diff --git a/lua/cp/config.lua b/lua/cp/config.lua
index cae943a..a36f6f2 100644
--- a/lua/cp/config.lua
+++ b/lua/cp/config.lua
@@ -31,6 +31,22 @@
 ---@field before_debug? fun(ctx: ProblemContext)
 ---@field setup_code? fun(ctx: ProblemContext)
 
+---@class TestPanelConfig
+---@field diff_mode "vim"|"git" Diff backend to use
+---@field toggle_key string Key to toggle test panel
+---@field status_format "compact"|"verbose" Status display format
+
+---@class DiffGitConfig
+---@field command string Git executable name
+---@field args string[] Additional git diff arguments
+
+---@class DiffVimConfig
+---@field enable_diffthis boolean Enable vim's diffthis
+
+---@class DiffConfig
+---@field git DiffGitConfig
+---@field vim DiffVimConfig
+
 ---@class cp.Config
 ---@field contests table<string, ContestConfig>
 ---@field snippets table[]
@@ -38,6 +54,8 @@
 ---@field debug boolean
 ---@field scrapers table<string, boolean>
 ---@field filename? fun(contest: string, contest_id: string, problem_id?: string, config: cp.Config, language?: string): string
+---@field test_panel TestPanelConfig
+---@field diff DiffConfig
 
 ---@class cp.UserConfig
 ---@field contests? table<string, PartialContestConfig>
@@ -46,6 +64,8 @@
 ---@field debug? boolean
 ---@field scrapers? table<string, boolean>
 ---@field filename? fun(contest: string, contest_id: string, problem_id?: string, config: cp.Config, language?: string): string
+---@field test_panel? TestPanelConfig
+---@field diff? DiffConfig
 
 local M = {}
 local constants = require('cp.constants')
@@ -62,6 +82,20 @@ M.defaults = {
   debug = false,
   scrapers = constants.PLATFORMS,
   filename = nil,
+  test_panel = {
+    diff_mode = "vim",
+    toggle_key = "t",
+    status_format = "compact",
+  },
+  diff = {
+    git = {
+      command = "git",
+      args = {"diff", "--no-index", "--word-diff=plain", "--word-diff-regex=.", "--no-prefix"},
+    },
+    vim = {
+      enable_diffthis = true,
+    },
+  },
 }
 
 ---@param user_config cp.UserConfig|nil
@@ -79,6 +113,8 @@ function M.setup(user_config)
       debug = { user_config.debug, { 'boolean', 'nil' }, true },
       scrapers = { user_config.scrapers, { 'table', 'nil' }, true },
       filename = { user_config.filename, { 'function', 'nil' }, true },
+      test_panel = { user_config.test_panel, { 'table', 'nil' }, true },
+      diff = { user_config.diff, { 'table', 'nil' }, true },
     })
 
     if user_config.hooks then
@@ -101,6 +137,33 @@ function M.setup(user_config)
       })
     end
 
