diff --git a/openhands-sdk/openhands/sdk/llm/mixins/fn_call_converter.py b/openhands-sdk/openhands/sdk/llm/mixins/fn_call_converter.py
index de713b80f4..a41e088f58 100644
--- a/openhands-sdk/openhands/sdk/llm/mixins/fn_call_converter.py
+++ b/openhands-sdk/openhands/sdk/llm/mixins/fn_call_converter.py
@@ -574,6 +574,16 @@ def _extract_and_validate_params(
     return params
 
 
+# Kimi K3 can emit a <tool_call> wrapper with the tool name on its own line
+# instead of the prompted <function=NAME> opener (see issue #4540):
+#     <tool_call>file_editor
+#     <parameter=command>view</parameter>
+#     </tool_call>
+_TOOL_CALL_WRAPPER_PATTERN = re.compile(
+    r"<tool_call>\s*([A-Za-z_][\w.-]*)\s*\n(?=\s*<parameter=)"
+)
+
+
 def _preprocess_model_output(content: str) -> str:
     """Clean up model-specific formatting before parsing function calls.
 
@@ -589,6 +599,13 @@ def _preprocess_model_output(content: str) -> str:
     content = re.sub(r"<tool_call>\s*(?=<function=)", "", content)
     # Strip </tool_call> when it appears right after </function>
     content = re.sub(r"(?<=</function>)\s*</tool_call>", "", content)
+
+    if "<function=" not in content:
+        content, replaced = _TOOL_CALL_WRAPPER_PATTERN.subn(
+            r"<function=\1>\n", content, count=1
+        )
+        if replaced:
+            content = re.sub(r"</tool_call>(\s*)\Z", r"</function>\1", content, count=1)
     return content
 
 
diff --git a/tests/sdk/llm/test_llm_fncall_converter.py b/tests/sdk/llm/test_llm_fncall_converter.py
index 71aa0e3029..0bd18a97b5 100644
--- a/tests/sdk/llm/test_llm_fncall_converter.py
+++ b/tests/sdk/llm/test_llm_fncall_converter.py
@@ -960,3 +960,66 @@ def test_security_params_excluded_when_flag_is_false():
     system_content = result[0]["content"]
     assert "<parameter=security_risk>" not in system_content
     assert "<parameter=summary>" not in system_content
+
+
+@pytest.mark.parametrize(
+    "content",
+    [
+        (
+            "I'll list the files.\n"
+            "<tool_call>terminal\n"
+            "<parameter=command>ls</parameter>\n"
+            "</tool_call>"
+        ),
+        "<tool_call>terminal\n<parameter=command>ls</parameter>",
+    ],
+)
+def test_tool_call_wrapper_normalized_to_function_call(content):
+    messages = [
+        {"role": "user", "content": "run ls"},
+        {"role": "assistant", "content": content},
+    ]
+
+    fncall_messages = convert_non_fncall_messages_to_fncall_messages(
+        messages, FNCALL_TOOLS
+    )
+
+    tool_call = fncall_messages[1]["tool_calls"][0]["function"]
+    assert tool_call["name"] == "terminal"
+    assert json.loads(tool_call["arguments"]) == {"command": "ls"}
+
+
+def test_tool_call_wrapper_preserves_closing_tag_in_parameter():
+    content = (
+        "<tool_call>terminal\n"
+        "<parameter=command>printf '</tool_call>'</parameter>\n"
+        "</tool_call>"
+    )
+    messages = [
+        {"role": "user", "content": "print the closing tag"},
+        {"role": "assistant", "content": content},
+    ]
+
+    fncall_messages = convert_non_fncall_messages_to_fncall_messages(
+        messages, FNCALL_TOOLS
+    )
+
+    tool_call = fncall_messages[1]["tool_calls"][0]["function"]
+    assert json.loads(tool_call["arguments"]) == {"command": "printf '</tool_call>'"}
+
+
+def test_tool_call_mention_in_plain_text_is_not_converted():
+    content = (
+        "Here is how you write a tool call:\n\n"
+        "<tool_call> is the opening tag, followed by parameters."
+    )
+    messages = [
+        {"role": "user", "content": "explain the format"},
+        {"role": "assistant", "content": content},
+    ]
+
+    fncall_messages = convert_non_fncall_messages_to_fncall_messages(
+        messages, FNCALL_TOOLS
+    )
+
+    assert not fncall_messages[1].get("tool_calls")