diff --git a/packages/cli/src/config/config.ts b/packages/cli/src/config/config.ts
index bd7f7f5a9e..f56aec679e 100755
--- a/packages/cli/src/config/config.ts
+++ b/packages/cli/src/config/config.ts
@@ -43,6 +43,7 @@ import { resolvePath } from '../utils/resolvePath.js';
 import { appEvents } from '../utils/events.js';
 
 import { isWorkspaceTrusted } from './trustedFolders.js';
+import { createPolicyEngineConfig } from './policy.js';
 
 // Simple console logger for now - replace with actual logger if available
 const logger = {
@@ -489,6 +490,8 @@ export async function loadCliConfig(
     approvalMode = ApprovalMode.DEFAULT;
   }
 
+  const policyEngineConfig = createPolicyEngineConfig(settings, approvalMode);
+
   const interactive =
     !!argv.promptInteractive || (process.stdin.isTTY && question.length === 0);
   // In non-interactive mode, exclude tools that require a prompt.
@@ -574,6 +577,7 @@ export async function loadCliConfig(
     fullContext: argv.allFiles || false,
     coreTools: settings.tools?.core || undefined,
     allowedTools: argv.allowedTools || settings.tools?.allowed || undefined,
+    policyEngineConfig,
     excludeTools,
     toolDiscoveryCommand: settings.tools?.discoveryCommand,
     toolCallCommand: settings.tools?.callCommand,
diff --git a/packages/cli/src/config/policy-engine.integration.test.ts b/packages/cli/src/config/policy-engine.integration.test.ts
new file mode 100644
index 0000000000..3b19121d5f
--- /dev/null
+++ b/packages/cli/src/config/policy-engine.integration.test.ts
@@ -0,0 +1,404 @@
+/**
+ * @license
+ * Copyright 2025 Google LLC
+ * SPDX-License-Identifier: Apache-2.0
+ */
+
+import { describe, it, expect } from 'vitest';
+import {
+  ApprovalMode,
+  PolicyDecision,
+  PolicyEngine,
+} from '@google/gemini-cli-core';
+import { createPolicyEngineConfig } from './policy.js';
+import type { Settings } from './settings.js';
+
+describe('Policy Engine Integration Tests', () => {
+  describe('Policy configuration produces valid PolicyEngine config', () => {
+    it('should create a working PolicyEngine from basic settings', () => {
+      const settings: Settings = {
+        tools: {
+          allowed: ['run_shell_command'],
+          exclude: ['write_file'],
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Allowed tool should be allowed
+      expect(engine.check({ name: 'run_shell_command' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+
+      // Excluded tool should be denied
+      expect(engine.check({ name: 'write_file' })).toBe(PolicyDecision.DENY);
+
+      // Other write tools should ask user
+      expect(engine.check({ name: 'replace' })).toBe(PolicyDecision.ASK_USER);
+
+      // Unknown tools should use default
+      expect(engine.check({ name: 'unknown_tool' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+    });
+
+    it('should handle MCP server wildcard patterns correctly', () => {
+      const settings: Settings = {
+        mcp: {
+          allowed: ['allowed-server'],
+          excluded: ['blocked-server'],
+        },
+        mcpServers: {
+          'trusted-server': {
+            command: 'node',
+            args: ['server.js'],
+            trust: true,
+          },
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Tools from allowed server should be allowed
+      expect(engine.check({ name: 'allowed-server__tool1' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'allowed-server__another_tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+
+      // Tools from trusted server should be allowed
+      expect(engine.check({ name: 'trusted-server__tool1' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'trusted-server__special_tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+
+      // Tools from blocked server should be denied
+      expect(engine.check({ name: 'blocked-server__tool1' })).toBe(
+        PolicyDecision.DENY,
+      );
+      expect(engine.check({ name: 'blocked-server__any_tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+
+      // Tools from unknown servers should use default
+      expect(engine.check({ name: 'unknown-server__tool' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+    });
+
+    it('should correctly prioritize specific tool rules over MCP server wildcards', () => {
+      const settings: Settings = {
+        mcp: {
+          allowed: ['my-server'],
+        },
+        tools: {
+          exclude: ['my-server__dangerous-tool'],
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Server is allowed, but specific tool is excluded
+      expect(engine.check({ name: 'my-server__safe-tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'my-server__dangerous-tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+    });
+
+    it('should handle complex mixed configurations', () => {
+      const settings: Settings = {
+        tools: {
+          autoAccept: true, // Allows read-only tools
+          allowed: ['custom-tool', 'my-server__special-tool'],
+          exclude: ['glob', 'dangerous-tool'],
+        },
+        mcp: {