+    if user_config.test_panel then
+      vim.validate({
+        diff_mode = {
+          user_config.test_panel.diff_mode,
+          function(value)
+            return vim.tbl_contains({"vim", "git"}, value)
+          end,
+          "diff_mode must be 'vim' or 'git'",
+        },
+        toggle_key = { user_config.test_panel.toggle_key, 'string', true },
+        status_format = {
+          user_config.test_panel.status_format,
+          function(value)
+            return vim.tbl_contains({"compact", "verbose"}, value)
+          end,
+          "status_format must be 'compact' or 'verbose'",
+        },
+      })
+    end
+
+    if user_config.diff then
+      vim.validate({
+        git = { user_config.diff.git, { 'table', 'nil' }, true },
+        vim = { user_config.diff.vim, { 'table', 'nil' }, true },
+      })
+    end
+
     if user_config.contests then
       for contest_name, contest_config in pairs(user_config.contests) do
         for lang_name, lang_config in pairs(contest_config) do
diff --git a/lua/cp/diff.lua b/lua/cp/diff.lua
new file mode 100644
index 0000000..03928fa
--- /dev/null
+++ b/lua/cp/diff.lua
@@ -0,0 +1,150 @@
+---@class DiffResult
+---@field content string[]
+---@field highlights table[]?
+
+---@class DiffBackend
+---@field name string
+---@field render fun(expected: string, actual: string, mode: string?): DiffResult
+
+local M = {}
+
+---Vim's built-in diff backend using diffthis
+---@type DiffBackend
+local vim_backend = {
+  name = 'vim',
+  render = function(expected, actual, mode)
+    -- For vim backend, we return the content as-is since diffthis handles highlighting
+    local expected_lines = vim.split(expected, '\n', { plain = true, trimempty = true })
+    local actual_lines = vim.split(actual, '\n', { plain = true, trimempty = true })
+
+    return {
+      content = actual_lines,
+      highlights = nil -- diffthis handles highlighting
+    }
+  end
+}
+
+---Git word-diff backend for character-level precision
+---@type DiffBackend
+local git_backend = {
+  name = 'git',
+  render = function(expected, actual, mode)
+    -- Create temporary files for git diff
+    local tmp_expected = vim.fn.tempname()
+    local tmp_actual = vim.fn.tempname()
+
+    vim.fn.writefile(vim.split(expected, '\n', { plain = true }), tmp_expected)
+    vim.fn.writefile(vim.split(actual, '\n', { plain = true }), tmp_actual)
+
+    local cmd = {
+      'git', 'diff', '--no-index', '--word-diff=plain', '--word-diff-regex=.',
+      '--no-prefix', tmp_expected, tmp_actual
+    }
+
+    local result = vim.system(cmd, { text = true }):wait()
+
+    -- Clean up temp files
+    vim.fn.delete(tmp_expected)
+    vim.fn.delete(tmp_actual)
+
+    if result.code == 0 then
+      -- No differences, return actual content as-is
+      return {
+        content = vim.split(actual, '\n', { plain = true, trimempty = true }),
+        highlights = {}
+      }
+    else
+      -- Parse git diff output
+      local lines = vim.split(result.stdout or '', '\n', { plain = true })
+      local content_lines = {}
+      local highlights = {}
+
+      -- Skip git diff header lines (start with @@, +++, ---, etc.)
+      local content_started = false
+      for _, line in ipairs(lines) do
+        if content_started or (not line:match('^@@') and not line:match('^%+%+%+') and not line:match('^%-%-%-') and not line:match('^index')) then
+          content_started = true
+          if line:match('^[^%-+]') or line:match('^%+') then
+            -- Skip lines starting with - (removed lines) for the actual pane
+            -- Only show lines that are unchanged or added
+            if not line:match('^%-') then
+              local clean_line = line:gsub('^%+', '') -- Remove + prefix
+              table.insert(content_lines, clean_line)
+
+              -- Parse highlights will be handled in highlight.lua
+              table.insert(highlights, {
