diff --git a/src/tools/repositories.ts b/src/tools/repositories.ts
index 62c422fd..557158a5 100644
--- a/src/tools/repositories.ts
+++ b/src/tools/repositories.ts
@@ -297,8 +297,9 @@ function configureRepoTools(server: McpServer, tokenProvider: () => Promise<stri
       deleteSourceBranch: z.boolean().optional().default(false).describe("Whether to delete the source branch when the pull request autocompletes. Defaults to false."),
       transitionWorkItems: z.boolean().optional().default(true).describe("Whether to transition associated work items to the next state when the pull request autocompletes. Defaults to true."),
       bypassReason: z.string().optional().describe("Reason for bypassing branch policies. When provided, branch policies will be automatically bypassed during autocompletion."),
+      labels: z.array(z.string()).optional().describe("Array of label names to replace existing labels. Undefined = no change, empty array = remove all labels, array with values = replace labels."),
     },
-    async ({ repositoryId, pullRequestId, title, description, isDraft, targetRefName, status, autoComplete, mergeStrategy, deleteSourceBranch, transitionWorkItems, bypassReason }) => {
+    async ({ repositoryId, pullRequestId, title, description, isDraft, targetRefName, status, autoComplete, mergeStrategy, deleteSourceBranch, transitionWorkItems, bypassReason, labels }) => {
       const connection = await connectionProvider();
       const gitApi = await connection.getGitApi();
 
@@ -313,6 +314,10 @@ function configureRepoTools(server: McpServer, tokenProvider: () => Promise<stri
         updateRequest.status = status === "Active" ? PullRequestStatus.Active.valueOf() : PullRequestStatus.Abandoned.valueOf();
       }
 
+      if (labels !== undefined) {
+        updateRequest.labels = labels.map((label) => ({ name: label }));
+      }
+
       if (autoComplete !== undefined) {
         if (autoComplete) {
           const data = await getCurrentUserDetails(tokenProvider, connectionProvider, userAgentProvider);
diff --git a/test/src/tools/repositories.test.ts b/test/src/tools/repositories.test.ts
index b0396e37..23aaffd1 100644
--- a/test/src/tools/repositories.test.ts
+++ b/test/src/tools/repositories.test.ts
@@ -609,6 +609,131 @@ describe("repos tools", () => {
       // Validation should fail due to description being too long
       await expect(handler(params)).rejects.toThrow();
     });
+
+    it("should not update labels when labels parameter is undefined", async () => {
+      configureRepoTools(server, tokenProvider, connectionProvider, userAgentProvider);
+
+      const call = (server.tool as jest.Mock).mock.calls.find(([toolName]) => toolName === REPO_TOOLS.update_pull_request);
+      if (!call) throw new Error("repo_update_pull_request tool not registered");
+      const [, , , handler] = call;
+
+      const mockUpdatedPR = {
+        pullRequestId: 123,
+        codeReviewId: 123,
+        repository: { name: "test-repo" },
+        status: PullRequestStatus.Active,
+        createdBy: {
+          displayName: "Test User",
+          uniqueName: "testuser@example.com",
+        },
+        creationDate: "2023-01-01T00:00:00Z",
+        title: "Updated Title",
+        isDraft: false,
+        sourceRefName: "refs/heads/feature",
+        targetRefName: "refs/heads/main",
+      };
+      mockGitApi.updatePullRequest.mockResolvedValue(mockUpdatedPR);
+
+      const params = {
+        repositoryId: "repo123",
+        pullRequestId: 123,
+        title: "Updated Title",
+        // labels is undefined (not provided)
+      };
+
+      await handler(params);
+
+      // Verify that labels field is not included in the update request
+      const updateRequestArg = mockGitApi.updatePullRequest.mock.calls[0][0];
+      expect(updateRequestArg).not.toHaveProperty("labels");
+      expect(updateRequestArg).toEqual({
+        title: "Updated Title",
+      });
+    });
+
+    it("should remove all labels when empty array is provided", async () => {
+      configureRepoTools(server, tokenProvider, connectionProvider, userAgentProvider);
+
+      const call = (server.tool as jest.Mock).mock.calls.find(([toolName]) => toolName === REPO_TOOLS.update_pull_request);
+      if (!call) throw new Error("repo_update_pull_request tool not registered");
+      const [, , , handler] = call;
+
+      const mockUpdatedPR = {
+        pullRequestId: 123,
+        codeReviewId: 123,
+        repository: { name: "test-repo" },
+        status: PullRequestStatus.Active,
+        createdBy: {
+          displayName: "Test User",
+          uniqueName: "testuser@example.com",
+        },
+        creationDate: "2023-01-01T00:00:00Z",
+        title: "Test PR",
+        isDraft: false,
+        sourceRefName: "refs/heads/feature",
+        targetRefName: "refs/heads/main",
+      };
+      mockGitApi.updatePullRequest.mockResolvedValue(mockUpdatedPR);
+
+      const params = {
+        repositoryId: "repo123",
+        pullRequestId: 123,
+        labels: [],
+      };
+
+      await handler(params);
+
+      // Verify that labels field is included with empty array
+      expect(mockGitApi.updatePullRequest).toHaveBeenCalledWith(
+        {
+          labels: [],
+        },
+        "repo123",
+        123
+      );
+    });
+
+    it("should replace labels when array with values is provided", async () => {
+      configureRepoTools(server, tokenProvider, connectionProvider, userAgentProvider);
+
+      const call = (server.tool as jest.Mock).mock.calls.find(([toolName]) => toolName === REPO_TOOLS.update_pull_request);
+      if (!call) throw new Error("repo_update_pull_request tool not registered");
+      const [, , , handler] = call;
+
+      const mockUpdatedPR = {
+        pullRequestId: 123,
+        codeReviewId: 123,
+        repository: { name: "test-repo" },
+        status: PullRequestStatus.Active,
+        createdBy: {
+          displayName: "Test User",
+          uniqueName: "testuser@example.com",
+        },
+        creationDate: "2023-01-01T00:00:00Z",
+        title: "Test PR",
+        isDraft: false,
+        sourceRefName: "refs/heads/feature",
+        targetRefName: "refs/heads/main",
+      };
+      mockGitApi.updatePullRequest.mockResolvedValue(mockUpdatedPR);
+
+      const params = {
+        repositoryId: "repo123",
+        pullRequestId: 123,
+        labels: ["bug", "urgent"],
+      };
+
+      await handler(params);
+
+      // Verify that labels are mapped to WebApiTagDefinition format
+      expect(mockGitApi.updatePullRequest).toHaveBeenCalledWith(
+        {
+          labels: [{ name: "bug" }, { name: "urgent" }],
+        },
+        "repo123",
+        123
+      );
+    });
   });
 
   describe("repo_create_pull_request", () => {