+          allowed: ['allowed-server'],
+          excluded: ['blocked-server'],
+        },
+        mcpServers: {
+          'trusted-server': {
+            command: 'node',
+            args: ['server.js'],
+            trust: true,
+          },
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Read-only tools should be allowed (autoAccept)
+      expect(engine.check({ name: 'read_file' })).toBe(PolicyDecision.ALLOW);
+      expect(engine.check({ name: 'list_directory' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+
+      // But glob is explicitly excluded, so it should be denied
+      expect(engine.check({ name: 'glob' })).toBe(PolicyDecision.DENY);
+
+      // Replace should ask user (normal write tool behavior)
+      expect(engine.check({ name: 'replace' })).toBe(PolicyDecision.ASK_USER);
+
+      // Explicitly allowed tools
+      expect(engine.check({ name: 'custom-tool' })).toBe(PolicyDecision.ALLOW);
+      expect(engine.check({ name: 'my-server__special-tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+
+      // MCP server tools
+      expect(engine.check({ name: 'allowed-server__tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'trusted-server__tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'blocked-server__tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+
+      // Write tools should ask by default
+      expect(engine.check({ name: 'write_file' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+    });
+
+    it('should handle YOLO mode correctly', () => {
+      const settings: Settings = {
+        tools: {
+          exclude: ['dangerous-tool'], // Even in YOLO, excludes should be respected
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.YOLO);
+      const engine = new PolicyEngine(config);
+
+      // Most tools should be allowed in YOLO mode
+      expect(engine.check({ name: 'run_shell_command' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'write_file' })).toBe(PolicyDecision.ALLOW);
+      expect(engine.check({ name: 'unknown_tool' })).toBe(PolicyDecision.ALLOW);
+
+      // But explicitly excluded tools should still be denied
+      expect(engine.check({ name: 'dangerous-tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+    });
+
+    it('should handle AUTO_EDIT mode correctly', () => {
+      const settings: Settings = {};
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.AUTO_EDIT);
+      const engine = new PolicyEngine(config);
+
+      // Edit tool should be allowed (EditTool.Name = 'replace')
+      expect(engine.check({ name: 'replace' })).toBe(PolicyDecision.ALLOW);
+
+      // Other tools should follow normal rules
+      expect(engine.check({ name: 'run_shell_command' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+      expect(engine.check({ name: 'write_file' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+    });
+
+    it('should verify priority ordering works correctly in practice', () => {
+      const settings: Settings = {
+        tools: {
+          autoAccept: true, // Priority 50
+          allowed: ['specific-tool'], // Priority 100
+          exclude: ['blocked-tool'], // Priority 200
+        },
+        mcp: {
+          allowed: ['mcp-server'], // Priority 85
+          excluded: ['blocked-server'], // Priority 195
+        },
+        mcpServers: {
+          'trusted-server': {
+            command: 'node',
+            args: ['server.js'],
+            trust: true, // Priority 90
+          },
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Test that priorities are applied correctly
+      const rules = config.rules || [];
+
+      // Find rules and verify their priorities
+      const blockedToolRule = rules.find((r) => r.toolName === 'blocked-tool');
+      expect(blockedToolRule?.priority).toBe(200);
+
+      const blockedServerRule = rules.find(
+        (r) => r.toolName === 'blocked-server__*',
+      );
+      expect(blockedServerRule?.priority).toBe(195);
+
+      const specificToolRule = rules.find(
+        (r) => r.toolName === 'specific-tool',
+      );
+      expect(specificToolRule?.priority).toBe(100);
+
+      const trustedServerRule = rules.find(
+        (r) => r.toolName === 'trusted-server__*',
+      );
+      expect(trustedServerRule?.priority).toBe(90);
+
+      const mcpServerRule = rules.find((r) => r.toolName === 'mcp-server__*');
+      expect(mcpServerRule?.priority).toBe(85);
+
+      const readOnlyToolRule = rules.find((r) => r.toolName === 'glob');
+      expect(readOnlyToolRule?.priority).toBe(50);
+
+      // Verify the engine applies these priorities correctly
+      expect(engine.check({ name: 'blocked-tool' })).toBe(PolicyDecision.DENY);
+      expect(engine.check({ name: 'blocked-server__any' })).toBe(
+        PolicyDecision.DENY,
+      );
+      expect(engine.check({ name: 'specific-tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'trusted-server__any' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'mcp-server__any' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'glob' })).toBe(PolicyDecision.ALLOW);