+                line = #content_lines,
+                content = clean_line
+              })
+            end
+          end
+        end
+      end
+
+      return {
+        content = content_lines,
+        highlights = highlights
+      }
+    end
+  end
+}
+
+---Available diff backends
+---@type table<string, DiffBackend>
+local backends = {
+  vim = vim_backend,
+  git = git_backend,
+}
+
+---Get available backend names
+---@return string[]
+function M.get_available_backends()
+  return vim.tbl_keys(backends)
+end
+
+---Get a diff backend by name
+---@param name string
+---@return DiffBackend?
+function M.get_backend(name)
+  return backends[name]
+end
+
+---Check if git backend is available
+---@return boolean
+function M.is_git_available()
+  local result = vim.system({'git', '--version'}, { text = true }):wait()
+  return result.code == 0
+end
+
+---Get the best available backend based on config and system availability
+---@param preferred_backend? string
+---@return DiffBackend
+function M.get_best_backend(preferred_backend)
+  if preferred_backend and backends[preferred_backend] then
+    if preferred_backend == 'git' and not M.is_git_available() then
+      -- Fall back to vim if git is not available
+      return backends.vim
+    end
+    return backends[preferred_backend]
+  end
+
+  -- Default to git if available, otherwise vim
+  if M.is_git_available() then
+    return backends.git
+  else
+    return backends.vim
+  end
+end
+
+---Render diff using specified backend
+---@param expected string
+---@param actual string
+---@param backend_name? string
+---@param mode? string
+---@return DiffResult
+function M.render_diff(expected, actual, backend_name, mode)
+  local backend = M.get_best_backend(backend_name)
+  return backend.render(expected, actual, mode)
+end
+
+return M
\ No newline at end of file
diff --git a/lua/cp/highlight.lua b/lua/cp/highlight.lua
new file mode 100644
index 0000000..13d7e65
--- /dev/null
+++ b/lua/cp/highlight.lua
@@ -0,0 +1,164 @@
+---@class DiffHighlight
+---@field line number
+---@field col_start number
+---@field col_end number
+---@field highlight_group string
+
+---@class ParsedDiff
+---@field content string[]
+---@field highlights DiffHighlight[]
+
+local M = {}
+
+---Parse git diff markers and extract highlight information
+---@param text string Raw git diff output line
+---@return string cleaned_text, DiffHighlight[]
+local function parse_diff_line(text)
+  local highlights = {}
+  local cleaned_text = text
+  local offset = 0
+
+  -- Pattern for removed text: [-removed text-]
+  for removed_text in text:gmatch('%[%-(.-)%-%]') do
+    local start_pos = text:find('%[%-' .. vim.pesc(removed_text) .. '%-%]', 1, false)
+    if start_pos then
+      -- Remove the marker and adjust positions
+      local marker_len = #('[-%-%]') + #removed_text
+      cleaned_text = cleaned_text:gsub('%[%-' .. vim.pesc(removed_text) .. '%-%]', '', 1)
+
+      -- Since we're removing text, we don't add highlights for removed content in the actual pane
+      -- This is handled by showing removed content in the expected pane
+    end
+  end
+
+  -- Reset for added text parsing on the cleaned text
+  local final_text = cleaned_text
+  local final_highlights = {}
+  offset = 0
+
+  -- Pattern for added text: {+added text+}
+  for added_text in cleaned_text:gmatch('{%+(.-)%+}') do
+    local start_pos = final_text:find('{%+' .. vim.pesc(added_text) .. '%+}', 1, false)
+    if start_pos then
+      -- Calculate position after previous highlights
+      local highlight_start = start_pos - offset - 1  -- 0-based for extmarks
+      local highlight_end = highlight_start + #added_text
+
+      table.insert(final_highlights, {
+        line = 0, -- Will be set by caller
+        col_start = highlight_start,
+        col_end = highlight_end,
+        highlight_group = 'CpDiffAdded'
+      })
+
+      -- Remove the marker
