diff --git a/extensions/matrix/src/matrix/format.test.ts b/extensions/matrix/src/matrix/format.test.ts
index bad6ecbbd2d..02c2ae9ed02 100644
--- a/extensions/matrix/src/matrix/format.test.ts
+++ b/extensions/matrix/src/matrix/format.test.ts
@@ -50,6 +50,55 @@ describe("markdownToMatrixHtml", () => {
     expect(html).toContain("<br");
   });
 
+  it("compacts loose ordered lists without paragraph tags", () => {
+    const html = markdownToMatrixHtml("1. first\n\n2. second\n\n3. third");
+    expect(html).toContain("<ol>");
+    expect(html).toContain("<li>");
+    expect(html).not.toContain("<p>");
+  });
+
+  it("compacts loose unordered lists without paragraph tags", () => {
+    const html = markdownToMatrixHtml("- one\n\n- two\n\n- three");
+    expect(html).toContain("<ul>");
+    expect(html).not.toContain("<p>");
+  });
+
+  it("keeps tight lists unchanged", () => {
+    const html = markdownToMatrixHtml("- one\n- two");
+    expect(html).toContain("<ul>");
+    expect(html).not.toContain("<p>");
+  });
+
+  it("preserves inline formatting in loose lists", () => {
+    const html = markdownToMatrixHtml("1. **bold**\n\n2. _italic_");
+    expect(html).toContain("<strong>bold</strong>");
+    expect(html).toContain("<em>italic</em>");
+    expect(html).not.toContain("<p>");
+  });
+
+  it("does not strip paragraph tags outside lists", () => {
+    const html = markdownToMatrixHtml("Hello\n\nWorld");
+    expect(html).toContain("<p>Hello</p>");
+    expect(html).toContain("<p>World</p>");
+  });
+
+  it("compacts nested sublists without paragraph tags", () => {
+    const html = markdownToMatrixHtml("1. parent\n\n   - child\n\n2. other");
+    expect(html).toContain("<ol>");
+    expect(html).toContain("<ul>");
+    expect(html).not.toContain("<p>");
+  });
+
+  it("compacts loose lists with mentions via renderMarkdownToMatrixHtmlWithMentions", async () => {
+    const result = await renderMarkdownToMatrixHtmlWithMentions({
+      markdown: "1. hello @alice:example.org\n\n2. bye",
+      client: createMentionClient(),
+    });
+    expect(result.html).not.toContain("<p>");
+    expect(result.html).toContain('href="https://matrix.to/#/%40alice%3Aexample.org"');
+    expect(result.mentions).toEqual({ user_ids: ["@alice:example.org"] });
+  });
+
   it("renders qualified Matrix user mentions as matrix.to links and m.mentions metadata", async () => {
     const result = await renderMarkdownToMatrixHtmlWithMentions({
       markdown: "hello @alice:example.org",
diff --git a/extensions/matrix/src/matrix/format.ts b/extensions/matrix/src/matrix/format.ts
index 5d640f13995..b134a4526dc 100644
--- a/extensions/matrix/src/matrix/format.ts
+++ b/extensions/matrix/src/matrix/format.ts
@@ -309,9 +309,28 @@ function mutateInlineTokensWithMentions(params: {
   return { children: nextChildren, roomMentioned };
 }
 
+// Compact loose lists by hiding paragraph tokens inside list items,
+// mirroring what markdown-it already does for tight lists. Without this
+// Element renders <p> margins inside <li>, splitting numbers from content.
+function compactLooseListTokens(tokens: MarkdownToken[]): void {
+  let insideListItem = 0;
+  for (const token of tokens) {
+    if (token.type === "list_item_open") {
+      insideListItem++;
+    } else if (token.type === "list_item_close") {
+      insideListItem--;
+    } else if (insideListItem > 0) {
+      if (token.type === "paragraph_open" || token.type === "paragraph_close") {
+        token.hidden = true;
+      }
+    }
+  }
+}
+
 export function markdownToMatrixHtml(markdown: string): string {
-  const rendered = md.render(markdown ?? "");
-  return rendered.trimEnd();
+  const tokens = md.parse(markdown ?? "", {});
+  compactLooseListTokens(tokens);
+  return md.renderer.render(tokens, md.options, {}).trimEnd();
 }
 
 async function resolveMarkdownMentionState(params: {
@@ -366,6 +385,7 @@ export async function renderMarkdownToMatrixHtmlWithMentions(params: {
   client: MatrixClient;
 }): Promise<{ html?: string; mentions: MatrixMentions }> {
   const state = await resolveMarkdownMentionState(params);
+  compactLooseListTokens(state.tokens);
   const html = md.renderer.render(state.tokens, md.options, {}).trimEnd();
   return {
     html: html || undefined,