diff --git a/src/assets/__tests__/__snapshots__/assets.snapshot.test.ts.snap b/src/assets/__tests__/__snapshots__/assets.snapshot.test.ts.snap
index 89ef1df5..bdd7c567 100644
--- a/src/assets/__tests__/__snapshots__/assets.snapshot.test.ts.snap
+++ b/src/assets/__tests__/__snapshots__/assets.snapshot.test.ts.snap
@@ -395,6 +395,9 @@ exports[`Assets Directory Snapshots > File listing > should match the expected f
   "cdk/tsconfig.json",
   "container/python/Dockerfile",
   "container/python/dockerignore.template",
+  "mcp/python-fastmcp-lambda/README.md",
+  "mcp/python-fastmcp-lambda/handler.py",
+  "mcp/python-fastmcp-lambda/pyproject.toml",
   "mcp/python-lambda/README.md",
   "mcp/python-lambda/handler.py",
   "mcp/python-lambda/pyproject.toml",
@@ -631,6 +634,177 @@ if __name__ == "__main__":
 "
 `;
 
+exports[`Assets Directory Snapshots > MCP assets > mcp/mcp/python-fastmcp-lambda/README.md should match snapshot 1`] = `
+"# {{ name }}
+
+FastMCP server running on AWS Lambda with a function URL, generated by the AgentCore CLI.
+
+Demonstrates HTTP tool patterns with proper error handling and retry logic.
+
+## How It Works
+
+This server uses [FastMCP](https://github.com/jlowin/fastmcp) to define MCP tools and
+[Mangum](https://github.com/jordanh/mangum) to adapt the ASGI app for AWS Lambda.
+The Lambda function URL provides the HTTP endpoint that the AgentCore gateway connects to.
+
+## Available Tools
+
+| Tool              | Description                                            |
+| ----------------- | ------------------------------------------------------ |
+| \`lookup_ip\`       | Look up geolocation and network info for an IP address |
+| \`get_random_user\` | Generate a random user profile for testing             |
+| \`fetch_post\`      | Fetch a post by ID from JSONPlaceholder API            |
+
+## Deployment
+
+\`\`\`bash
+agentcore deploy
+\`\`\`
+
+The CDK stack creates the Lambda function, function URL, and wires it to the gateway target.
+"
+`;
+
+exports[`Assets Directory Snapshots > MCP assets > mcp/mcp/python-fastmcp-lambda/handler.py should match snapshot 1`] = `
+""""
+FastMCP Server for AWS Lambda with Function URL.
+
+This template shows:
+- FastMCP server running on Lambda via Mangum ASGI adapter
+- HTTP tool patterns with proper error handling
+- Retry logic and response validation
+
+Deploy with: agentcore deploy
+"""
+
+import logging
+from typing import Any
+
+import httpx
+from mangum import Mangum
+from mcp.server.fastmcp import FastMCP
+
+logging.basicConfig(level=logging.INFO, format="%(levelname)s - %(message)s")
+logger = logging.getLogger(__name__)
+
+mcp = FastMCP("tools")
+
+HTTP_TIMEOUT = 10.0
+MAX_RETRIES = 2
+
+
+async def fetch_json(url: str, headers: dict[str, str] | None = None) -> dict[str, Any] | None:
+    """Make an HTTP GET request with retry logic."""
+    async with httpx.AsyncClient() as client:
+        for attempt in range(MAX_RETRIES):
+            try:
+                response = await client.get(url, headers=headers, timeout=HTTP_TIMEOUT)
+                response.raise_for_status()
+                return response.json()
+            except httpx.TimeoutException:
+                logger.warning(f"Timeout on attempt {attempt + 1} for {url}")
+            except httpx.HTTPStatusError as e:
+                logger.error(f"HTTP {e.response.status_code} for {url}")
+                return None
+            except httpx.RequestError as e:
+                logger.error(f"Request failed: {e}")
+                return None
+    return None
+
+
+@mcp.tool()
+async def lookup_ip(ip_address: str) -> str:
+    """Look up geolocation and network info for an IP address.
+
+    Args:
+        ip_address: IPv4 or IPv6 address to look up
+    """
+    data = await fetch_json(f"http://ip-api.com/json/{ip_address}")
+
+    if not data:
+        return f"Failed to look up IP: {ip_address}"
+
+    if data.get("status") == "fail":
+        return f"Lookup failed: {data.get('message', 'unknown error')}"
+
+    return (
+        f"IP: {data['query']}\\n"
+        f"Location: {data['city']}, {data['regionName']}, {data['country']}\\n"
+        f"ISP: {data['isp']}\\n"
+        f"Organization: {data['org']}\\n"
+        f"Timezone: {data['timezone']}"
+    )
+
+
+@mcp.tool()
+async def get_random_user() -> str:
+    """Generate a random user profile for testing or mock data."""
+    data = await fetch_json("https://randomuser.me/api/")
+
+    if not data or "results" not in data:
+        return "Failed to generate random user."
+
+    user = data["results"][0]
+    name = user["name"]
+    location = user["location"]
+
+    return (
+        f"Name: {name['first']} {name['last']}\\n"
+        f"Email: {user['email']}\\n"
+        f"Location: {location['city']}, {location['country']}\\n"
+        f"Phone: {user['phone']}"
+    )
+
+
+@mcp.tool()
+async def fetch_post(post_id: int) -> str:
+    """Fetch a post by ID from JSONPlaceholder API.
+
+    Args:
+        post_id: The post ID (1-100)
+    """
+    if not 1 <= post_id <= 100:
+        return "Post ID must be between 1 and 100."
+
+    data = await fetch_json(f"https://jsonplaceholder.typicode.com/posts/{post_id}")
+
+    if not data:
+        return f"Failed to fetch post {post_id}."
+
+    return (
+        f"Post #{data['id']}\\n"
+        f"Title: {data['title']}\\n\\n"
+        f"{data['body']}"
+    )
+
+
+# Create ASGI app from FastMCP server and wrap with Mangum for Lambda
+lambda_handler = Mangum(mcp.sse_app(), lifespan="off")
+"
+`;
+
+exports[`Assets Directory Snapshots > MCP assets > mcp/mcp/python-fastmcp-lambda/pyproject.toml should match snapshot 1`] = `
+"[build-system]
+requires = ["hatchling"]
+build-backend = "hatchling.build"
+
+[project]
+name = "{{ name }}"
+version = "0.1.0"
+description = "FastMCP Server on AWS Lambda"
+readme = "README.md"
+requires-python = ">=3.10"
+dependencies = [
+    "mcp[cli] >= 1.2.0",
+    "httpx >= 0.27.0",
+    "mangum >= 0.19.0",
+]
+
+[tool.hatch.build.targets.wheel]
+packages = ["."]
+"
+`;
+
 exports[`Assets Directory Snapshots > MCP assets > mcp/mcp/python-lambda/README.md should match snapshot 1`] = `
 "# {{ Name }}
 
