diff --git a/crates/terminal/src/alacritty.rs b/crates/terminal/src/alacritty.rs
index 4cf8fe1d58..1e1acb798d 100644
--- a/crates/terminal/src/alacritty.rs
+++ b/crates/terminal/src/alacritty.rs
@@ -806,6 +806,19 @@ pub(super) fn shrink_to_used(term: &mut Term<ZedListener>) {
     term.grid_mut().truncate();
 }
 
+pub(super) fn used_lines(term: &Term<ZedListener>) -> usize {
+    if term.mode().contains(TermMode::ALT_SCREEN) {
+        return term.total_lines();
+    }
+    let grid = term.grid();
+    let cursor_line = grid.cursor.point.line.0.max(0) as usize;
+    let last_occupied_line = (cursor_line + 1..term.screen_lines())
+        .rev()
+        .find(|&line| !grid[Line(line as i32)].is_clear())
+        .unwrap_or(cursor_line);
+    term.history_size() + last_occupied_line + 1
+}
+
 pub(super) fn make_content(term: &Term<ZedListener>, last_content: &Content) -> Content {
     let content = term.renderable_content();
 
diff --git a/crates/terminal/src/terminal.rs b/crates/terminal/src/terminal.rs
index 310c191305..170dba9d98 100644
--- a/crates/terminal/src/terminal.rs
+++ b/crates/terminal/src/terminal.rs
@@ -70,7 +70,8 @@ use crate::alacritty::{
     scroll_display, scroll_to_point, search_matches, selection_text, set_default_cursor_style,
     set_selection as set_term_selection, shrink_to_used, spawn_event_loop,
     toggle_vi_mode as toggle_term_vi_mode, total_lines, update_selection as update_term_selection,
-    update_selection_to_vi_cursor, update_vi_cursor_for_scroll, vi_goto_point, vi_motion,
+    update_selection_to_vi_cursor, update_vi_cursor_for_scroll, used_lines, vi_goto_point,
+    vi_motion,
 };
 use crate::mappings::colors::to_vte_rgb;
 use crate::mappings::keys::to_esc_str;
@@ -1891,6 +1892,10 @@ impl Terminal {
         screen_lines(&self.term.lock_unfair())
     }
 
+    pub fn used_lines(&self) -> usize {
+        used_lines(&self.term.lock_unfair())
+    }
+
     //To test:
     //- Activate match on terminal (scrolling and selection)
     //- Editor search snapping behavior
diff --git a/crates/terminal_view/src/terminal_view.rs b/crates/terminal_view/src/terminal_view.rs
index 1f380c8aac..6ef5121136 100644
--- a/crates/terminal_view/src/terminal_view.rs
+++ b/crates/terminal_view/src/terminal_view.rs
@@ -346,12 +346,13 @@ impl TerminalView {
             TerminalMode::Embedded {
                 max_lines_when_unfocused,
             } => {
-                let total_lines = self.terminal.read(cx).total_lines();
+                let terminal = self.terminal.read(cx);
+                let total_lines = terminal.total_lines();
 
                 if total_lines > Self::MAX_EMBEDDED_LINES {
                     ContentMode::Scrollable
                 } else {
-                    let mut displayed_lines = total_lines;
+                    let mut displayed_lines = terminal.used_lines().min(total_lines);
 
                     if !self.focus_handle.is_focused(window)
                         && let Some(max_lines) = max_lines_when_unfocused
@@ -3168,6 +3169,61 @@ mod tests {
         }
     }
 
+    #[gpui::test]
+    async fn test_inline_terminal_shrinks_after_clear(cx: &mut TestAppContext) {
+        let (project, workspace) = init_test(cx).await;
+        let terminal = cx.new(|cx| {
+            terminal::TerminalBuilder::new_display_only(
+                CursorShape::default(),
+                terminal::terminal_settings::AlternateScroll::On,
+                None,
+                0,
+                cx.background_executor(),
+                PathStyle::local(),
+            )
+            .subscribe(cx)
+        });
+        let (terminal_view, cx) = cx.add_window_view(|window, cx| {
+            let mut terminal_view = TerminalView::new(
+                terminal.clone(),
+                workspace.downgrade(),
+                None,
+                project.downgrade(),
+                window,
+                cx,
+            );
+            terminal_view.set_embedded_mode(None, cx);
+            terminal_view
+        });
+
+        for _ in 1..=20 {
+            terminal.update(cx, |terminal, cx| {
+                terminal.write_output(b"line\n", cx);
+            });
+            cx.draw(
+                gpui::Point::default(),
+                gpui::size(px(400.), px(100.)),
+                |_, _| terminal_view.clone().into_any_element(),
+            );
+        }
+        terminal.read_with(cx, |terminal, _| {
+            assert_eq!(terminal.total_lines(), 21);
+        });
+
+        terminal.update(cx, |terminal, _| terminal.clear());
+        for _ in 1..=2 {
+            cx.draw(
+                gpui::Point::default(),
+                gpui::size(px(400.), px(100.)),
+                |_, _| terminal_view.clone().into_any_element(),
+            );
+        }
+        terminal.read_with(cx, |terminal, _| {
+            assert_eq!(terminal.total_lines(), 1);
+            assert_eq!(terminal.viewport_lines(), 1);
+        });
+    }
+
     #[gpui::test]
     async fn test_tab_content_shows_terminal_title_when_custom_title_directly_set_empty(
         cx: &mut TestAppContext,