diff --git a/src/lmstudio/json_api.py b/src/lmstudio/json_api.py
index 231e0fa..c70f57b 100644
--- a/src/lmstudio/json_api.py
+++ b/src/lmstudio/json_api.py
@@ -11,7 +11,9 @@
 
 import asyncio
 import copy
+import inspect
 import json
+import sys
 import uuid
 import warnings
 
@@ -40,6 +42,7 @@
     # Native in 3.11+
     assert_never,
     NoReturn,
+    NotRequired,
     Self,
 )
 
@@ -1089,27 +1092,75 @@ def __init__(
         super().__init__(model_key, params, on_load_progress)
 
 
+if sys.version_info < (3, 11):
+    # Generic typed dictionaries aren't supported in Python 3.10
+    # https://github.com/python/cpython/issues/89026
+    class ToolParamDefDict(TypedDict):
+        type: type[Any]
+        default: NotRequired[Any]
+
+    ParamDefDict: TypeAlias = ToolParamDefDict
+else:
+
+    class ToolParamDefDict(TypedDict, Generic[T]):
+        type: type[T]
+        default: NotRequired[T]
+
+    ParamDefDict: TypeAlias = ToolParamDefDict[Any]
+
+
 class ToolFunctionDefDict(TypedDict):
     """SDK input format to specify an LLM tool call and its implementation (as a dict)."""
 
     name: str
     description: str
-    parameters: Mapping[str, Any]
+    parameters: Mapping[str, type[Any] | ParamDefDict]
     implementation: Callable[..., Any]
 
 
+# Sentinel for parameters with no defined default value
+_NO_DEFAULT = object()
+
+
 @dataclass(kw_only=True, frozen=True, slots=True)
 class ToolFunctionDef:
     """SDK input format to specify an LLM tool call and its implementation."""
 
     name: str
     description: str
-    parameters: Mapping[str, Any]
+    parameters: Mapping[str, type[Any] | ParamDefDict]
     implementation: Callable[..., Any]
 
+    @staticmethod
+    def _extract_type_and_default(
+        param_value: type[Any] | ParamDefDict,
+    ) -> tuple[type[Any], Any]:
+        """Extract type and default value from parameter definition."""
+        if isinstance(param_value, dict):
+            # Inline format: {"type": type, "default": value}
+            param_type = param_value.get("type", None)
+            if param_type is None:
+                raise TypeError(
+                    f"Missing 'type' key in tool parameter definition {param_value!r}"
+                )
+            default_value = param_value.get("default", _NO_DEFAULT)
+            return param_type, default_value
+        else:
+            # Simple format: just the type
+            return param_value, _NO_DEFAULT
+
     def _to_llm_tool_def(self) -> tuple[type[Struct], LlmTool]:
         params_struct_name = f"{self.name.capitalize()}Parameters"
-        params_struct = defstruct(params_struct_name, self.parameters.items())
+        # Build fields list with defaults
+        fields: list[tuple[str, type[Any]] | tuple[str, type[Any], Any]] = []
+        for param_name, param_value in self.parameters.items():
+            param_type, default_value = self._extract_type_and_default(param_value)
+            if default_value is _NO_DEFAULT:
+                fields.append((param_name, param_type))
+            else:
+                fields.append((param_name, param_type, default_value))
+        # Define msgspec struct and API tool definition from the field list
+        params_struct = defstruct(params_struct_name, fields, kw_only=True)
         return params_struct, LlmTool._from_api_dict(
             {
                 "type": "function",
@@ -1160,6 +1211,23 @@ def from_callable(
             ) from exc
         # Tool definitions only annotate the input parameters, not the return type
         parameters.pop("return", None)
+
+        # Extract default values from function signature and convert to inline format
+        try:
+            sig = inspect.signature(f)
+        except Exception:
+            # If we can't extract defaults, continue without them
+            pass
+        else:
+            for param_name, param in sig.parameters.items():
+                if param.default is not inspect.Parameter.empty:
+                    # Convert to inline format: {"type": type, "default": value}
+                    original_type = parameters[param_name]
+                    parameters[param_name] = {
+                        "type": original_type,
+                        "default": param.default,
+                    }
+
         return cls(
             name=name, description=description, parameters=parameters, implementation=f
         )
@@ -1601,6 +1669,7 @@ def parse_tools(
             elif callable(tool):
                 tool_def = ToolFunctionDef.from_callable(tool)
             else:
+                # Handle dictionary-based tool definition
                 tool_def = ToolFunctionDef(**tool)
             if tool_def.name in client_tool_map:
                 raise LMStudioValueError(
diff --git a/src/lmstudio/schemas.py b/src/lmstudio/schemas.py
index 92d4a11..992c802 100644
--- a/src/lmstudio/schemas.py
+++ b/src/lmstudio/schemas.py
@@ -65,6 +65,10 @@ def _to_json_schema(cls: type, *, omit: Sequence[str] = ()) -> DictSchema:
         for field in omit:
             named_schema.pop(field, None)
         json_schema.update(named_schema)
+
+    # msgspec automatically handles default values in the generated JSON schema
+    # when they are properly defined in the Struct fields
+
     return json_schema
 