diff --git a/src/assets/mcp/python-fastmcp-lambda/README.md b/src/assets/mcp/python-fastmcp-lambda/README.md
new file mode 100644
index 00000000..4a707fe1
--- /dev/null
+++ b/src/assets/mcp/python-fastmcp-lambda/README.md
@@ -0,0 +1,27 @@
+# {{ name }}
+
+FastMCP server running on AWS Lambda with a function URL, generated by the AgentCore CLI.
+
+Demonstrates HTTP tool patterns with proper error handling and retry logic.
+
+## How It Works
+
+This server uses [FastMCP](https://github.com/jlowin/fastmcp) to define MCP tools and
+[Mangum](https://github.com/jordanh/mangum) to adapt the ASGI app for AWS Lambda.
+The Lambda function URL provides the HTTP endpoint that the AgentCore gateway connects to.
+
+## Available Tools
+
+| Tool              | Description                                            |
+| ----------------- | ------------------------------------------------------ |
+| `lookup_ip`       | Look up geolocation and network info for an IP address |
+| `get_random_user` | Generate a random user profile for testing             |
+| `fetch_post`      | Fetch a post by ID from JSONPlaceholder API            |
+
+## Deployment
+
+```bash
+agentcore deploy
+```
+
+The CDK stack creates the Lambda function, function URL, and wires it to the gateway target.
diff --git a/src/assets/mcp/python-fastmcp-lambda/handler.py b/src/assets/mcp/python-fastmcp-lambda/handler.py
new file mode 100644
index 00000000..28f2aef3
--- /dev/null
+++ b/src/assets/mcp/python-fastmcp-lambda/handler.py
@@ -0,0 +1,114 @@
+"""
+FastMCP Server for AWS Lambda with Function URL.
+
+This template shows:
+- FastMCP server running on Lambda via Mangum ASGI adapter
+- HTTP tool patterns with proper error handling
+- Retry logic and response validation
+
+Deploy with: agentcore deploy
+"""
+
+import logging
+from typing import Any
+
+import httpx
+from mangum import Mangum
+from mcp.server.fastmcp import FastMCP
+
+logging.basicConfig(level=logging.INFO, format="%(levelname)s - %(message)s")
+logger = logging.getLogger(__name__)
+
+mcp = FastMCP("tools")
+
+HTTP_TIMEOUT = 10.0
+MAX_RETRIES = 2
+
+
+async def fetch_json(url: str, headers: dict[str, str] | None = None) -> dict[str, Any] | None:
+    """Make an HTTP GET request with retry logic."""
+    async with httpx.AsyncClient() as client:
+        for attempt in range(MAX_RETRIES):
+            try:
+                response = await client.get(url, headers=headers, timeout=HTTP_TIMEOUT)
+                response.raise_for_status()
+                return response.json()
+            except httpx.TimeoutException:
+                logger.warning(f"Timeout on attempt {attempt + 1} for {url}")
+            except httpx.HTTPStatusError as e:
+                logger.error(f"HTTP {e.response.status_code} for {url}")
+                return None
+            except httpx.RequestError as e:
+                logger.error(f"Request failed: {e}")
+                return None
+    return None
+
+
+@mcp.tool()
+async def lookup_ip(ip_address: str) -> str:
+    """Look up geolocation and network info for an IP address.
+
+    Args:
+        ip_address: IPv4 or IPv6 address to look up
+    """
+    data = await fetch_json(f"http://ip-api.com/json/{ip_address}")
+
+    if not data:
+        return f"Failed to look up IP: {ip_address}"
