diff --git a/server/src/agents/pool/auto_assign/merge_failure_block_subscriber.rs b/server/src/agents/pool/auto_assign/merge_failure_block_subscriber.rs
index aaae6be1..fa13c8b8 100644
--- a/server/src/agents/pool/auto_assign/merge_failure_block_subscriber.rs
+++ b/server/src/agents/pool/auto_assign/merge_failure_block_subscriber.rs
@@ -11,11 +11,16 @@
 
 use std::collections::HashMap;
 use std::path::{Path, PathBuf};
+use std::sync::Arc;
 
 use crate::pipeline_state::{MergeFailureKind, PipelineEvent, Stage, StoryId};
 use crate::slog;
 use crate::slog_warn;
 
+use super::super::super::PipelineStage;
+use super::super::AgentPool;
+use super::scan::is_story_assigned_for_stage;
+
 /// Spawn a background task that blocks stories after N consecutive `MergeFailure` transitions.
 ///
 /// Subscribes to the pipeline transition broadcast channel and tracks a per-story
@@ -25,14 +30,23 @@ use crate::slog_warn;
 ///
 /// The counter resets when the story leaves `MergeFailure` (e.g. on `FixupRequested`,
 /// `ReQueuedForQa`, or a successful merge via `Unblock → Merge → Done`).
-pub(crate) fn spawn_merge_failure_block_subscriber(project_root: PathBuf) {
+///
+/// Bug 1025: while a mergemaster is actively running on the story, its
+/// iteration loop (squash → fail → fix → retry) generates multiple
+/// MergeFailure transitions.  Those are NOT consecutive give-ups — they are
+/// recovery iterations in progress.  We skip counter increments while a
+/// mergemaster is in the pool for the story; the counter only increments on
+/// transitions that happen with no recovery agent attached.
+pub(crate) fn spawn_merge_failure_block_subscriber(pool: Arc<AgentPool>, project_root: PathBuf) {
     let mut rx = crate::pipeline_state::subscribe_transitions();
     tokio::spawn(async move {
         let mut counters: HashMap<StoryId, (u32, MergeFailureKind)> = HashMap::new();
         loop {
             match rx.recv().await {
                 Ok(fired) => {
-                    on_transition(&project_root, &fired, &mut counters);
+                    let recovery_running =
+                        is_mergemaster_running(&pool, &project_root, &fired.story_id.0);
+                    on_transition(&project_root, &fired, &mut counters, recovery_running);
                 }
                 Err(tokio::sync::broadcast::error::RecvError::Lagged(n)) => {
                     slog_warn!(
@@ -46,14 +60,42 @@ pub(crate) fn spawn_merge_failure_block_subscriber(project_root: PathBuf) {
     });
 }
 
+/// Return true if a mergemaster agent is currently in the pool for `story_id`.
+/// Used to suppress counter increments while recovery is actively iterating
+/// (bug 1025).
+fn is_mergemaster_running(pool: &AgentPool, project_root: &Path, story_id: &str) -> bool {
+    let config = match crate::config::ProjectConfig::load(project_root) {
+        Ok(c) => c,
+        Err(_) => return false,
+    };
+    let agents = match pool.agents.lock() {
+        Ok(a) => a,
+        Err(_) => return false,
+    };
+    is_story_assigned_for_stage(&config, &agents, story_id, &PipelineStage::Mergemaster)
+}
+
 /// Handle a single transition event: update counters and emit Block if threshold is reached.
+///
+/// `recovery_running`: when `true`, a mergemaster is currently in the pool for
+/// the story and the failure is part of an in-flight recovery loop.  We do NOT
+/// increment the consecutive-failure counter in that case (bug 1025).
 fn on_transition(
     project_root: &Path,
     fired: &crate::pipeline_state::TransitionFired,
     counters: &mut HashMap<StoryId, (u32, MergeFailureKind)>,
+    recovery_running: bool,
 ) {
     match &fired.after {
         Stage::MergeFailure { kind, .. } => {
+            if recovery_running {
+                slog!(
+                    "[merge-block-sub] Story '{}' MergeFailure while mergemaster is running; \
+                     not counting toward block threshold (recovery in progress).",
+                    fired.story_id.0
+                );
+                return;
+            }
             let entry = counters
                 .entry(fired.story_id.clone())
                 .or_insert_with(|| (0, kind.clone()));
@@ -195,7 +237,7 @@ mod tests {
         // Fire 2 MergeFailure events (default threshold is 3).
         for _ in 0..2 {
             let fired = make_merge_failure_fired(story_id, kind.clone());
-            on_transition(tmp.path(), &fired, &mut counters);
+            on_transition(tmp.path(), &fired, &mut counters, false);
         }
 
         // Story must still be in MergeFailure (not Blocked).
@@ -229,7 +271,7 @@ mod tests {
         // Fire 3 MergeFailure events — the 3rd must trigger the block.
         for _ in 0..3 {
             let fired = make_merge_failure_fired(story_id, kind.clone());
-            on_transition(tmp.path(), &fired, &mut counters);
+            on_transition(tmp.path(), &fired, &mut counters, false);
         }
 
         let item = crate::pipeline_state::read_typed(story_id)
@@ -272,7 +314,7 @@ mod tests {
         // Fire 2 MergeFailure events.
         for _ in 0..2 {
             let fired = make_merge_failure_fired(story_id, kind.clone());
-            on_transition(tmp.path(), &fired, &mut counters);
+            on_transition(tmp.path(), &fired, &mut counters, false);
         }
         assert_eq!(
             counters.get(&StoryId(story_id.to_string())).map(|e| e.0),
@@ -282,7 +324,7 @@ mod tests {
 