+    });
+
+    it('should handle edge case: MCP server with both trust and exclusion', () => {
+      const settings: Settings = {
+        mcpServers: {
+          'conflicted-server': {
+            command: 'node',
+            args: ['server.js'],
+            trust: true, // Priority 90 - ALLOW
+          },
+        },
+        mcp: {
+          excluded: ['conflicted-server'], // Priority 195 - DENY
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Exclusion (195) should win over trust (90)
+      expect(engine.check({ name: 'conflicted-server__tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+    });
+
+    it('should handle edge case: specific tool allowed but server excluded', () => {
+      const settings: Settings = {
+        mcp: {
+          excluded: ['my-server'], // Priority 195 - DENY
+        },
+        tools: {
+          allowed: ['my-server__special-tool'], // Priority 100 - ALLOW
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Server exclusion (195) wins over specific tool allow (100)
+      // This might be counterintuitive but follows the priority system
+      expect(engine.check({ name: 'my-server__special-tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+      expect(engine.check({ name: 'my-server__other-tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+    });
+
+    it('should verify non-interactive mode transformation', () => {
+      const settings: Settings = {};
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      // Enable non-interactive mode
+      const engineConfig = { ...config, nonInteractive: true };
+      const engine = new PolicyEngine(engineConfig);
+
+      // ASK_USER should become DENY in non-interactive mode
+      expect(engine.check({ name: 'unknown_tool' })).toBe(PolicyDecision.DENY);
+      expect(engine.check({ name: 'run_shell_command' })).toBe(
+        PolicyDecision.DENY,
+      );
+    });
+
+    it('should handle empty settings gracefully', () => {
+      const settings: Settings = {};
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const engine = new PolicyEngine(config);
+
+      // Should have default rules for write tools
+      expect(engine.check({ name: 'write_file' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+      expect(engine.check({ name: 'replace' })).toBe(PolicyDecision.ASK_USER);
+
+      // Unknown tools should use default
+      expect(engine.check({ name: 'unknown' })).toBe(PolicyDecision.ASK_USER);
+    });
+
+    it('should verify rules are created with correct priorities', () => {
+      const settings: Settings = {
+        tools: {
+          autoAccept: true,
+          allowed: ['tool1', 'tool2'],
+          exclude: ['tool3'],
+        },
+        mcp: {
+          allowed: ['server1'],
+          excluded: ['server2'],
+        },
+      };
+
+      const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+      const rules = config.rules || [];
+
+      // Verify each rule has the expected priority
+      const tool3Rule = rules.find((r) => r.toolName === 'tool3');
+      expect(tool3Rule?.priority).toBe(200); // Excluded tools
+
+      const server2Rule = rules.find((r) => r.toolName === 'server2__*');
+      expect(server2Rule?.priority).toBe(195); // Excluded servers
+
+      const tool1Rule = rules.find((r) => r.toolName === 'tool1');
+      expect(tool1Rule?.priority).toBe(100); // Allowed tools
+
+      const server1Rule = rules.find((r) => r.toolName === 'server1__*');
+      expect(server1Rule?.priority).toBe(85); // Allowed servers
+
+      const globRule = rules.find((r) => r.toolName === 'glob');
+      expect(globRule?.priority).toBe(50); // Auto-accept read-only
+
+      // The PolicyEngine will sort these by priority when it's created
+      const engine = new PolicyEngine(config);
+      const sortedRules = engine.getRules();
+
+      // Verify the engine sorted them correctly
+      for (let i = 1; i < sortedRules.length; i++) {
+        const prevPriority = sortedRules[i - 1].priority ?? 0;
+        const currPriority = sortedRules[i].priority ?? 0;
+        expect(prevPriority).toBeGreaterThanOrEqual(currPriority);
+      }
+    });
+  });
+});
diff --git a/packages/cli/src/config/policy.test.ts b/packages/cli/src/config/policy.test.ts
new file mode 100644
index 0000000000..38537852c4
--- /dev/null
+++ b/packages/cli/src/config/policy.test.ts
@@ -0,0 +1,477 @@
+/**
+ * @license
+ * Copyright 2025 Google LLC
+ * SPDX-License-Identifier: Apache-2.0
+ */
+
+import { describe, it, expect } from 'vitest';
+import { createPolicyEngineConfig } from './policy.js';
+import type { Settings } from './settings.js';
+import { ApprovalMode, PolicyDecision } from '@google/gemini-cli-core';
+
+describe('createPolicyEngineConfig', () => {
+  it('should return ASK_USER for all tools by default', () => {
+    const settings: Settings = {};
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    expect(config.defaultDecision).toBe(PolicyDecision.ASK_USER);
+    expect(config.rules).toEqual([
+      { toolName: 'replace', decision: 'ask_user', priority: 10 },