+
+    if data.get("status") == "fail":
+        return f"Lookup failed: {data.get('message', 'unknown error')}"
+
+    return (
+        f"IP: {data['query']}\n"
+        f"Location: {data['city']}, {data['regionName']}, {data['country']}\n"
+        f"ISP: {data['isp']}\n"
+        f"Organization: {data['org']}\n"
+        f"Timezone: {data['timezone']}"
+    )
+
+
+@mcp.tool()
+async def get_random_user() -> str:
+    """Generate a random user profile for testing or mock data."""
+    data = await fetch_json("https://randomuser.me/api/")
+
+    if not data or "results" not in data:
+        return "Failed to generate random user."
+
+    user = data["results"][0]
+    name = user["name"]
+    location = user["location"]
+
+    return (
+        f"Name: {name['first']} {name['last']}\n"
+        f"Email: {user['email']}\n"
+        f"Location: {location['city']}, {location['country']}\n"
+        f"Phone: {user['phone']}"
+    )
+
+
+@mcp.tool()
+async def fetch_post(post_id: int) -> str:
+    """Fetch a post by ID from JSONPlaceholder API.
+
+    Args:
+        post_id: The post ID (1-100)
+    """
+    if not 1 <= post_id <= 100:
+        return "Post ID must be between 1 and 100."
+
+    data = await fetch_json(f"https://jsonplaceholder.typicode.com/posts/{post_id}")
+
+    if not data:
+        return f"Failed to fetch post {post_id}."
+
+    return (
+        f"Post #{data['id']}\n"
+        f"Title: {data['title']}\n\n"
+        f"{data['body']}"
+    )
+
+
+# Create ASGI app from FastMCP server and wrap with Mangum for Lambda
+lambda_handler = Mangum(mcp.sse_app(), lifespan="off")
diff --git a/src/assets/mcp/python-fastmcp-lambda/pyproject.toml b/src/assets/mcp/python-fastmcp-lambda/pyproject.toml
new file mode 100644
index 00000000..ba5b0d8d
--- /dev/null
+++ b/src/assets/mcp/python-fastmcp-lambda/pyproject.toml
@@ -0,0 +1,18 @@
+[build-system]
+requires = ["hatchling"]
+build-backend = "hatchling.build"
+
+[project]
+name = "{{ name }}"
+version = "0.1.0"
+description = "FastMCP Server on AWS Lambda"
+readme = "README.md"
+requires-python = ">=3.10"
+dependencies = [
+    "mcp[cli] >= 1.2.0",
+    "httpx >= 0.27.0",
+    "mangum >= 0.19.0",
+]
+
+[tool.hatch.build.targets.wheel]
+packages = ["."]
diff --git a/src/cli/commands/add/__tests__/actions.test.ts b/src/cli/commands/add/__tests__/actions.test.ts
index 852523bc..84cc4713 100644
--- a/src/cli/commands/add/__tests__/actions.test.ts
+++ b/src/cli/commands/add/__tests__/actions.test.ts
@@ -1,6 +1,15 @@
 import { buildGatewayTargetConfig } from '../actions.js';
 import type { ValidatedAddGatewayTargetOptions } from '../actions.js';
-import { describe, expect, it } from 'vitest';
+import { afterEach, describe, expect, it, vi } from 'vitest';
+
+const mockCreateToolFromWizard = vi.fn().mockResolvedValue({ toolName: 'test', projectPath: '/tmp' });
+const mockCreateExternalGatewayTarget = vi.fn().mockResolvedValue({ toolName: 'test', projectPath: '' });
+
+vi.mock('../../../operations/mcp/create-mcp', () => ({
+  createToolFromWizard: (...args: unknown[]) => mockCreateToolFromWizard(...args),
+  createExternalGatewayTarget: (...args: unknown[]) => mockCreateExternalGatewayTarget(...args),
+  createGatewayFromWizard: vi.fn(),
+}));
 
