Claude model in Agent mode completely non-functional in VS Code Copilot Chat - fails on all requests including simple messages

When using Claude as the selected model in Agent mode in GitHub Copilot Chat (VS Code extension), requests that trigger tool calls fail with a 400 error indicating invalid JSON format in tool call arguments. Ask mode and other models both in ask and agent modes (GPT-5, Gemini 2.5) work without issues on identical requests.
```
`Sorry, your request failed. Please try again.

Copilot Request id: 0a0a4e31-bc20-4290-982c-db7fea498b24

GH Request Id: C251:15F35E:532F5C6:5FEEC0E:6931EDD2

Reason: Request Failed: 400 {"error":{"message":"Invalid JSON format in tool call arguments","code":"invalid_tool_call_format"}}
````

tried to sign off - sign in, checked the license ( business Copilot seat), reinstalled copilot extension, updated vs code - nothing seems to help.