+      { toolName: 'save_memory', decision: 'ask_user', priority: 10 },
+      { toolName: 'run_shell_command', decision: 'ask_user', priority: 10 },
+      { toolName: 'write_file', decision: 'ask_user', priority: 10 },
+      { toolName: 'web_fetch', decision: 'ask_user', priority: 10 },
+    ]);
+  });
+
+  it('should allow tools in tools.allowed', () => {
+    const settings: Settings = {
+      tools: { allowed: ['run_shell_command'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    const rule = config.rules?.find(
+      (r) =>
+        r.toolName === 'run_shell_command' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    expect(rule).toBeDefined();
+    expect(rule?.priority).toBe(100);
+  });
+
+  it('should deny tools in tools.exclude', () => {
+    const settings: Settings = {
+      tools: { exclude: ['run_shell_command'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    const rule = config.rules?.find(
+      (r) =>
+        r.toolName === 'run_shell_command' &&
+        r.decision === PolicyDecision.DENY,
+    );
+    expect(rule).toBeDefined();
+    expect(rule?.priority).toBe(200);
+  });
+
+  it('should allow tools from allowed MCP servers', () => {
+    const settings: Settings = {
+      mcp: { allowed: ['my-server'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    const rule = config.rules?.find(
+      (r) =>
+        r.toolName === 'my-server__*' && r.decision === PolicyDecision.ALLOW,
+    );
+    expect(rule).toBeDefined();
+    expect(rule?.priority).toBe(85);
+  });
+
+  it('should deny tools from excluded MCP servers', () => {
+    const settings: Settings = {
+      mcp: { excluded: ['my-server'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    const rule = config.rules?.find(
+      (r) =>
+        r.toolName === 'my-server__*' && r.decision === PolicyDecision.DENY,
+    );
+    expect(rule).toBeDefined();
+    expect(rule?.priority).toBe(195);
+  });
+
+  it('should allow tools from trusted MCP servers', () => {
+    const settings: Settings = {
+      mcpServers: {
+        'trusted-server': {
+          command: 'node',
+          args: ['server.js'],
+          trust: true,
+        },
+        'untrusted-server': {
+          command: 'node',
+          args: ['server.js'],
+          trust: false,
+        },
+      },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    const trustedRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'trusted-server__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    expect(trustedRule).toBeDefined();
+    expect(trustedRule?.priority).toBe(90);
+
+    // Untrusted server should not have an allow rule
+    const untrustedRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'untrusted-server__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    expect(untrustedRule).toBeUndefined();
+  });
+
+  it('should handle multiple MCP server configurations together', () => {
+    const settings: Settings = {
+      mcp: {
+        allowed: ['allowed-server'],
+        excluded: ['excluded-server'],
+      },
+      mcpServers: {
+        'trusted-server': {
+          command: 'node',
+          args: ['server.js'],
+          trust: true,
+        },
+      },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    // Check allowed server
+    const allowedRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'allowed-server__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    expect(allowedRule).toBeDefined();
+    expect(allowedRule?.priority).toBe(85);
+
+    // Check trusted server
+    const trustedRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'trusted-server__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    expect(trustedRule).toBeDefined();
+    expect(trustedRule?.priority).toBe(90);
+
+    // Check excluded server
+    const excludedRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'excluded-server__*' &&
+        r.decision === PolicyDecision.DENY,
+    );
+    expect(excludedRule).toBeDefined();
+    expect(excludedRule?.priority).toBe(195);
+  });
+
+  it('should allow read-only tools if autoAccept is true', () => {
+    const settings: Settings = {
+      tools: { autoAccept: true },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    const rule = config.rules?.find(
+      (r) => r.toolName === 'glob' && r.decision === PolicyDecision.ALLOW,
+    );
+    expect(rule).toBeDefined();
+    expect(rule?.priority).toBe(50);
+  });
+
+  it('should allow all tools in YOLO mode', () => {
+    const settings: Settings = {};
+    const config = createPolicyEngineConfig(settings, ApprovalMode.YOLO);
+    const rule = config.rules?.find(
+      (r) => r.decision === PolicyDecision.ALLOW && r.priority === 0,
+    );
+    expect(rule).toBeDefined();
+  });
+
+  it('should allow edit tool in AUTO_EDIT mode', () => {
+    const settings: Settings = {};
+    const config = createPolicyEngineConfig(settings, ApprovalMode.AUTO_EDIT);
+    const rule = config.rules?.find(
+      (r) => r.toolName === 'replace' && r.decision === PolicyDecision.ALLOW,