 describe('buildGatewayTargetConfig', () => {
   it('maps name, gateway, language correctly', () => {
@@ -66,3 +75,55 @@ describe('buildGatewayTargetConfig', () => {
     expect(config.outboundAuth).toBeUndefined();
   });
 });
+
+// Dynamic import to pick up mocks
+const { handleAddGatewayTarget } = await import('../actions.js');
+
+describe('handleAddGatewayTarget', () => {
+  afterEach(() => vi.clearAllMocks());
+
+  it('routes existing-endpoint to createExternalGatewayTarget', async () => {
+    const options: ValidatedAddGatewayTargetOptions = {
+      name: 'test-tool',
+      language: 'Other',
+      host: 'Lambda',
+      source: 'existing-endpoint',
+      endpoint: 'https://example.com/mcp',
+      gateway: 'my-gw',
+    };
+
+    await handleAddGatewayTarget(options);
+
+    expect(mockCreateExternalGatewayTarget).toHaveBeenCalledOnce();
+    expect(mockCreateToolFromWizard).not.toHaveBeenCalled();
+  });
+
+  it('routes create-new to createToolFromWizard', async () => {
+    const options: ValidatedAddGatewayTargetOptions = {
+      name: 'test-tool',
+      language: 'Python',
+      host: 'Lambda',
+      source: 'create-new',
+      gateway: 'my-gw',
+    };
+
+    await handleAddGatewayTarget(options);
+
+    expect(mockCreateToolFromWizard).toHaveBeenCalledOnce();
+    expect(mockCreateExternalGatewayTarget).not.toHaveBeenCalled();
+  });
+
+  it('routes to createToolFromWizard when source not specified', async () => {
+    const options: ValidatedAddGatewayTargetOptions = {
+      name: 'test-tool',
+      language: 'Python',
+      host: 'Lambda',
+      gateway: 'my-gw',
+    };
+
+    await handleAddGatewayTarget(options);
+
+    expect(mockCreateToolFromWizard).toHaveBeenCalledOnce();
+    expect(mockCreateExternalGatewayTarget).not.toHaveBeenCalled();
+  });
+});
diff --git a/src/cli/commands/add/__tests__/validate.test.ts b/src/cli/commands/add/__tests__/validate.test.ts
index e9a7992a..4e66f32b 100644
--- a/src/cli/commands/add/__tests__/validate.test.ts
+++ b/src/cli/commands/add/__tests__/validate.test.ts
@@ -422,6 +422,47 @@ describe('validate', () => {
       expect(result.valid).toBe(false);
       expect(result.error).toContain('--credential-name is required');
     });
+
+    // Source and host defaults
+    it('defaults source to create-new when not specified', async () => {
+      const options: AddGatewayTargetOptions = { name: 'test-tool', language: 'Python' };
+      const result = await validateAddGatewayTargetOptions(options);
+      expect(result.valid).toBe(true);
+      expect(options.source).toBe('create-new');
+    });
+
+    it('defaults host to Lambda when not specified', async () => {
+      const options: AddGatewayTargetOptions = { name: 'test-tool', language: 'Python' };
+      const result = await validateAddGatewayTargetOptions(options);
+      expect(result.valid).toBe(true);
+      expect(options.host).toBe('Lambda');
+    });
+
+    // Lambda-only enforcement
+    it('rejects AgentCoreRuntime host for create-new', async () => {
+      const options: AddGatewayTargetOptions = {
+        name: 'test-tool',
+        language: 'Python',
+        source: 'create-new',
+        host: 'AgentCoreRuntime',
+      };
+      const result = await validateAddGatewayTargetOptions(options);
+      expect(result.valid).toBe(false);
+      expect(result.error).toBe('Only Lambda is supported as compute host for scaffolded targets');
+    });
+
+    // Host rejected for existing-endpoint
+    it('rejects --host with existing-endpoint', async () => {
+      const options: AddGatewayTargetOptions = {
+        name: 'test-tool',
+        source: 'existing-endpoint',
+        endpoint: 'https://example.com/mcp',
+        host: 'Lambda',
+      };
+      const result = await validateAddGatewayTargetOptions(options);
+      expect(result.valid).toBe(false);
+      expect(result.error).toBe('--host is not applicable for existing endpoint targets');
+    });
   });
 
