diff --git a/crates/services/src/services/diff_stream.rs b/crates/services/src/services/diff_stream.rs
index bd7303c1..8c6ebbae 100644
--- a/crates/services/src/services/diff_stream.rs
+++ b/crates/services/src/services/diff_stream.rs
@@ -148,51 +148,69 @@ pub async fn create(
     base_commit: Commit,
     stats_only: bool,
 ) -> Result<DiffStreamHandle, DiffStreamError> {
-    let initial_diffs_raw = git_service.get_diffs(
-        DiffTarget::Worktree {
-            worktree_path: &worktree_path,
-            base_commit: &base_commit,
-        },
-        None,
-    )?;
+    let (tx, rx) = mpsc::channel::<Result<LogMsg, io::Error>>(DIFF_STREAM_CHANNEL_CAPACITY);
 
     let cumulative = Arc::new(AtomicUsize::new(0));
     let full_sent = Arc::new(std::sync::RwLock::new(HashSet::<String>::new()));
-    let mut initial_diffs = Vec::with_capacity(initial_diffs_raw.len());
-    for mut diff in initial_diffs_raw {
-        apply_stream_omit_policy(&mut diff, &cumulative, stats_only);
-        initial_diffs.push(diff);
-    }
 
-    {
-        let mut guard = full_sent.write().unwrap();
-        for diff in &initial_diffs {
-            if !diff.content_omitted {
-                guard.insert(GitService::diff_path(diff));
+    // Spawn a task to fetch initial diffs and set up the file watcher.
+    // This allows the stream to be returned immediately while diff fetching
+    // happens in the background, preventing WebSocket timeouts for large diffs.
+    let tx_clone = tx.clone();
+    let watcher_task = tokio::spawn(async move {
+        // Fetch initial diffs in a blocking task to avoid blocking the async runtime
+        let git_for_diff = git_service.clone();
+        let worktree_for_diff = worktree_path.clone();
+        let base_for_diff = base_commit.clone();
+
+        let initial_diffs_result = tokio::task::spawn_blocking(move || {
+            git_for_diff.get_diffs(
+                DiffTarget::Worktree {
+                    worktree_path: &worktree_for_diff,
+                    base_commit: &base_for_diff,
+                },
+                None,
+            )
+        })
+        .await;
+
+        let initial_diffs_raw = match initial_diffs_result {
+            Ok(Ok(diffs)) => diffs,
+            Ok(Err(e)) => {
+                tracing::error!("Failed to get initial diffs: {e}");
+                send_error(&tx_clone, e.to_string()).await;
+                return;
+            }
+            Err(join_err) => {
+                tracing::error!("Diff fetch task join error: {join_err}");
+                send_error(&tx_clone, format!("Diff fetch failed: {join_err}")).await;
+                return;
+            }
+        };
+
+        let mut initial_diffs = Vec::with_capacity(initial_diffs_raw.len());
+        for mut diff in initial_diffs_raw {
+            apply_stream_omit_policy(&mut diff, &cumulative, stats_only);
+            initial_diffs.push(diff);
+        }
+
+        {
+            let mut guard = full_sent.write().unwrap();
+            for diff in &initial_diffs {
+                if !diff.content_omitted {
+                    guard.insert(GitService::diff_path(diff));
+                }
             }
         }
-    }
 
-    let (tx, rx) = mpsc::channel::<Result<LogMsg, io::Error>>(DIFF_STREAM_CHANNEL_CAPACITY);
-    if !send_initial_diffs(&tx, initial_diffs).await {
-        return Ok(DiffStreamHandle::new(ReceiverStream::new(rx).boxed(), None));
-    }
+        if !send_initial_diffs(&tx_clone, initial_diffs).await {
+            return;
+        }
 
-    let tx_clone = tx.clone();
-    let ctx = DiffWatcherContext {
-        git_service,
-        worktree_path: worktree_path.clone(),
-        base_commit,
-        cumulative,
-        full_sent,
-        stats_only,
-        tx: tx_clone,
-    };
-
-    let watcher_task = tokio::spawn(async move {
-        let worktree_path_for_spawn = worktree_path;
+        // Set up filesystem watcher for live updates
+        let worktree_for_watcher = worktree_path.clone();
         let watcher_result = tokio::task::spawn_blocking(move || {
-            filesystem_watcher::async_watcher(worktree_path_for_spawn)
+            filesystem_watcher::async_watcher(worktree_for_watcher)
         })
         .await;
 
@@ -200,13 +218,13 @@ pub async fn create(
             Ok(Ok(parts)) => parts,
             Ok(Err(e)) => {
                 tracing::error!("Failed to set up filesystem watcher: {e}");
-                send_error(&ctx.tx, e.to_string()).await;
+                send_error(&tx_clone, e.to_string()).await;
                 return;
             }
             Err(join_err) => {
                 tracing::error!("Failed to spawn watcher setup: {join_err}");
                 send_error(
-                    &ctx.tx,
+                    &tx_clone,
                     format!("Failed to spawn watcher setup: {join_err}"),
                 )
                 .await;
@@ -214,6 +232,16 @@ pub async fn create(
             }
         };
 
+        let ctx = DiffWatcherContext {
+            git_service,
+            worktree_path,
+            base_commit,
+            cumulative,
+            full_sent,
+            stats_only,
+            tx: tx_clone,
+        };
+
         let _debouncer_guard = debouncer;
 
         while let Some(result) = watcher_rx.next().await {
diff --git a/frontend/src/components/panels/DiffsPanel.tsx b/frontend/src/components/panels/DiffsPanel.tsx
index ecd328ce..fbd138ef 100644
--- a/frontend/src/components/panels/DiffsPanel.tsx
+++ b/frontend/src/components/panels/DiffsPanel.tsx
@@ -39,10 +39,6 @@ export function DiffsPanel({ selectedAttempt, gitOps }: DiffsPanelProps) {
     setHasInitialized(false);
   }, [selectedAttempt?.id]);
 
-  useEffect(() => {
-    setLoading(true);
-  }, [selectedAttempt?.id]);
-
   useEffect(() => {
     if (diffs.length > 0 && loading) {
       setLoading(false);