+    );
+    expect(rule).toBeDefined();
+    expect(rule?.priority).toBe(15);
+  });
+
+  it('should prioritize exclude over allow', () => {
+    const settings: Settings = {
+      tools: { allowed: ['run_shell_command'], exclude: ['run_shell_command'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+    const denyRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'run_shell_command' &&
+        r.decision === PolicyDecision.DENY,
+    );
+    const allowRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'run_shell_command' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    expect(denyRule).toBeDefined();
+    expect(allowRule).toBeDefined();
+    expect(denyRule!.priority).toBeGreaterThan(allowRule!.priority!);
+  });
+
+  it('should prioritize specific tool allows over MCP server excludes', () => {
+    const settings: Settings = {
+      mcp: { excluded: ['my-server'] },
+      tools: { allowed: ['my-server__specific-tool'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    const serverDenyRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'my-server__*' && r.decision === PolicyDecision.DENY,
+    );
+    const toolAllowRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'my-server__specific-tool' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+
+    expect(serverDenyRule).toBeDefined();
+    expect(serverDenyRule?.priority).toBe(195);
+    expect(toolAllowRule).toBeDefined();
+    expect(toolAllowRule?.priority).toBe(100);
+
+    // Tool allow (100) has lower priority than server deny (195),
+    // so server deny wins - this might be counterintuitive
+  });
+
+  it('should prioritize specific tool excludes over MCP server allows', () => {
+    const settings: Settings = {
+      mcp: { allowed: ['my-server'] },
+      mcpServers: {
+        'my-server': {
+          command: 'node',
+          args: ['server.js'],
+          trust: true,
+        },
+      },
+      tools: { exclude: ['my-server__dangerous-tool'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    const serverAllowRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'my-server__*' && r.decision === PolicyDecision.ALLOW,
+    );
+    const toolDenyRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'my-server__dangerous-tool' &&
+        r.decision === PolicyDecision.DENY,
+    );
+
+    expect(serverAllowRule).toBeDefined();
+    expect(toolDenyRule).toBeDefined();
+    expect(toolDenyRule!.priority).toBeGreaterThan(serverAllowRule!.priority!);
+  });
+
+  it('should handle complex priority scenarios correctly', () => {
+    const settings: Settings = {
+      tools: {
+        autoAccept: true, // Priority 50 for read-only tools
+        allowed: ['my-server__tool1', 'other-tool'], // Priority 100
+        exclude: ['my-server__tool2', 'glob'], // Priority 200
+      },
+      mcp: {
+        allowed: ['allowed-server'], // Priority 85
+        excluded: ['excluded-server'], // Priority 195
+      },
+      mcpServers: {
+        'trusted-server': {
+          command: 'node',
+          args: ['server.js'],
+          trust: true, // Priority 90
+        },
+      },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    // Verify glob is denied even though autoAccept would allow it
+    const globDenyRule = config.rules?.find(
+      (r) => r.toolName === 'glob' && r.decision === PolicyDecision.DENY,
+    );
+    const globAllowRule = config.rules?.find(
+      (r) => r.toolName === 'glob' && r.decision === PolicyDecision.ALLOW,
+    );
+    expect(globDenyRule).toBeDefined();
+    expect(globAllowRule).toBeDefined();
+    expect(globDenyRule!.priority).toBe(200);
+    expect(globAllowRule!.priority).toBe(50);
+
+    // Verify all priority levels are correct
+    const priorities = config.rules
+      ?.map((r) => ({
+        tool: r.toolName,
+        decision: r.decision,
+        priority: r.priority,
+      }))
+      .sort((a, b) => (b.priority ?? 0) - (a.priority ?? 0));
+
+    // Check that the highest priority items are the excludes
+    const highestPriorityExcludes = priorities?.filter(
+      (p) => p.priority === 200,
+    );
+    expect(
+      highestPriorityExcludes?.every((p) => p.decision === PolicyDecision.DENY),
+    ).toBe(true);
+  });
+
+  it('should handle MCP servers with undefined trust property', () => {
+    const settings: Settings = {
+      mcpServers: {
+        'no-trust-property': {
+          command: 'node',
+          args: ['server.js'],
+          // trust property is undefined/missing
+        },
+        'explicit-false': {
+          command: 'node',
+          args: ['server.js'],
+          trust: false,
+        },
+      },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    // Neither server should have an allow rule
+    const noTrustRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'no-trust-property__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    const explicitFalseRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'explicit-false__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+