+      local marker_len = #{'{+'} + #{'+}'} + #added_text
+      final_text = final_text:gsub('{%+' .. vim.pesc(added_text) .. '%+}', added_text, 1)
+      offset = offset + #{'{+'} + #{'+}'}
+    end
+  end
+
+  return final_text, final_highlights
+end
+
+---Parse complete git diff output
+---@param diff_output string
+---@return ParsedDiff
+function M.parse_git_diff(diff_output)
+  local lines = vim.split(diff_output, '\n', { plain = true })
+  local content_lines = {}
+  local all_highlights = {}
+
+  -- Skip git diff header lines
+  local content_started = false
+  for _, line in ipairs(lines) do
+    -- Skip header lines (@@, +++, ---, index, etc.)
+    if content_started or (
+      not line:match('^@@') and
+      not line:match('^%+%+%+') and
+      not line:match('^%-%-%-') and
+      not line:match('^index') and
+      not line:match('^diff %-%-git')
+    ) then
+      content_started = true
+
+      -- Process content lines
+      if line:match('^%+') then
+        -- Added line - remove + prefix and parse highlights
+        local clean_line = line:sub(2) -- Remove + prefix
+        local parsed_line, line_highlights = parse_diff_line(clean_line)
+
+        table.insert(content_lines, parsed_line)
+
+        -- Set line numbers for highlights
+        local line_num = #content_lines
+        for _, highlight in ipairs(line_highlights) do
+          highlight.line = line_num - 1 -- 0-based for extmarks
+          table.insert(all_highlights, highlight)
+        end
+      elseif line:match('^%-') then
+        -- Removed line - we handle this in the expected pane, skip for actual
+      elseif not line:match('^\\') then -- Skip "\ No newline" messages
+        -- Unchanged line
+        local parsed_line, line_highlights = parse_diff_line(line)
+        table.insert(content_lines, parsed_line)
+
+        -- Set line numbers for any highlights (shouldn't be any for unchanged lines)
+        local line_num = #content_lines
+        for _, highlight in ipairs(line_highlights) do
+          highlight.line = line_num - 1 -- 0-based for extmarks
+          table.insert(all_highlights, highlight)
+        end
+      end
+    end
+  end
+
+  return {
+    content = content_lines,
+    highlights = all_highlights
+  }
+end
+
+---Apply highlights to a buffer using extmarks
+---@param bufnr number
+---@param highlights DiffHighlight[]
+---@param namespace number
+function M.apply_highlights(bufnr, highlights, namespace)
+  -- Clear existing highlights in this namespace
+  vim.api.nvim_buf_clear_namespace(bufnr, namespace, 0, -1)
+
+  for _, highlight in ipairs(highlights) do
+    if highlight.col_start < highlight.col_end then
+      vim.api.nvim_buf_set_extmark(bufnr, namespace, highlight.line, highlight.col_start, {
+        end_col = highlight.col_end,
+        hl_group = highlight.highlight_group,
+        priority = 100,
+      })
+    end
+  end
+end
+
+---Create namespace for diff highlights
+---@return number
+function M.create_namespace()
+  return vim.api.nvim_create_namespace('cp_diff_highlights')
+end
+
+---Parse and apply git diff to buffer
+---@param bufnr number
+---@param diff_output string
+---@param namespace number
+---@return string[] content_lines
+function M.parse_and_apply_diff(bufnr, diff_output, namespace)
+  local parsed = M.parse_git_diff(diff_output)
+
+  -- Set buffer content
+  vim.api.nvim_buf_set_lines(bufnr, 0, -1, false, parsed.content)
+
+  -- Apply highlights
+  M.apply_highlights(bufnr, parsed.highlights, namespace)
+
+  return parsed.content
+end
+
+return M
\ No newline at end of file
diff --git a/lua/cp/init.lua b/lua/cp/init.lua
index 075ee65..607b8ad 100644
--- a/lua/cp/init.lua
+++ b/lua/cp/init.lua
@@ -191,9 +191,13 @@ local function toggle_test_panel(is_debug)
   local expected_buf = vim.api.nvim_create_buf(false, true)
   local actual_buf = vim.api.nvim_create_buf(false, true)
 
