diff --git a/CHANGELOG.md b/CHANGELOG.md
index 4a8b53189d..a5b01de39d 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -40,6 +40,7 @@
 - Fix `reanalyze` reporting record labels reached through a record coercion as dead. The typed tree now keeps the source type of a coercion, so reading a label on the target counts as reading the source label of the same name. https://github.com/rescript-lang/rescript/issues/8643
 - Fix GenType path resolution hanging on Windows when project paths use different short and canonical forms. https://github.com/rescript-lang/rescript/pull/8639
 - Allow `rescript clean` to remove generated files when the source module graph is invalid. https://github.com/rescript-lang/rescript/pull/8640
+- Keep watch mode running after full rebuild initialization fails so it can recover after a later valid change. https://github.com/rescript-lang/rescript/pull/8641
 - Fix constant folding of pattern matches on unboxed variants whose payload overlaps a literal constructor, so inlined calls agree with runtime matching. Reject multi-argument unboxed constructors instead of crashing. https://github.com/rescript-lang/rescript/pull/8631
 - Fix escaped backticks and interpolation openers in backquoted `%raw`, `%ffi`, and `%re` payloads leaking into emitted JavaScript. https://github.com/rescript-lang/rescript/pull/8630
 - Fix the side-effect analysis treating bigint exponentiation and bounds-checked array and string reads as pure, which let dead-code elimination drop an unused one that throws: `let _ = 2n ** -1n` no longer raised. https://github.com/rescript-lang/rescript/pull/8617
diff --git a/rewatch/src/watcher.rs b/rewatch/src/watcher.rs
index e435c75785..9bb738a77a 100644
--- a/rewatch/src/watcher.rs
+++ b/rewatch/src/watcher.rs
@@ -486,7 +486,7 @@ async fn async_watch(
                 let timing_total = Instant::now();
                 // Reinitialization runs cleanup for previous build artifacts, so full rebuilds need
                 // the same build lock boundary as regular `rescript build`.
-                let result = build::with_build_lock(path, || {
+                let result = build::with_build_lock(path, || -> Result<_> {
                     let mut next_build_state = build::initialize_build(
                         None,
                         filter,
@@ -498,7 +498,7 @@ async fn async_watch(
                         features.clone(),
                         SourceMapCommand::Watch,
                     )
-                    .expect("Could not initialize build");
+                    .context("Could not initialize build")?;
 
                     // Full rebuilds can be triggered by editor atomic saves that surface as rename events.
                     // Preserve warning state for unchanged modules so their warnings are re-emitted after the
@@ -521,10 +521,10 @@ async fn async_watch(
                         plain_output,
                     );
                     build::write_build_ninja(&build_state);
-                    result
+                    Ok(result)
                 });
                 match result {
-                    Ok(result) => {
+                    Ok(Ok(result)) => {
                         finish_successful_watch_compile(
                             after_build.clone(),
                             timing_total,
@@ -535,7 +535,13 @@ async fn async_watch(
                             result,
                         );
                     }
-                    Err(_) => {
+                    Ok(Err(_)) => {
+                        if should_clear_screen(clear_screen, show_progress, plain_output) {
+                            print_build_failed_footer();
+                        }
+                    }
+                    Err(error) => {
+                        eprintln!("{error:#}");
                         if should_clear_screen(clear_screen, show_progress, plain_output) {