+    expect(noTrustRule).toBeUndefined();
+    expect(explicitFalseRule).toBeUndefined();
+  });
+
+  it('should not add write tool rules in YOLO mode', () => {
+    const settings: Settings = {
+      tools: { exclude: ['dangerous-tool'] },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.YOLO);
+
+    // Should have the wildcard allow rule with priority 0
+    const wildcardRule = config.rules?.find(
+      (r) =>
+        !r.toolName && r.decision === PolicyDecision.ALLOW && r.priority === 0,
+    );
+    expect(wildcardRule).toBeDefined();
+
+    // Should NOT have any write tool rules (which would have priority 10)
+    const writeToolRules = config.rules?.filter(
+      (r) =>
+        [
+          'replace',
+          'save_memory',
+          'run_shell_command',
+          'write_file',
+          'web_fetch',
+        ].includes(r.toolName || '') && r.decision === PolicyDecision.ASK_USER,
+    );
+    expect(writeToolRules).toHaveLength(0);
+
+    // Should still have the exclude rule
+    const excludeRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'dangerous-tool' && r.decision === PolicyDecision.DENY,
+    );
+    expect(excludeRule).toBeDefined();
+    expect(excludeRule?.priority).toBe(200);
+  });
+
+  it('should handle combination of trusted server and excluded server for same name', () => {
+    const settings: Settings = {
+      mcpServers: {
+        'conflicted-server': {
+          command: 'node',
+          args: ['server.js'],
+          trust: true, // Priority 90
+        },
+      },
+      mcp: {
+        excluded: ['conflicted-server'], // Priority 195
+      },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    // Both rules should exist
+    const trustRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'conflicted-server__*' &&
+        r.decision === PolicyDecision.ALLOW,
+    );
+    const excludeRule = config.rules?.find(
+      (r) =>
+        r.toolName === 'conflicted-server__*' &&
+        r.decision === PolicyDecision.DENY,
+    );
+
+    expect(trustRule).toBeDefined();
+    expect(trustRule?.priority).toBe(90);
+    expect(excludeRule).toBeDefined();
+    expect(excludeRule?.priority).toBe(195);
+
+    // Exclude (195) should win over trust (90) when evaluated
+  });
+
+  it('should create all read-only tool rules when autoAccept is enabled', () => {
+    const settings: Settings = {
+      tools: { autoAccept: true },
+    };
+    const config = createPolicyEngineConfig(settings, ApprovalMode.DEFAULT);
+
+    // All read-only tools should have allow rules
+    const readOnlyTools = [
+      'glob',
+      'search_file_content',
+      'list_directory',
+      'read_file',
+      'read_many_files',
+    ];
+    for (const tool of readOnlyTools) {
+      const rule = config.rules?.find(
+        (r) => r.toolName === tool && r.decision === PolicyDecision.ALLOW,
+      );
+      expect(rule).toBeDefined();
+      expect(rule?.priority).toBe(50);
+    }
+  });
+
+  it('should handle all approval modes correctly', () => {
+    const settings: Settings = {};
+
+    // Test DEFAULT mode
+    const defaultConfig = createPolicyEngineConfig(
+      settings,
+      ApprovalMode.DEFAULT,
+    );
+    expect(defaultConfig.defaultDecision).toBe(PolicyDecision.ASK_USER);
+    expect(
+      defaultConfig.rules?.find(
+        (r) => !r.toolName && r.decision === PolicyDecision.ALLOW,
+      ),
+    ).toBeUndefined();
+
+    // Test YOLO mode
+    const yoloConfig = createPolicyEngineConfig(settings, ApprovalMode.YOLO);
+    expect(yoloConfig.defaultDecision).toBe(PolicyDecision.ASK_USER);
+    const yoloWildcard = yoloConfig.rules?.find(
+      (r) => !r.toolName && r.decision === PolicyDecision.ALLOW,
+    );
+    expect(yoloWildcard).toBeDefined();
+    expect(yoloWildcard?.priority).toBe(0);
+
+    // Test AUTO_EDIT mode
+    const autoEditConfig = createPolicyEngineConfig(
+      settings,
+      ApprovalMode.AUTO_EDIT,
+    );
+    expect(autoEditConfig.defaultDecision).toBe(PolicyDecision.ASK_USER);
+    const editRule = autoEditConfig.rules?.find(
+      (r) => r.toolName === 'replace' && r.decision === PolicyDecision.ALLOW,
+    );
+    expect(editRule).toBeDefined();
+    expect(editRule?.priority).toBe(15);
+  });
+});
diff --git a/packages/cli/src/config/policy.ts b/packages/cli/src/config/policy.ts
new file mode 100644
index 0000000000..9ef676460e
--- /dev/null
+++ b/packages/cli/src/config/policy.ts
@@ -0,0 +1,183 @@
+/**
+ * @license
+ * Copyright 2025 Google LLC
+ * SPDX-License-Identifier: Apache-2.0
+ */
+
+import {
+  type PolicyEngineConfig,
+  PolicyDecision,
+  type PolicyRule,
+  ApprovalMode,
+  // Read-only tools
+  GlobTool,
+  GrepTool,
+  LSTool,
+  ReadFileTool,
+  ReadManyFilesTool,
+  RipGrepTool,
+  // Write tools
+  EditTool,
+  MemoryTool,
+  ShellTool,
+  WriteFileTool,
+  WebFetchTool,
+  WebSearchTool,
+} from '@google/gemini-cli-core';
+import type { Settings } from './settings.js';
+
+// READ_ONLY_TOOLS is a list of built-in tools that do not modify the user's
+// files or system state.
