diff --git a/src/lmstudio/json_api.py b/src/lmstudio/json_api.py
index e758a07..25926a1 100644
--- a/src/lmstudio/json_api.py
+++ b/src/lmstudio/json_api.py
@@ -1131,7 +1131,7 @@ def __init__(
         on_prompt_processing_progress: PromptProcessingCallback | None = None,
         # The remaining options are only relevant for multi-round tool actions
         handle_invalid_tool_request: Callable[
-            [LMStudioPredictionError, ToolCallRequest | None], str
+            [LMStudioPredictionError, ToolCallRequest | None], str | None
         ]
         | None = None,
         llm_tools: LlmToolUseSettingToolArray | None = None,
@@ -1336,12 +1336,14 @@ def _report_prompt_processing_progress(self, progress: float) -> None:
     def _handle_invalid_tool_request(
         self, err_msg: str, request: ToolCallRequest | None = None
     ) -> str:
-        exc = LMStudioPredictionError(err_msg)
         _on_handle_invalid_tool_request = self._on_handle_invalid_tool_request
         if _on_handle_invalid_tool_request is not None:
             # Allow users to override the error message, or force an exception
             self._logger.debug("Invoking on_handle_invalid_tool_request callback")
-            err_msg = _on_handle_invalid_tool_request(exc, request)
+            exc = LMStudioPredictionError(err_msg)
+            user_err_msg = _on_handle_invalid_tool_request(exc, request)
+            if user_err_msg is not None:
+                err_msg = user_err_msg
         if request is not None:
             return err_msg
         # We don't allow users to prevent the exception when there's no request
diff --git a/src/lmstudio/sync_api.py b/src/lmstudio/sync_api.py
index 720664b..735c029 100644
--- a/src/lmstudio/sync_api.py
+++ b/src/lmstudio/sync_api.py
@@ -1499,7 +1499,7 @@ def act(
         on_prediction_completed: Callable[[PredictionRoundResult], Any] | None = None,
         on_prompt_processing_progress: Callable[[float, int], Any] | None = None,
         handle_invalid_tool_request: Callable[
-            [LMStudioPredictionError, ToolCallRequest | None], str
+            [LMStudioPredictionError, ToolCallRequest | None], str | None
         ]
         | None = None,
     ) -> ActResult:
diff --git a/tests/test_inference.py b/tests/test_inference.py
index a523b9b..71027fe 100644
--- a/tests/test_inference.py
+++ b/tests/test_inference.py
@@ -15,9 +15,11 @@
     Client,
     LlmPredictionConfig,
     LlmPredictionFragment,
+    LMStudioPredictionError,
     LMStudioValueError,
     PredictionResult,
     PredictionRoundResult,
+    ToolCallRequest,
     ToolFunctionDef,
     ToolFunctionDefDict,
 )
@@ -162,7 +164,7 @@ def test_duplicate_tool_names_rejected() -> None:
 
 @pytest.mark.lmstudio
 def test_tool_using_agent(caplog: LogCap) -> None:
-    # This is currently a sync-only API (it will be refactored after 1.0.0)
+    # This is currently a sync-only API (it will be refactored in a future release)
 
     caplog.set_level(logging.DEBUG)
     model_id = TOOL_LLM_ID
@@ -192,7 +194,7 @@ def test_tool_using_agent(caplog: LogCap) -> None:
 
 @pytest.mark.lmstudio
 def test_tool_using_agent_callbacks(caplog: LogCap) -> None:
-    # This is currently a sync-only API (it will be refactored after 1.0.0)
+    # This is currently a sync-only API (it will be refactored in a future release)
 
     caplog.set_level(logging.DEBUG)
     model_id = TOOL_LLM_ID
@@ -241,3 +243,49 @@ def _append_fragment(f: LlmPredictionFragment, round_index: int) -> None:
 
         cloned_chat = chat.copy()
         assert cloned_chat._messages == chat._messages
+
+
+def divide(numerator: float, denominator: float) -> float | str:
+    """Divide the given numerator by the given denominator. Return the result."""
+    try:
+        return numerator / denominator
+    except Exception as exc:
+        # TODO: Perform this exception-to-response-string translation implicitly
+        return f"Unhandled Python exception: {exc!r}"
+
+
+@pytest.mark.lmstudio
+def test_tool_using_agent_error_handling(caplog: LogCap) -> None:
+    # This is currently a sync-only API (it will be refactored in a future release)
+
+    caplog.set_level(logging.DEBUG)
+    model_id = TOOL_LLM_ID
+    with Client() as client:
+        llm = client.llm.model(model_id)
+        chat = Chat()
+        chat.add_user_message(
+            "Attempt to divide 1 by 0 using the tool. Explain the result."
+        )
+        tools = [divide]
+        predictions: list[PredictionRoundResult] = []
+        invalid_requests: list[tuple[LMStudioPredictionError, ToolCallRequest]] = []
+
+        def _handle_invalid_request(
+            exc: LMStudioPredictionError, request: ToolCallRequest | None
+        ) -> None:
+            if request is not None:
+                invalid_requests.append((exc, request))
+
+        act_result = llm.act(
+            chat,
+            tools,
+            handle_invalid_tool_request=_handle_invalid_request,
+            on_prediction_completed=predictions.append,
+        )
+        assert len(predictions) > 1
+        assert act_result.rounds == len(predictions)
+        # Test case is currently suppressing exceptions inside the tool call
+        assert invalid_requests == []
+        # If the content checks prove flaky in practice, they can be dropped
+        assert "divide" in predictions[-1].content
+        assert "zero" in predictions[-1].content