diff --git a/CHANGELOG.md b/CHANGELOG.md
index 4ca187d2e..35edd45c6 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -1,5 +1,11 @@
 # Changelog
 
+## Unreleased
+
+### Fixes
+
+- Fix `set_layout` tool not defaulting to HUG sizing when enabling auto-layout — frames now shrink/grow to fit children instead of keeping fixed dimensions
+
 ## 0.10.0 — 2026-03-15
 
 ### Performance
diff --git a/packages/core/src/tools/modify.ts b/packages/core/src/tools/modify.ts
index cdea45102..b674dfc9c 100644
--- a/packages/core/src/tools/modify.ts
+++ b/packages/core/src/tools/modify.ts
@@ -229,7 +229,12 @@ export const setLayout = defineTool({
       return { error: 'Frame has no auto-layout. Pass direction ("HORIZONTAL" or "VERTICAL") to enable it.' }
     }
 
+    const wasNone = raw?.layoutMode === 'NONE'
     if (args.direction) node.layoutMode = args.direction as 'HORIZONTAL' | 'VERTICAL'
+    if (args.direction && wasNone) {
+      node.primaryAxisSizingMode = 'AUTO'
+      node.counterAxisSizingMode = 'AUTO'
+    }
     if (args.spacing !== undefined) node.itemSpacing = args.spacing
     if (args.align !== undefined) node.primaryAxisAlignItems = args.align
     if (args.counter_align !== undefined) node.counterAxisAlignItems = args.counter_align
diff --git a/tests/engine/tools.test.ts b/tests/engine/tools.test.ts
index 8da7c2dc1..d3a42efac 100644
--- a/tests/engine/tools.test.ts
+++ b/tests/engine/tools.test.ts
@@ -1,6 +1,6 @@
 import { describe, expect, test } from 'bun:test'
 
-import { ALL_TOOLS, FigmaAPI, SceneGraph } from '@open-pencil/core'
+import { ALL_TOOLS, FigmaAPI, SceneGraph, computeAllLayouts } from '@open-pencil/core'
 
 function setup() {
   const graph = new SceneGraph()
@@ -216,6 +216,67 @@ describe('set_layout', () => {
     expect(node.paddingLeft).toBe(20)
     expect(node.paddingTop).toBe(20)
   })
+
+  test('defaults to HUG sizing when enabling auto-layout', () => {
+    const { graph, figma } = setup()
+    const frame = figma.createFrame()
+    frame.resize(300, 200)
+
+    const rawBefore = graph.getNode(frame.id)!
+    expect(rawBefore.layoutMode).toBe('NONE')
+    expect(rawBefore.primaryAxisSizing).toBe('FIXED')
+    expect(rawBefore.counterAxisSizing).toBe('FIXED')
+
+    const tool = ALL_TOOLS.find((t) => t.name === 'set_layout')!
+    tool.execute(figma, { id: frame.id, direction: 'VERTICAL' })
+
+    const rawAfter = graph.getNode(frame.id)!
+    expect(rawAfter.layoutMode).toBe('VERTICAL')
+    expect(rawAfter.primaryAxisSizing).toBe('HUG')
+    expect(rawAfter.counterAxisSizing).toBe('HUG')
+  })
+
+  test('preserves sizing modes when updating existing auto-layout', () => {
+    const { graph, figma } = setup()
+    const frame = figma.createFrame()
+    frame.resize(300, 200)
+
+    const tool = ALL_TOOLS.find((t) => t.name === 'set_layout')!
+    tool.execute(figma, { id: frame.id, direction: 'HORIZONTAL' })
+
+    // Manually set primary axis back to FIXED (user wants fixed width)
+    graph.updateNode(frame.id, { primaryAxisSizing: 'FIXED' })
+    expect(graph.getNode(frame.id)!.primaryAxisSizing).toBe('FIXED')
+
+    // Updating spacing should NOT reset sizing modes
+    tool.execute(figma, { id: frame.id, spacing: 24 })
+
+    const raw = graph.getNode(frame.id)!
+    expect(raw.primaryAxisSizing).toBe('FIXED')
+    expect(raw.counterAxisSizing).toBe('HUG')
+  })
+
+  test('HUG default enables hug-to-fit with 5 children', () => {
+    const { graph, figma } = setup()
+    const frame = figma.createFrame()
+    frame.resize(320, 100)
+
+    const tool = ALL_TOOLS.find((t) => t.name === 'set_layout')!
+    tool.execute(figma, { id: frame.id, direction: 'VERTICAL', spacing: 8, padding: 16 })
+
+    for (let i = 0; i < 5; i++) {
+      const child = figma.createRectangle()
+      child.resize(280, 50)
+      frame.appendChild(child)
+    }
+
+    computeAllLayouts(graph)
+
+    const node = graph.getNode(frame.id)!
+    expect(node.primaryAxisSizing).toBe('HUG')
+    // 16 (top pad) + 5*50 (children) + 4*8 (gaps) + 16 (bottom pad) = 314
+    expect(node.height).toBe(314)
+  })
 })
 
 describe('delete_node', () => {