+const READ_ONLY_TOOLS = new Set([
+  GlobTool.Name,
+  GrepTool.Name,
+  RipGrepTool.Name,
+  LSTool.Name,
+  ReadFileTool.Name,
+  ReadManyFilesTool.Name,
+  WebSearchTool.Name,
+]);
+
+// WRITE_TOOLS is a list of built-in tools that can modify the user's files or
+// system state. These tools have a shouldConfirmExecute method.
+// We are keeping this here for visibility and to maintain backwards compatibility
+// with the existing tool permissions system. Eventually we'll remove this and
+// any tool that isn't read only will require a confirmation unless altered by
+// config and policy.
+const WRITE_TOOLS = new Set([
+  EditTool.Name,
+  MemoryTool.Name,
+  ShellTool.Name,
+  WriteFileTool.Name,
+  WebFetchTool.Name,
+]);
+
+export function createPolicyEngineConfig(
+  settings: Settings,
+  approvalMode: ApprovalMode,
+): PolicyEngineConfig {
+  const rules: PolicyRule[] = [];
+
+  // Priority system for policy rules:
+  // - Higher priority numbers win over lower priority numbers
+  // - When multiple rules match, the highest priority rule is applied
+  // - Rules are evaluated in order of priority (highest first)
+  //
+  // Priority levels used in this configuration:
+  //   0: Default allow-all (YOLO mode only)
+  //   10: Write tools default to ASK_USER
+  //   50: Auto-accept read-only tools
+  //   85: MCP servers allowed list
+  //   90: MCP servers with trust=true
+  //   100: Explicitly allowed individual tools
+  //   195: Explicitly excluded MCP servers
+  //   200: Explicitly excluded individual tools (highest priority)
+
+  // MCP servers that are explicitly allowed in settings.mcp.allowed
+  // Priority: 85 (lower than trusted servers)
+  if (settings.mcp?.allowed) {
+    for (const serverName of settings.mcp.allowed) {
+      rules.push({
+        toolName: `${serverName}__*`,
+        decision: PolicyDecision.ALLOW,
+        priority: 85,
+      });
+    }
+  }
+
+  // MCP servers that are trusted in the settings.
+  // Priority: 90 (higher than general allowed servers but lower than explicit tool allows)
+  if (settings.mcpServers) {
+    for (const [serverName, serverConfig] of Object.entries(
+      settings.mcpServers,
+    )) {
+      if (serverConfig.trust) {
+        // Trust all tools from this MCP server
+        // Using pattern matching for MCP tool names which are formatted as "serverName__toolName"
+        rules.push({
+          toolName: `${serverName}__*`,
+          decision: PolicyDecision.ALLOW,
+          priority: 90,
+        });
+      }
+    }
+  }
+
+  // Tools that are explicitly allowed in the settings.
+  // Priority: 100
+  if (settings.tools?.allowed) {
+    for (const tool of settings.tools.allowed) {
+      rules.push({
+        toolName: tool,
+        decision: PolicyDecision.ALLOW,
+        priority: 100,
+      });
+    }
+  }
+
+  // Tools that are explicitly excluded in the settings.
+  // Priority: 200
+  if (settings.tools?.exclude) {
+    for (const tool of settings.tools.exclude) {
+      rules.push({
+        toolName: tool,
+        decision: PolicyDecision.DENY,
+        priority: 200,
+      });
+    }
+  }
+
+  // MCP servers that are explicitly excluded in settings.mcp.excluded
+  // Priority: 195 (high priority to block servers)
+  if (settings.mcp?.excluded) {
+    for (const serverName of settings.mcp.excluded) {
+      rules.push({
+        toolName: `${serverName}__*`,
+        decision: PolicyDecision.DENY,
+        priority: 195,
+      });
+    }
+  }
+
+  // If auto-accept is enabled, allow all read-only tools.