-  vim.api.nvim_set_option_value('bufhidden', 'wipe', { buf = tab_buf })
-  vim.api.nvim_set_option_value('bufhidden', 'wipe', { buf = expected_buf })
-  vim.api.nvim_set_option_value('bufhidden', 'wipe', { buf = actual_buf })
+  -- Set buffer options
+  local buffer_opts = { 'bufhidden', 'wipe' }
+  for _, buf in ipairs({tab_buf, expected_buf, actual_buf}) do
+    vim.api.nvim_set_option_value('bufhidden', 'wipe', { buf = buf })
+    vim.api.nvim_set_option_value('readonly', true, { buf = buf })
+    vim.api.nvim_set_option_value('modifiable', false, { buf = buf })
+  end
 
   local main_win = vim.api.nvim_get_current_win()
   vim.api.nvim_win_set_buf(main_win, tab_buf)
@@ -222,61 +226,16 @@ local function toggle_test_panel(is_debug)
   }
 
   local function render_test_tabs()
+    local test_render = require('cp.test_render')
+    test_render.setup_highlights()
     local test_state = test_module.get_test_panel_state()
-    local tab_lines = {}
+    return test_render.render_test_list(test_state, config.test_panel)
+  end
 
-    local max_status_width = 0
-    local max_code_width = 0
-    local max_time_width = 0
-
-    for _, test_case in ipairs(test_state.test_cases) do
-      local status_text = test_case.status == 'pending' and '' or string.upper(test_case.status)
-      max_status_width = math.max(max_status_width, #status_text)
-
-      if test_case.code then
-        max_code_width = math.max(max_code_width, #tostring(test_case.code))
-      end
-
-      if test_case.time_ms then
-        local time_text = string.format('%.0fms', test_case.time_ms)
-        max_time_width = math.max(max_time_width, #time_text)
-      end
-    end
-
-    for i, test_case in ipairs(test_state.test_cases) do
-      local prefix = i == test_state.current_index and '> ' or '  '
-      local tab = string.format('%s%d.', prefix, i)
-
-      if test_case.ok ~= nil then
-        tab = tab .. string.format(' [ok:%-5s]', tostring(test_case.ok))
-      end
-
-      if test_case.code then
-        tab = tab .. string.format(' [code:%-' .. max_code_width .. 's]', tostring(test_case.code))
-      end
-
-      if test_case.time_ms then
-        local time_text = string.format('%.0fms', test_case.time_ms)
-        tab = tab .. string.format(' [time:%-' .. max_time_width .. 's]', time_text)
-      end
-
-      if test_case.signal then
-        tab = tab .. string.format(' [%s]', test_case.signal)
-      end
-
-      table.insert(tab_lines, tab)
-    end
-
-    local current_test = test_state.test_cases[test_state.current_index]
-    if current_test then
-      table.insert(tab_lines, '')
-      table.insert(tab_lines, 'Input:')
-      for _, line in ipairs(vim.split(current_test.input, '\n', { plain = true, trimempty = true })) do
-        table.insert(tab_lines, line)
-      end
-    end
-
-    return tab_lines
+  local function update_buffer_content(bufnr, lines)
+    vim.api.nvim_set_option_value('modifiable', true, { buf = bufnr })
+    vim.api.nvim_buf_set_lines(bufnr, 0, -1, false, lines)
+    vim.api.nvim_set_option_value('modifiable', false, { buf = bufnr })
   end
 
   local function update_expected_pane()
@@ -290,11 +249,7 @@ local function toggle_test_panel(is_debug)
     local expected_text = current_test.expected
     local expected_lines = vim.split(expected_text, '\n', { plain = true, trimempty = true })
 
-    vim.api.nvim_buf_set_lines(test_buffers.expected_buf, 0, -1, false, expected_lines)
-
-    if vim.fn.has('nvim-0.8.0') == 1 then
-      vim.api.nvim_set_option_value('winbar', 'Expected', { win = test_windows.expected_win })
-    end
+    update_buffer_content(test_buffers.expected_buf, expected_lines)
   end
 
   local function update_actual_pane()
@@ -315,10 +270,12 @@ local function toggle_test_panel(is_debug)
       actual_lines = { '(not run yet)' }
     end
 
-    vim.api.nvim_buf_set_lines(test_buffers.actual_buf, 0, -1, false, actual_lines)
+    update_buffer_content(test_buffers.actual_buf, actual_lines)
 
-    if vim.fn.has('nvim-0.8.0') == 1 then
-      vim.api.nvim_set_option_value('winbar', 'Actual', { win = test_windows.actual_win })
+    local test_render = require('cp.test_render')
+    local status_bar_text = test_render.render_status_bar(current_test)
+    if status_bar_text ~= '' then
+      vim.api.nvim_set_option_value('winbar', status_bar_text, { win = test_windows.actual_win })
     end
 
     vim.api.nvim_set_option_value('diff', enable_diff, { win = test_windows.expected_win })
@@ -340,7 +297,7 @@ local function toggle_test_panel(is_debug)
     end
 
     local tab_lines = render_test_tabs()
-    vim.api.nvim_buf_set_lines(test_buffers.tab_buf, 0, -1, false, tab_lines)
+    update_buffer_content(test_buffers.tab_buf, tab_lines)
 