   describe('validateAddMemoryOptions', () => {
diff --git a/src/cli/commands/add/actions.ts b/src/cli/commands/add/actions.ts
index 0d52fd3f..8f4aabf4 100644
--- a/src/cli/commands/add/actions.ts
+++ b/src/cli/commands/add/actions.ts
@@ -23,7 +23,11 @@ import {
   createCredential,
   resolveCredentialStrategy,
 } from '../../operations/identity/create-identity';
-import { createGatewayFromWizard, createToolFromWizard } from '../../operations/mcp/create-mcp';
+import {
+  createExternalGatewayTarget,
+  createGatewayFromWizard,
+  createToolFromWizard,
+} from '../../operations/mcp/create-mcp';
 import { createMemory } from '../../operations/memory/create-memory';
 import { createRenderer } from '../../templates';
 import type { MemoryOption } from '../../tui/screens/generate/types';
@@ -342,6 +346,10 @@ export async function handleAddGatewayTarget(
     }
 
     const config = buildGatewayTargetConfig(options);
+    if (config.source === 'existing-endpoint') {
+      const result = await createExternalGatewayTarget(config);
+      return { success: true, toolName: result.toolName };
+    }
     const result = await createToolFromWizard(config);
     return { success: true, toolName: result.toolName, sourcePath: result.projectPath };
   } catch (err) {
diff --git a/src/cli/commands/add/validate.ts b/src/cli/commands/add/validate.ts
index d7cbc802..b7e6a62c 100644
--- a/src/cli/commands/add/validate.ts
+++ b/src/cli/commands/add/validate.ts
@@ -198,6 +198,9 @@ export async function validateAddGatewayTargetOptions(options: AddGatewayTargetO
   }
 
   if (options.source === 'existing-endpoint') {
+    if (options.host) {
+      return { valid: false, error: '--host is not applicable for existing endpoint targets' };
+    }
     if (!options.endpoint) {
       return { valid: false, error: '--endpoint is required when source is existing-endpoint' };
     }
@@ -218,6 +221,15 @@ export async function validateAddGatewayTargetOptions(options: AddGatewayTargetO
     return { valid: true };
   }
 
