diff --git a/extensions/zalouser/src/text-styles.test.ts b/extensions/zalouser/src/text-styles.test.ts
index 28fb23be058..c8f5f50bd3d 100644
--- a/extensions/zalouser/src/text-styles.test.ts
+++ b/extensions/zalouser/src/text-styles.test.ts
@@ -90,6 +90,27 @@ describe("parseZalouserTextStyles", () => {
     });
   });
 
+  it("treats indented blockquotes as quoted lines", () => {
+    expect(parseZalouserTextStyles("  > quoted")).toEqual({
+      text: "quoted",
+      styles: [{ start: 0, len: 6, st: TextStyle.Indent, indentSize: 1 }],
+    });
+  });
+
+  it("treats indented quoted fences as literal code blocks", () => {
+    expect(parseZalouserTextStyles("  > ```\n  > *cmd*\n  > ```")).toEqual({
+      text: "*cmd*",
+      styles: [],
+    });
+  });
+
+  it("preserves inner quote markers inside quoted fenced code blocks", () => {
+    expect(parseZalouserTextStyles("> ```\n>> prompt\n> ```")).toEqual({
+      text: "> prompt",
+      styles: [],
+    });
+  });
+
   it("keeps unmatched fences literal", () => {
     expect(parseZalouserTextStyles("```python")).toEqual({
       text: "```python",
diff --git a/extensions/zalouser/src/text-styles.ts b/extensions/zalouser/src/text-styles.ts
index 3d6fbda8807..91d93b2e6f8 100644
--- a/extensions/zalouser/src/text-styles.ts
+++ b/extensions/zalouser/src/text-styles.ts
@@ -113,7 +113,10 @@ export function parseZalouserTextStyles(input: string): { text: string; styles:
     const { text: unquotedLine, indent: baseIndent } = stripQuotePrefix(rawLine);
 
     if (activeFence) {
-      const codeLine = activeFence.quoteIndent > 0 ? unquotedLine : rawLine;
+      const codeLine =
+        activeFence.quoteIndent > 0
+          ? stripQuotePrefix(rawLine, activeFence.quoteIndent).text
+          : rawLine;
       if (isClosingFence(codeLine, activeFence)) {
         activeFence = null;
         continue;
@@ -293,7 +296,8 @@ function clampIndent(spaceCount: number): number {
 
 function hasClosingFence(lines: string[], startIndex: number, fence: ActiveFence): boolean {
   for (let index = startIndex; index < lines.length; index += 1) {
-    const candidate = fence.quoteIndent > 0 ? stripQuotePrefix(lines[index]).text : lines[index];
+    const candidate =
+      fence.quoteIndent > 0 ? stripQuotePrefix(lines[index], fence.quoteIndent).text : lines[index];
     if (isClosingFence(candidate, fence)) {
       return true;
     }
@@ -323,14 +327,23 @@ function resolveOpeningFence(line: string): ActiveFence | null {
   };
 }
 
-function stripQuotePrefix(line: string): { text: string; indent: number } {
-  const match = line.match(/^(>+)\s?(.*)$/);
+function stripQuotePrefix(
+  line: string,
+  maxDepth = Number.POSITIVE_INFINITY,
+): { text: string; indent: number } {
+  const match = line.match(/^([ ]{0,3})(>+)( ?)(.*)$/);
   if (!match) {
     return { text: line, indent: 0 };
   }
+
+  const removedDepth = Math.min(match[2].length, maxDepth);
+  const remainingMarkers = match[2].slice(removedDepth);
+  const remainingText =
+    remainingMarkers.length > 0 ? `${remainingMarkers}${match[3]}${match[4]}` : match[4];
+
   return {
-    text: match[2],
-    indent: Math.min(5, match[1].length),
+    text: remainingText,
+    indent: Math.min(5, removedDepth),
   };
 }