diff --git a/client/src/components/SidePanel/MCPBuilder/MCPAuth.tsx b/client/src/components/SidePanel/MCPBuilder/MCPAuth.tsx
index 9576a10bce..51f8347145 100644
--- a/client/src/components/SidePanel/MCPBuilder/MCPAuth.tsx
+++ b/client/src/components/SidePanel/MCPBuilder/MCPAuth.tsx
@@ -28,6 +28,7 @@ enum AuthorizationTypeEnum {
 export interface AuthConfig {
   auth_type?: AuthTypeEnum;
   api_key?: string;
+  api_key_source?: 'admin' | 'user'; // Whether admin provides key for all or each user provides their own
   api_key_authorization_type?: AuthorizationTypeEnum;
   api_key_custom_header?: string;
   oauth_client_id?: string;
@@ -171,8 +172,6 @@ export default function MCPAuth({
                       {localize('com_ui_none')}
                     </label>
                   </div>
-                  {/* 
-                  TODO Support API keys for auth
                   <div className="flex items-center gap-2">
                     <label htmlFor="auth-apikey" className="flex cursor-pointer items-center gap-1">
                       <RadioGroup.Item
@@ -189,7 +188,7 @@ export default function MCPAuth({
                       </RadioGroup.Item>
                       {localize('com_ui_api_key')}
                     </label>
-                  </div> */}
+                  </div>
                   <div className="flex items-center gap-2">
                     <label htmlFor="auth-oauth" className="flex cursor-pointer items-center gap-1">
                       <RadioGroup.Item
@@ -228,21 +227,84 @@ export default function MCPAuth({
 const ApiKey = ({ inputClasses }: { inputClasses: string }) => {
   const localize = useLocalize();
   const { register, watch, setValue } = useFormContext();
-  const authorization_type = watch('api_key_authorization_type') || AuthorizationTypeEnum.Basic;
+  const api_key_source = watch('api_key_source') || 'admin';
+  const authorization_type = watch('api_key_authorization_type') || AuthorizationTypeEnum.Bearer;
 
   return (
     <>
-      <label className="mb-1 block text-sm font-medium">{localize('com_ui_api_key')}</label>
-      <input
-        placeholder="<HIDDEN>"
-        type="password"
-        autoComplete="new-password"
-        className={inputClasses}
-        {...register('api_key')}
-      />
-      <label className="mb-1 block text-sm font-medium">{localize('com_ui_auth_type')}</label>
+      {/* API Key Source selection */}
+      <label className="mb-1 block text-sm font-medium">{localize('com_ui_api_key_source')}</label>
       <RadioGroup.Root
-        defaultValue={AuthorizationTypeEnum.Basic}
+        defaultValue="admin"
+        onValueChange={(value) => setValue('api_key_source', value)}
+        value={api_key_source}
+        role="radiogroup"
+        aria-required="true"
+        dir="ltr"
+        className="mb-3 flex flex-col gap-2"
+        style={{ outline: 'none' }}
+      >
+        <div className="flex items-center gap-2">
+          <label htmlFor="source-admin" className="flex cursor-pointer items-center gap-1">
+            <RadioGroup.Item
+              type="button"
+              role="radio"
+              value="admin"
+              id="source-admin"
+              className={cn(
+                'mr-1 flex h-5 w-5 items-center justify-center rounded-full border',
+                'border-border-heavy bg-surface-primary',
+              )}
+            >
+              <RadioGroup.Indicator className="h-2 w-2 rounded-full bg-text-primary" />
+            </RadioGroup.Item>
+            {localize('com_ui_admin_provides_key')}
+          </label>
+        </div>
+        <div className="flex items-center gap-2">
+          <label htmlFor="source-user" className="flex cursor-pointer items-center gap-1">
+            <RadioGroup.Item
+              type="button"
+              role="radio"
+              value="user"
+              id="source-user"
+              className={cn(
+                'mr-1 flex h-5 w-5 items-center justify-center rounded-full border',
