+		}
+
+		this._decoration.value = decoration;
+
+		this._decorationListeners.add(decoration.onRender(element => {
+			if (!element.classList.contains('terminal-selection-decoration')) {
+				this._setupDecorationElement(element);
+			}
+		}));
+	}
+
+	private _setupDecorationElement(element: HTMLElement): void {
+		element.classList.add('terminal-selection-decoration');
+
+		// Create the action bar container
+		const actionBarContainer = dom.append(element, dom.$('.terminal-selection-action-bar'));
+
+		// Create a MenuWorkbenchToolBar for the actions
+		this._decorationListeners.add(this._instantiationService.createInstance(
+			MenuWorkbenchToolBar,
+			actionBarContainer,
+			MenuId.TerminalSelectionContext,
+			{
+				menuOptions: { shouldForwardArgs: true },
+				toolbarOptions: { primaryGroup: () => true }
+			}
+		));
+
+		this._decorationListeners.add(dom.addDisposableListener(actionBarContainer, dom.EventType.MOUSE_DOWN, (e) => {
+			e.stopImmediatePropagation();
+			e.preventDefault();
+		}));
+	}
+}
+
+registerTerminalContribution(TerminalSelectionDecorationContribution.ID, TerminalSelectionDecorationContribution, true);
+
+// #endregion
+
+// #region Actions
+
+const enum TerminalSelectionCommandId {
+	AttachSelectionToChat = 'workbench.action.terminal.attachSelectionToChat',
+}
+
+registerActiveXtermAction({
+	id: TerminalSelectionCommandId.AttachSelectionToChat,
+	title: localize2('workbench.action.terminal.attachSelectionToChat', 'Attach Selection to Chat'),
+	icon: Codicon.sparkle,
+	precondition: TerminalContextKeys.textSelectedInFocused,
+	run: async (_xterm, accessor, activeInstance) => {
+		const chatWidgetService = accessor.get(IChatWidgetService);
+
+		const selection = activeInstance.selection;
+		if (!selection) {
+			return;
+		}
+
+		let widget = chatWidgetService.lastFocusedWidget ?? chatWidgetService.getWidgetsByLocations(ChatAgentLocation.Chat)?.find(w => w.attachmentCapabilities.supportsTerminalAttachments);
+
+		if (!widget) {
+			widget = await chatWidgetService.revealWidget();
+		}
+
+		if (!widget || !widget.attachmentCapabilities.supportsTerminalAttachments) {
+			return;
+		}
+
+		// Clear the selection after attaching
+		activeInstance.clearSelection();
+
+		// Attach the selection as a string attachment
+		const attachment: IChatRequestStringVariableEntry = {
+			kind: 'string',
+			id: `terminalSelection:${Date.now()}`,
+			name: localize('terminal.selection', "Terminal Selection"),
+			value: selection,
+			icon: Codicon.terminal,
+			uri: URI.parse(`terminal-selection:${Date.now()}`),
+		};
+
+		widget.attachmentModel.addContext(attachment);
+		widget.focusInput();
+	},
+	menu: [
+		{
+			id: MenuId.TerminalSelectionContext,
+			group: 'navigation',
+			order: 1,
+		}
+	]
+});
+
+// #endregion