diff --git a/crates/gpui/src/elements/div.rs b/crates/gpui/src/elements/div.rs
index bf185b1b6cc20e0f0f484fd0029c78a6211e6a3a..c1bb2011d0bdff432fc5bd0da12b63a79cb9ef5a 100644
--- a/crates/gpui/src/elements/div.rs
+++ b/crates/gpui/src/elements/div.rs
@@ -2589,7 +2589,8 @@ impl Interactivity {
                     let pending_mouse_down = pending_mouse_down.clone();
                     let source_bounds = hitbox.bounds;
                     move |window: &Window| {
-                        pending_mouse_down.borrow().is_none()
+                        !window.last_input_was_keyboard()
+                            && pending_mouse_down.borrow().is_none()
                             && source_bounds.contains(&window.mouse_position())
                     }
                 });
diff --git a/crates/gpui/src/window.rs b/crates/gpui/src/window.rs
index 2a80f553eb9ff5a36cf1637a1106fd4c13712f15..5d9ea28fcf8c7998dfada055157dc0766c33628a 100644
--- a/crates/gpui/src/window.rs
+++ b/crates/gpui/src/window.rs
@@ -560,7 +560,8 @@ pub enum WindowControlArea {
 pub struct HitboxId(u64);
 
 impl HitboxId {
-    /// Checks if the hitbox with this ID is currently hovered. Except when handling
+    /// Checks if the hitbox with this ID is currently hovered. Returns `false` during keyboard
+    /// input modality so that keyboard navigation suppresses hover highlights. Except when handling
     /// `ScrollWheelEvent`, this is typically what you want when determining whether to handle mouse
     /// events or paint hover styles.
     ///
@@ -570,6 +571,9 @@ impl HitboxId {
         if window.captured_hitbox == Some(self) {
             return true;
         }
+        if window.last_input_was_keyboard() {
+            return false;
+        }
         let hit_test = &window.mouse_hit_test;
         for id in hit_test.ids.iter().take(hit_test.hover_hitbox_count) {
             if self == *id {
@@ -608,13 +612,15 @@ pub struct Hitbox {
 }
 
 impl Hitbox {
-    /// Checks if the hitbox is currently hovered. Except when handling `ScrollWheelEvent`, this is
-    /// typically what you want when determining whether to handle mouse events or paint hover
-    /// styles.
+    /// Checks if the hitbox is currently hovered. Returns `false` during keyboard input modality
+    /// so that keyboard navigation suppresses hover highlights. Except when handling
+    /// `ScrollWheelEvent`, this is typically what you want when determining whether to handle mouse
+    /// events or paint hover styles.
     ///
     /// This can return `false` even when the hitbox contains the mouse, if a hitbox in front of
     /// this sets `HitboxBehavior::BlockMouse` (`InteractiveElement::occlude`) or
-    /// `HitboxBehavior::BlockMouseExceptScroll` (`InteractiveElement::block_mouse_except_scroll`).
+    /// `HitboxBehavior::BlockMouseExceptScroll` (`InteractiveElement::block_mouse_except_scroll`),
+    /// or if the current input modality is keyboard (see [`Window::last_input_was_keyboard`]).
     ///
     /// Handling of `ScrollWheelEvent` should typically use `should_handle_scroll` instead.
     /// Concretely, this is due to use-cases like overlays that cause the elements under to be
@@ -4028,14 +4034,18 @@ impl Window {
     /// Dispatch a mouse or keyboard event on the window.
     #[profiling::function]
     pub fn dispatch_event(&mut self, event: PlatformInput, cx: &mut App) -> DispatchEventResult {
-        // Track whether this input was keyboard-based for focus-visible styling
+        // Track input modality for focus-visible styling and hover suppression.
+        // Hover is suppressed during keyboard modality so that keyboard navigation
+        // doesn't show hover highlights on the item under the mouse cursor.
+        let old_modality = self.last_input_modality;
         self.last_input_modality = match &event {
-            PlatformInput::KeyDown(_) | PlatformInput::ModifiersChanged(_) => {
-                InputModality::Keyboard
-            }
-            PlatformInput::MouseDown(e) if e.is_focusing() => InputModality::Mouse,
+            PlatformInput::KeyDown(_) => InputModality::Keyboard,
+            PlatformInput::MouseMove(_) | PlatformInput::MouseDown(_) => InputModality::Mouse,
             _ => self.last_input_modality,
         };
+        if self.last_input_modality != old_modality {
+            self.refresh();
+        }
 
         // Handlers may set this to false by calling `stop_propagation`.
         cx.propagate_event = true;
diff --git a/crates/picker/src/picker.rs b/crates/picker/src/picker.rs
index e87ec3415cf6d70d840d8566accb94ac6de1547c..2eb8d71bd4aa14960f8388859c974214f3e85c72 100644
--- a/crates/picker/src/picker.rs
+++ b/crates/picker/src/picker.rs
@@ -788,6 +788,12 @@ impl<D: PickerDelegate> Picker<D> {
                     this.handle_click(ix, event.modifiers.platform, window, cx)
                 }),
             )
+            .on_hover(cx.listener(move |this, hovered: &bool, window, cx| {
+                if *hovered {
+                    this.set_selected_index(ix, None, false, window, cx);
+                    cx.notify();
+                }
+            }))
             .children(self.delegate.render_match(
                 ix,
                 ix == self.delegate.selected_index(),