+  // Default source to create-new when not specified (scaffold flow)
+  options.source ??= 'create-new';
+  // Default host to Lambda for scaffolded targets
+  options.host ??= 'Lambda';
+
+  if (options.host !== 'Lambda') {
+    return { valid: false, error: 'Only Lambda is supported as compute host for scaffolded targets' };
+  }
+
   if (!options.language) {
     return { valid: false, error: '--language is required' };
   }
diff --git a/src/cli/operations/mcp/create-mcp.ts b/src/cli/operations/mcp/create-mcp.ts
index d6e36a1f..1d814067 100644
--- a/src/cli/operations/mcp/create-mcp.ts
+++ b/src/cli/operations/mcp/create-mcp.ts
@@ -345,7 +345,7 @@ export async function createToolFromWizard(config: AddGatewayTargetConfig): Prom
   // Create a single target with all tool definitions
   const target: AgentCoreGatewayTarget = {
     name: config.name,
-    targetType: config.host === 'AgentCoreRuntime' ? 'mcpServer' : 'lambda',
+    targetType: 'mcpServer',
     toolDefinitions: toolDefs,
     compute:
       config.host === 'Lambda'
diff --git a/src/cli/templates/GatewayTargetRenderer.ts b/src/cli/templates/GatewayTargetRenderer.ts
index 12e25f4d..3505a16a 100644
--- a/src/cli/templates/GatewayTargetRenderer.ts
+++ b/src/cli/templates/GatewayTargetRenderer.ts
@@ -79,7 +79,7 @@ export async function renderGatewayTargetTemplate(
   }
 
   // Select template based on compute host
-  const templateSubdir = host === 'Lambda' ? 'python-lambda' : 'python';
+  const templateSubdir = host === 'Lambda' ? 'python-fastmcp-lambda' : 'python';
   const templateDir = getTemplatePath('mcp', templateSubdir);
 
   await copyAndRenderDir(templateDir, outputDir, { Name: toolName });
diff --git a/src/cli/tui/screens/mcp/useAddGatewayTargetWizard.ts b/src/cli/tui/screens/mcp/useAddGatewayTargetWizard.ts
index 29aa54ac..c92498eb 100644
--- a/src/cli/tui/screens/mcp/useAddGatewayTargetWizard.ts
+++ b/src/cli/tui/screens/mcp/useAddGatewayTargetWizard.ts
@@ -13,7 +13,8 @@ function getSteps(source?: 'existing-endpoint' | 'create-new'): AddGatewayTarget
   if (source === 'existing-endpoint') {
     return ['name', 'source', 'endpoint', 'gateway', 'confirm'];
   }
-  return ['name', 'source', 'language', 'gateway', 'host', 'confirm'];
+  // Phase 1: Lambda is the only compute host, so skip host selection
+  return ['name', 'source', 'language', 'gateway', 'confirm'];
 }
 
 function deriveToolDefinition(name: string): ToolDefinition {
@@ -91,13 +92,8 @@ export function useAddGatewayTargetWizard(existingGateways: string[] = []) {
 
   const setGateway = useCallback((gateway: string) => {
     setConfig(c => {
-      const isExternal = c.source === 'existing-endpoint';
       const isSkipped = gateway === SKIP_FOR_NOW;
-      if (isExternal || isSkipped) {
-        setStep('confirm');
-      } else {
-        setStep('host');
-      }
+      setStep('confirm');
       return { ...c, gateway: isSkipped ? undefined : gateway };
     });
   }, []);
diff --git a/src/schema/schemas/__tests__/mcp.test.ts b/src/schema/schemas/__tests__/mcp.test.ts
index 8c95c268..97d5b7a7 100644
--- a/src/schema/schemas/__tests__/mcp.test.ts
+++ b/src/schema/schemas/__tests__/mcp.test.ts
@@ -492,6 +492,19 @@ describe('AgentCoreGatewayTargetSchema with outbound auth', () => {
     });
     expect(result.success).toBe(false);
   });
+
+  it('mcpServer target with compute (scaffolded) passes', () => {
+    const result = AgentCoreGatewayTargetSchema.safeParse({
+      name: 'myTarget',
+      targetType: 'mcpServer',
+      compute: {
+        host: 'Lambda',
+        implementation: { language: 'Python', path: 'app/mcp/myTarget', handler: 'handler.lambda_handler' },
+        pythonVersion: 'PYTHON_3_12',
+      },
+    });
+    expect(result.success).toBe(true);
+  });
 });
 
 describe('AgentCoreMcpSpecSchema', () => {