 
diff --git a/tests/test_default_values.py b/tests/test_default_values.py
new file mode 100644
index 0000000..4bcdd7e
--- /dev/null
+++ b/tests/test_default_values.py
@@ -0,0 +1,191 @@
+"""Tests for default parameter values in tool definitions."""
+
+import pytest
+
+from msgspec import defstruct
+
+from lmstudio.json_api import _NO_DEFAULT, ToolFunctionDef, ToolFunctionDefDict
+from lmstudio.schemas import _to_json_schema
+
+
+def greet(name: str, greeting: str = "Hello", punctuation: str = "!") -> str:
+    """Greet someone with a customizable message.
+
+    Args:
+        name: The name of the person to greet
+        greeting: The greeting word to use (default: "Hello")
+        punctuation: The punctuation to end with (default: "!")
+
+    Returns:
+        A greeting message
+    """
+    return f"{greeting}, {name}{punctuation}"
+
+
+def calculate(expression: str, precision: int = 2) -> str:
+    """Calculate a mathematical expression.
+
+    Args:
+        expression: The mathematical expression to evaluate
+        precision: Number of decimal places (default: 2)
+
+    Returns:
+        The calculated result as a string
+    """
+    return f"Result: {eval(expression):.{precision}f}"
+
+
+class TestDefaultValues:
+    """Test cases for default parameter values in tool definitions."""
+
+    def test_extract_defaults_from_callable(self) -> None:
+        """Test extracting default values from a callable function."""
+        tool_def = ToolFunctionDef.from_callable(greet)
+
+        assert tool_def.name == "greet"
+        # Check that defaults are converted to inline format
+        assert tool_def.parameters["greeting"] == {"type": str, "default": "Hello"}
+        assert tool_def.parameters["punctuation"] == {"type": str, "default": "!"}
+        assert tool_def.parameters["name"] is str  # No default, just type
+
+    def test_manual_inline_defaults(self) -> None:
+        """Test manually specifying default values in inline format."""
+        tool_def = ToolFunctionDef(
+            name="calculate",
+            description="Calculate a mathematical expression",
+            parameters={"expression": str, "precision": {"type": int, "default": 2}},
+            implementation=calculate,
+        )
+
+        # Check that the inline format is preserved
+        assert tool_def.parameters["precision"] == {"type": int, "default": 2}
+        assert tool_def.parameters["expression"] is str  # No default, just type
+
+    def test_json_schema_with_defaults(self) -> None:
+        """Test that JSON schema includes default values."""
+        tool_def = ToolFunctionDef.from_callable(greet)
+        params_struct, _ = tool_def._to_llm_tool_def()
+
+        json_schema = _to_json_schema(params_struct)
+
+        # Check that default values are included in the schema
+        assert json_schema["properties"]["greeting"]["default"] == "Hello"
+        assert json_schema["properties"]["punctuation"]["default"] == "!"
+        assert "default" not in json_schema["properties"]["name"]
+
+    def test_dict_based_definition(self) -> None:
+        """Test dictionary-based tool definition with inline defaults."""
+        dict_tool: ToolFunctionDefDict = {
+            "name": "format_text",
+            "description": "Format text with specified style",
+            "parameters": {
+                "text": str,
+                "style": {"type": str, "default": "normal"},
+                "uppercase": {"type": bool, "default": False},
+            },
+            "implementation": lambda text, style="normal", uppercase=False: text.upper()
+            if uppercase
+            else text,
+        }
+
+        # This should work without errors
+        tool_def = ToolFunctionDef(**dict_tool)
+        assert tool_def.parameters["style"] == {"type": str, "default": "normal"}
+        assert tool_def.parameters["uppercase"] == {"type": bool, "default": False}
+        assert tool_def.parameters["text"] is str  # No default, just type