         // Simulate FixupRequested (non-MergeFailure transition).
         let reset_fired = make_coding_fired(story_id);
-        on_transition(tmp.path(), &reset_fired, &mut counters);
+        on_transition(tmp.path(), &reset_fired, &mut counters, false);
         assert!(
             !counters.contains_key(&StoryId(story_id.to_string())),
             "counter must be cleared after non-MergeFailure transition"
@@ -298,7 +340,7 @@ mod tests {
         // Fire 2 more MergeFailure events — still below threshold.
         for _ in 0..2 {
             let fired = make_merge_failure_fired(story_id, kind.clone());
-            on_transition(tmp.path(), &fired, &mut counters);
+            on_transition(tmp.path(), &fired, &mut counters, false);
         }
 
         let item = crate::pipeline_state::read_typed(story_id)
@@ -310,4 +352,82 @@ mod tests {
             item.stage
         );
     }
+
+    /// Bug 1025: while a mergemaster is running, MergeFailure transitions are
+    /// recovery iterations, not consecutive give-ups.  3 failures with
+    /// `recovery_running=true` must NOT block.
+    #[test]
+    fn mergemaster_running_suppresses_block() {
+        let tmp = tempfile::tempdir().unwrap();
+        setup_project(&tmp);
+        let story_id = "1025_recovery_running";
+        seed_at_merge(story_id);
+
+        crate::agents::lifecycle::transition_to_merge_failure(
+            story_id,
+            MergeFailureKind::ConflictDetected(None),
+        )
+        .expect("initial MergeFailure transition");
+
+        let mut counters: HashMap<StoryId, (u32, MergeFailureKind)> = HashMap::new();
+        let kind = MergeFailureKind::ConflictDetected(None);
+
+        // Fire 3 MergeFailure events WHILE a mergemaster is running (gated).
+        for _ in 0..3 {
+            let fired = make_merge_failure_fired(story_id, kind.clone());
+            on_transition(tmp.path(), &fired, &mut counters, true);
+        }
+
+        // Counter must NOT have incremented at all — recovery in progress.
+        assert!(
+            !counters.contains_key(&StoryId(story_id.to_string())),
+            "counter must not increment while mergemaster is running"
+        );
+
+        // And the story must still be in MergeFailure (not Blocked).
+        let item = crate::pipeline_state::read_typed(story_id)
+            .expect("read")
+            .expect("item");
+        assert!(
+            matches!(item.stage, Stage::MergeFailure { .. }),
+            "story must NOT be blocked while mergemaster is running (recovery in progress): {:?}",
+            item.stage
+        );
+    }
+
+    /// Bug 1025 regression guard: the genuinely-stuck case (no mergemaster
+    /// running) still blocks at the threshold, so the original 1018 behaviour
+    /// is preserved.
+    #[test]
+    fn no_mergemaster_still_blocks_at_threshold() {
+        let tmp = tempfile::tempdir().unwrap();
+        setup_project(&tmp);
+        let story_id = "1025_genuine_stuck";
+        seed_at_merge(story_id);
+
+        crate::agents::lifecycle::transition_to_merge_failure(
+            story_id,
+            MergeFailureKind::ConflictDetected(None),
+        )
+        .expect("initial MergeFailure transition");
+
+        let mut counters: HashMap<StoryId, (u32, MergeFailureKind)> = HashMap::new();
+        let kind = MergeFailureKind::ConflictDetected(None);
+
+        // Fire 3 MergeFailure events with NO mergemaster (recovery_running=false).
+        for _ in 0..3 {
+            let fired = make_merge_failure_fired(story_id, kind.clone());
+            on_transition(tmp.path(), &fired, &mut counters, false);
+        }
+
+        // Story must be Blocked (genuine-stuck case unchanged).
+        let item = crate::pipeline_state::read_typed(story_id)
+            .expect("read")
+            .expect("item");
+        assert!(
+            matches!(item.stage, Stage::Blocked { .. }),
+            "story must still block when no mergemaster is running: {:?}",
+            item.stage
+        );
+    }
 }
diff --git a/server/src/startup/tick_loop.rs b/server/src/startup/tick_loop.rs
index 1b78e59e..25a7a116 100644
--- a/server/src/startup/tick_loop.rs
+++ b/server/src/startup/tick_loop.rs
@@ -69,8 +69,13 @@ pub(crate) fn spawn_event_bridges(
         );
 
         // Consecutive-failure auto-block subscriber: blocks stories after N
-        // consecutive MergeFailure transitions (story 1018).
-        crate::agents::pool::auto_assign::spawn_merge_failure_block_subscriber(root.clone());
+        // consecutive MergeFailure transitions (story 1018).  Bug 1025: takes
+        // the agent pool so it can gate the counter on mergemaster presence —
+        // failures during active recovery iteration do not count toward block.
+        crate::agents::pool::auto_assign::spawn_merge_failure_block_subscriber(
+            Arc::clone(&agents),
+            root.clone(),
+        );
 
         // Content-store GC subscriber: purges all ContentKey::* entries for a
         // story when it reaches a terminal stage, preventing zombie entries from