diff --git a/crates/g3-core/src/skills/prompt.rs b/crates/g3-core/src/skills/prompt.rs
index 2aa111a..ff20e5f 100644
--- a/crates/g3-core/src/skills/prompt.rs
+++ b/crates/g3-core/src/skills/prompt.rs
@@ -24,7 +24,9 @@ pub fn generate_skills_prompt(skills: &[Skill]) -> String {
         xml.push_str("  <skill>\n");
         xml.push_str(&format!("    <name>{}</name>\n", escape_xml(&skill.name)));
         xml.push_str(&format!("    <description>{}</description>\n", escape_xml(&skill.description)));
-        xml.push_str(&format!("    <location>{}</location>\n", escape_xml(&skill.path)));
+        // Don't escape location - it's a path the LLM needs to use with read_file
+        // Embedded paths like <embedded:name>/SKILL.md must remain unescaped
+        xml.push_str(&format!("    <location>{}</location>\n", &skill.path));
         
         // Include compatibility info if present
         if let Some(ref compat) = skill.compatibility {
@@ -137,4 +139,20 @@ mod tests {
         assert!(result.contains("# Available Skills"));
         assert!(result.contains("read the full skill file using `read_file`"));
     }
+
+    #[test]
+    fn test_embedded_skill_path_not_escaped() {
+        // Embedded skill paths use <embedded:name> syntax which must NOT be escaped
+        // so the LLM can use them directly with read_file
+        let skills = vec![
+            make_skill("research", "Web research skill", "<embedded:research>/SKILL.md"),
+        ];
+        
+        let result = generate_skills_prompt(&skills);
+        
+        // The path should appear unescaped
+        assert!(result.contains("<location><embedded:research>/SKILL.md</location>"));
+        // Should NOT be escaped
+        assert!(!result.contains("&lt;embedded:research&gt;"));
+    }
 }
diff --git a/crates/g3-core/src/tools/file_ops.rs b/crates/g3-core/src/tools/file_ops.rs
index 29b2e52..aa5ad2d 100644
--- a/crates/g3-core/src/tools/file_ops.rs
+++ b/crates/g3-core/src/tools/file_ops.rs
@@ -74,17 +74,24 @@ fn calculate_read_limit(file_bytes: usize, total_tokens: u32, used_tokens: u32)
 /// Recognizes paths like:
 /// - `<embedded:research>/SKILL.md`
 /// - `<embedded:skill-name>/SKILL.md`
+/// - `&lt;embedded:research&gt;/SKILL.md` (XML-escaped fallback)
 ///
 /// Returns the skill content if found, None otherwise.
 fn try_read_embedded_skill(path: &str) -> Option<&'static str> {
     // Check for embedded skill path pattern: <embedded:name>/SKILL.md
-    if !path.starts_with("<embedded:") {
+    // Also handle XML-escaped version: &lt;embedded:name&gt;/SKILL.md
+    let (after_prefix, closing) = if path.starts_with("<embedded:") {
+        // Normal unescaped path
+        (path.strip_prefix("<embedded:")?, ">")
+    } else if path.starts_with("&lt;embedded:") {
+        // XML-escaped path (fallback for older prompts or LLM quirks)
+        (path.strip_prefix("&lt;embedded:")?, "&gt;")
+    } else {
         return None;
-    }
+    };
     
-    // Extract skill name from path like "<embedded:research>/SKILL.md"
-    let after_prefix = path.strip_prefix("<embedded:")?;
-    let skill_name = after_prefix.split('>').next()?;
+    // Extract skill name from path
+    let skill_name = after_prefix.split(closing).next()?;
     
     // Look up the embedded skill
     let skill = get_embedded_skill(skill_name)?;
@@ -899,3 +906,41 @@ pub fn print_imgcat(
     // Blank line before next image (no │ prefix)
     println!();
 }
+
+#[cfg(test)]
+mod tests {
+    use super::*;
+
+    #[test]
+    fn test_try_read_embedded_skill_unescaped() {
+        // Normal unescaped path should work
+        let result = try_read_embedded_skill("<embedded:research>/SKILL.md");
+        assert!(result.is_some(), "Should find embedded research skill");
+        assert!(result.unwrap().contains("name: research"));
+    }
+
+    #[test]
+    fn test_try_read_embedded_skill_escaped() {
+        // XML-escaped path should also work (fallback for LLM quirks)
+        let result = try_read_embedded_skill("&lt;embedded:research&gt;/SKILL.md");
+        assert!(result.is_some(), "Should find embedded research skill with escaped path");
+        assert!(result.unwrap().contains("name: research"));
+    }
+
+    #[test]
+    fn test_try_read_embedded_skill_invalid_name() {
+        // Invalid skill name should return None
+        let result = try_read_embedded_skill("<embedded:nonexistent>/SKILL.md");
+        assert!(result.is_none(), "Should not find nonexistent skill");
+    }
+
+    #[test]
+    fn test_try_read_embedded_skill_not_embedded_path() {
+        // Regular file paths should return None
+        let result = try_read_embedded_skill("/path/to/SKILL.md");
+        assert!(result.is_none(), "Regular path should not match");
+        
+        let result = try_read_embedded_skill("skills/research/SKILL.md");
+        assert!(result.is_none(), "Relative path should not match");
+    }
+}