+  // Priority: 50
+  if (settings.tools?.autoAccept) {
+    for (const tool of READ_ONLY_TOOLS) {
+      rules.push({
+        toolName: tool,
+        decision: PolicyDecision.ALLOW,
+        priority: 50,
+      });
+    }
+  }
+
+  // Only add write tool rules if not in YOLO mode
+  // In YOLO mode, the wildcard ALLOW rule handles everything
+  if (approvalMode !== ApprovalMode.YOLO) {
+    for (const tool of WRITE_TOOLS) {
+      rules.push({
+        toolName: tool,
+        decision: PolicyDecision.ASK_USER,
+        priority: 10,
+      });
+    }
+  }
+
+  if (approvalMode === ApprovalMode.YOLO) {
+    rules.push({
+      decision: PolicyDecision.ALLOW,
+      priority: 0, // Lowest priority - catches everything not explicitly configured
+    });
+  } else if (approvalMode === ApprovalMode.AUTO_EDIT) {
+    rules.push({
+      toolName: EditTool.Name,
+      decision: PolicyDecision.ALLOW,
+      priority: 15, // Higher than write tools (10) to override ASK_USER
+    });
+  }
+
+  return {
+    rules,
+    defaultDecision: PolicyDecision.ASK_USER,
+  };
+}
diff --git a/packages/core/src/index.ts b/packages/core/src/index.ts
index 4a640f3f2d..1d9dc71668 100644
--- a/packages/core/src/index.ts
+++ b/packages/core/src/index.ts
@@ -8,6 +8,8 @@
 export * from './config/config.js';
 export * from './output/types.js';
 export * from './output/json-formatter.js';
+export * from './policy/types.js';
+export * from './policy/policy-engine.js';
 
 // Export Core Logic
 export * from './core/client.js';
diff --git a/packages/core/src/policy/policy-engine.test.ts b/packages/core/src/policy/policy-engine.test.ts
index 51f222b2e4..03caf2524e 100644
--- a/packages/core/src/policy/policy-engine.test.ts
+++ b/packages/core/src/policy/policy-engine.test.ts
@@ -217,6 +217,75 @@ describe('PolicyEngine', () => {
     });
   });
 
+  describe('MCP server wildcard patterns', () => {
+    it('should match MCP server wildcard patterns', () => {
+      const rules: PolicyRule[] = [
+        {
+          toolName: 'my-server__*',
+          decision: PolicyDecision.ALLOW,
+          priority: 10,
+        },
+        {
+          toolName: 'blocked-server__*',
+          decision: PolicyDecision.DENY,
+          priority: 20,
+        },
+      ];
+
+      engine = new PolicyEngine({ rules });
+
+      // Should match my-server tools
+      expect(engine.check({ name: 'my-server__tool1' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+      expect(engine.check({ name: 'my-server__another_tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+
+      // Should match blocked-server tools
+      expect(engine.check({ name: 'blocked-server__tool1' })).toBe(
+        PolicyDecision.DENY,
+      );
+      expect(engine.check({ name: 'blocked-server__dangerous' })).toBe(
+        PolicyDecision.DENY,
+      );
+
+      // Should not match other patterns
+      expect(engine.check({ name: 'other-server__tool' })).toBe(
+        PolicyDecision.ASK_USER,
+      );
+      expect(engine.check({ name: 'my-server-tool' })).toBe(
+        PolicyDecision.ASK_USER,
+      ); // No __ separator
+      expect(engine.check({ name: 'my-server' })).toBe(PolicyDecision.ASK_USER); // No tool name
+    });
+
+    it('should prioritize specific tool rules over server wildcards', () => {
+      const rules: PolicyRule[] = [
+        {
+          toolName: 'my-server__*',
+          decision: PolicyDecision.ALLOW,
+          priority: 10,
+        },
+        {
+          toolName: 'my-server__dangerous-tool',
+          decision: PolicyDecision.DENY,
+          priority: 20,
+        },
+      ];
+
+      engine = new PolicyEngine({ rules });
+
+      // Specific tool deny should override server allow
+      expect(engine.check({ name: 'my-server__dangerous-tool' })).toBe(
+        PolicyDecision.DENY,
+      );
+      expect(engine.check({ name: 'my-server__safe-tool' })).toBe(
+        PolicyDecision.ALLOW,
+      );
+    });
+  });
+
   describe('complex scenarios', () => {
     it('should handle multiple matching rules with different priorities', () => {
       const rules: PolicyRule[] = [
diff --git a/packages/core/src/policy/policy-engine.ts b/packages/core/src/policy/policy-engine.ts
index e1006ffdef..cf4388c09d 100644
--- a/packages/core/src/policy/policy-engine.ts
+++ b/packages/core/src/policy/policy-engine.ts
@@ -18,8 +18,16 @@ function ruleMatches(
   stringifiedArgs: string | undefined,
 ): boolean {
   // Check tool name if specified
-  if (rule.toolName && toolCall.name !== rule.toolName) {
-    return false;
+  if (rule.toolName) {
+    // Support wildcard patterns: "serverName__*" matches "serverName__anyTool"
+    if (rule.toolName.endsWith('__*')) {
+      const prefix = rule.toolName.slice(0, -3); // Remove "__*"
+      if (!toolCall.name || !toolCall.name.startsWith(prefix + '__')) {
+        return false;
+      }
+    } else if (toolCall.name !== rule.toolName) {
+      return false;
+    }
   }
 
   // Check args pattern if specified