     update_expected_pane()
     update_actual_pane()
@@ -373,6 +330,9 @@ local function toggle_test_panel(is_debug)
     vim.keymap.set('n', 'q', function()
       toggle_test_panel()
     end, { buffer = buf, silent = true })
+    vim.keymap.set('n', config.test_panel.toggle_key, function()
+      toggle_test_panel()
+    end, { buffer = buf, silent = true })
   end
 
   if is_debug and config.hooks and config.hooks.before_debug then
diff --git a/lua/cp/test_render.lua b/lua/cp/test_render.lua
new file mode 100644
index 0000000..5ca1298
--- /dev/null
+++ b/lua/cp/test_render.lua
@@ -0,0 +1,102 @@
+---@class TestRenderConfig
+---@field status_format "compact"|"verbose"
+
+---@class StatusInfo
+---@field text string
+---@field highlight_group string
+
+local M = {}
+
+---Convert test status to CP terminology with colors
+---@param test_case TestCase
+---@return StatusInfo
+local function get_status_info(test_case)
+  if test_case.status == 'pass' then
+    return { text = 'AC', highlight_group = 'CpTestAC' }
+  elseif test_case.status == 'fail' then
+    if test_case.timed_out then
+      return { text = 'TLE', highlight_group = 'CpTestError' }
+    elseif test_case.code and test_case.code ~= 0 then
+      return { text = 'RTE', highlight_group = 'CpTestError' }
+    else
+      return { text = 'WA', highlight_group = 'CpTestError' }
+    end
+  elseif test_case.status == 'timeout' then
+    return { text = 'TLE', highlight_group = 'CpTestError' }
+  elseif test_case.status == 'running' then
+    return { text = '...', highlight_group = 'CpTestPending' }
+  else
+    return { text = '', highlight_group = 'CpTestPending' }
+  end
+end
+
+---Render test cases list with improved layout
+---@param test_state TestPanelState
+---@param config? TestRenderConfig
+---@return string[]
+function M.render_test_list(test_state, config)
+  config = config or { status_format = 'compact' }
+  local lines = {}
+
+  for i, test_case in ipairs(test_state.test_cases) do
+    local is_current = i == test_state.current_index
+    local prefix = is_current and '> ' or '  '
+    local status_info = get_status_info(test_case)
+
+    local status_text = status_info.text ~= '' and status_info.text or ''
+    local line = string.format('%s%d. %s', prefix, i, status_text)
+
+    table.insert(lines, line)
+
+    if is_current and test_case.input and test_case.input ~= '' then
+      for _, input_line in ipairs(vim.split(test_case.input, '\n', { plain = true, trimempty = false })) do
+        table.insert(lines, '  ' .. input_line)
+      end
+    end
+  end
+
+  return lines
+end
+
+---Create status bar content for diff pane
+---@param test_case TestCase?
+---@return string
+function M.render_status_bar(test_case)
+  if not test_case then
+    return ''
+  end
+
+  local parts = {}
+
+  if test_case.time_ms then
+    table.insert(parts, string.format('%.0fms', test_case.time_ms))
+  end
+
+  if test_case.code then
+    table.insert(parts, string.format('Exit: %d', test_case.code))
+  end
+
+  return table.concat(parts, ' │ ')
+end
+
+---Get highlight groups needed for test rendering
+---@return table<string, table>
+function M.get_highlight_groups()
+  return {
+    CpTestAC = { fg = '#10b981', bold = true },
+    CpTestError = { fg = '#ef4444', bold = true },
+    CpTestPending = { fg = '#6b7280' },
+    CpDiffRemoved = { fg = '#ef4444', bg = '#1f1f1f' },
+    CpDiffAdded = { fg = '#10b981', bg = '#1f1f1f' },
+  }
+end
+
+---Setup highlight groups
+function M.setup_highlights()
+  local groups = M.get_highlight_groups()
+  for group_name, opts in pairs(groups) do
+    vim.api.nvim_set_hl(0, group_name, opts)
+  end
+end
+
+return M