                             print_build_failed_footer();
                         }
diff --git a/rewatch/tests/suite.sh b/rewatch/tests/suite.sh
index a38d72ee57..135c18372a 100755
--- a/rewatch/tests/suite.sh
+++ b/rewatch/tests/suite.sh
@@ -147,6 +147,7 @@ fi
 ./watch/04-watch-config-change.sh &&
 ./watch/05-watch-ignores-non-source.sh &&
 ./watch/06-watch-missing-source-folder.sh &&
+./watch/07-watch-recovers-from-invalid-config.sh &&
 
 # Lock tests
 ./lock/01-lock-when-watching.sh &&
diff --git a/rewatch/tests/watch/07-watch-recovers-from-invalid-config.sh b/rewatch/tests/watch/07-watch-recovers-from-invalid-config.sh
new file mode 100755
index 0000000000..775e54e0be
--- /dev/null
+++ b/rewatch/tests/watch/07-watch-recovers-from-invalid-config.sh
@@ -0,0 +1,103 @@
+#!/bin/bash
+cd $(dirname $0)
+source "../utils.sh"
+cd ../../testrepo
+
+bold "Test: Watcher recovers from an invalid config change"
+
+wait_for_pattern() {
+  local file="$1" pattern="$2" timeout="${3:-30}"
+  while [ "$timeout" -gt 0 ]; do
+    grep -q "$pattern" "$file" 2> /dev/null && return 0
+    sleep 1
+    timeout=$((timeout - 1))
+  done
+  return 1
+}
+
+wait_for_pattern_count() {
+  local file="$1" pattern="$2" expected="$3" timeout="${4:-30}"
+  while [ "$timeout" -gt 0 ]; do
+    local count
+    count=$(grep -c "$pattern" "$file" 2> /dev/null || true)
+    [ "$count" -ge "$expected" ] && return 0
+    sleep 1
+    timeout=$((timeout - 1))
+  done
+  return 1
+}
+
+rewatch clean > /dev/null 2>&1
+cp rescript.json rescript.json.watch-recovery.bak
+rewatch_bg watch > rewatch.log 2>&1 &
+
+if ! wait_for_file "./src/Test.mjs" 20 || ! wait_for_file "lib/watch.lock" 20; then
+  error "Initial watch build did not complete"
+  cat rewatch.log
+  exit_watcher
+  mv rescript.json.watch-recovery.bak rescript.json
+  exit 1
+fi
+
+if ! wait_for_pattern rewatch.log "Finished initial compilation" 60; then
+  error "Initial watch build did not finish"
+  cat rewatch.log
+  exit_watcher
+  mv rescript.json.watch-recovery.bak rescript.json
+  exit 1
+fi
+
+initial_completed=$(grep -c "Finished compilation" rewatch.log 2> /dev/null || true)
+printf '{"name":' > rescript.json.watch-recovery.next
+mv rescript.json.watch-recovery.next rescript.json
+
+if ! wait_for_pattern rewatch.log "Could not initialize build" 30; then
+  error "Watcher did not report the invalid config"
+  cat rewatch.log
+  exit_watcher
+  mv rescript.json.watch-recovery.bak rescript.json
+  exit 1
+fi
+
+node -e '
+  const fs = require("fs");
+  const config = JSON.parse(fs.readFileSync(process.argv[1], "utf8"));
+  config.suffix = ".recovered.mjs";
+  fs.writeFileSync(process.argv[2], `${JSON.stringify(config, null, 2)}\n`);
+' rescript.json.watch-recovery.bak rescript.json.watch-recovery.next
+mv rescript.json.watch-recovery.next rescript.json
+
+expected_completed=$((initial_completed + 1))
+if ! wait_for_pattern_count rewatch.log "Finished compilation" "$expected_completed" 30; then
+  error "Watcher did not recover after restoring a valid config"
+  cat rewatch.log
+  exit_watcher
+  mv rescript.json.watch-recovery.bak rescript.json
+  exit 1
+fi
+
+echo '// watch-recovery-test' >> src/Test.res
+if ! wait_for_file "./src/Test.recovered.mjs" 20; then
+  error "Recovered watcher did not compile with the restored config"
+  cat rewatch.log
+  exit_watcher
+  mv rescript.json.watch-recovery.bak rescript.json
+  git checkout -- src/Test.res
+  exit 1
+fi
+
+exit_watcher
+rewatch clean > /dev/null 2>&1
+mv rescript.json.watch-recovery.bak rescript.json
+git checkout -- src/Test.res
+rm -f rewatch.log
+rewatch build > /dev/null 2>&1
+
+if git diff --exit-code . > /dev/null 2>&1 && [ -z "$(git ls-files --others --exclude-standard .)" ]; then
+  success "Watcher recovered from invalid config"
+else
+  error "Watcher recovery test left repository changes"
+  git diff .
+  git ls-files --others --exclude-standard .
+  exit 1
+fi