+
+    def test_no_defaults(self) -> None:
+        """Test function with no default values."""
+
+        def no_defaults(a: int, b: str) -> str:
+            """Function with no default parameters."""
+            return f"{a}: {b}"
+
+        tool_def = ToolFunctionDef.from_callable(no_defaults)
+        # All parameters should be simple types without defaults
+        assert tool_def.parameters["a"] is int
+        assert tool_def.parameters["b"] is str
+
+        params_struct, _ = tool_def._to_llm_tool_def()
+        json_schema = _to_json_schema(params_struct)
+
+        # No default values should be present
+        assert "default" not in json_schema["properties"]["a"]
+        assert "default" not in json_schema["properties"]["b"]
+
+    def test_mixed_defaults(self) -> None:
+        """Test function with some parameters having defaults and others not."""
+
+        def mixed_defaults(
+            required: str, optional1: int = 42, optional2: bool = True
+        ) -> str:
+            """Function with mixed required and optional parameters."""
+            return f"{required}: {optional1}, {optional2}"
+
+        tool_def = ToolFunctionDef.from_callable(mixed_defaults)
+        # Check inline format for parameters with defaults
+        assert tool_def.parameters["optional1"] == {"type": int, "default": 42}
+        assert tool_def.parameters["optional2"] == {"type": bool, "default": True}
+        assert tool_def.parameters["required"] is str  # No default, just type
+
+        params_struct, _ = tool_def._to_llm_tool_def()
+        json_schema = _to_json_schema(params_struct)
+
+        # Check that default values are correctly included in schema
+        assert json_schema["properties"]["optional1"]["default"] == 42
+        assert json_schema["properties"]["optional2"]["default"] is True
+        assert "default" not in json_schema["properties"]["required"]
+
+    def test_extract_type_and_default_method(self) -> None:
+        """Test the _extract_type_and_default helper method."""
+
+        # Test simple type
+        param_type, default = ToolFunctionDef._extract_type_and_default(str)
+        assert param_type is str
+        assert default is _NO_DEFAULT
+
+        # Test inline format with missing type key
+        with pytest.raises(TypeError, match="Missing 'type' key"):
+            param_type, default = ToolFunctionDef._extract_type_and_default(
+                {"default": 42}  # type: ignore[arg-type]
+            )
+
+        # Test inline format with no default
+        param_type, default = ToolFunctionDef._extract_type_and_default({"type": int})
+        assert param_type is int
+        assert default is _NO_DEFAULT
+
+        # Test inline format with default
+        param_type, default = ToolFunctionDef._extract_type_and_default(
+            {"type": int, "default": 42}
+        )
+        assert param_type is int
+        assert default == 42
+
+        # Test complex default
+        param_type, default = ToolFunctionDef._extract_type_and_default(
+            {"type": list, "default": [1, 2, 3]}
+        )
+        assert param_type is list
+        assert default == [1, 2, 3]
+
+    def test_msgspec_auto_defaults(self) -> None:
+        """msgspec automatically reflects default values in the JSON schema."""
+        TestStruct = defstruct(
+            "TestStruct",
+            [
+                ("name", str),
+                ("age", int, 18),
+                ("active", bool, True),
+            ],
+            kw_only=True,
+        )
+
+        schema = _to_json_schema(TestStruct)
+        properties = schema.get("properties", {})
+        required = schema.get("required", [])
+
+        assert "name" in properties and "default" not in properties["name"]
+        assert properties["age"].get("default") == 18
+        assert properties["active"].get("default") is True
+        assert "name" in required and "age" not in required and "active" not in required