+                'border-border-heavy bg-surface-primary',
+              )}
+            >
+              <RadioGroup.Indicator className="h-2 w-2 rounded-full bg-text-primary" />
+            </RadioGroup.Item>
+            {localize('com_ui_user_provides_key')}
+          </label>
+        </div>
+      </RadioGroup.Root>
+
+      {/* API Key input - only show for admin-provided mode */}
+      {api_key_source === 'admin' && (
+        <>
+          <label className="mb-1 block text-sm font-medium">{localize('com_ui_api_key')}</label>
+          <input
+            placeholder="<HIDDEN>"
+            type="password"
+            autoComplete="new-password"
+            className={inputClasses}
+            {...register('api_key')}
+          />
+        </>
+      )}
+
+      {/* User-provided mode info */}
+      {api_key_source === 'user' && (
+        <div className="mb-3 rounded-lg border border-border-medium bg-surface-secondary p-3">
+          <p className="text-sm text-text-secondary">{localize('com_ui_user_provides_key_note')}</p>
+        </div>
+      )}
+
+      {/* Header Format selection - shown for both modes */}
+      <label className="mb-1 block text-sm font-medium">{localize('com_ui_header_format')}</label>
+      <RadioGroup.Root
+        defaultValue={AuthorizationTypeEnum.Bearer}
         onValueChange={(value) => setValue('api_key_authorization_type', value)}
         value={authorization_type}
         role="radiogroup"
@@ -251,23 +313,6 @@ const ApiKey = ({ inputClasses }: { inputClasses: string }) => {
         className="mb-2 flex gap-6 overflow-hidden rounded-lg"
         style={{ outline: 'none' }}
       >
-        <div className="flex items-center gap-2">
-          <label htmlFor="auth-basic" className="flex cursor-pointer items-center gap-1">
-            <RadioGroup.Item
-              type="button"
-              role="radio"
-              value={AuthorizationTypeEnum.Basic}
-              id="auth-basic"
-              className={cn(
-                'mr-1 flex h-5 w-5 items-center justify-center rounded-full border',
-                'border-border-heavy bg-surface-primary',
-              )}
-            >
-              <RadioGroup.Indicator className="h-2 w-2 rounded-full bg-text-primary" />
-            </RadioGroup.Item>
-            {localize('com_ui_basic')}
-          </label>
-        </div>
         <div className="flex items-center gap-2">
           <label htmlFor="auth-bearer" className="flex cursor-pointer items-center gap-1">
             <RadioGroup.Item
@@ -285,6 +330,23 @@ const ApiKey = ({ inputClasses }: { inputClasses: string }) => {
             {localize('com_ui_bearer')}
           </label>
         </div>
+        <div className="flex items-center gap-2">
+          <label htmlFor="auth-basic" className="flex cursor-pointer items-center gap-1">
+            <RadioGroup.Item
+              type="button"
+              role="radio"
+              value={AuthorizationTypeEnum.Basic}
+              id="auth-basic"
+              className={cn(
+                'mr-1 flex h-5 w-5 items-center justify-center rounded-full border',
+                'border-border-heavy bg-surface-primary',
+              )}
+            >
+              <RadioGroup.Indicator className="h-2 w-2 rounded-full bg-text-primary" />
+            </RadioGroup.Item>
+            {localize('com_ui_basic')}
+          </label>
+        </div>
         <div className="flex items-center gap-2">
           <label htmlFor="auth-custom" className="flex cursor-pointer items-center gap-1">
             <RadioGroup.Item
diff --git a/client/src/components/SidePanel/MCPBuilder/MCPServerDialog.tsx b/client/src/components/SidePanel/MCPBuilder/MCPServerDialog.tsx
index 42514182c2..b4da42482b 100644
--- a/client/src/components/SidePanel/MCPBuilder/MCPServerDialog.tsx
+++ b/client/src/components/SidePanel/MCPBuilder/MCPServerDialog.tsx
@@ -85,10 +85,13 @@ export default function MCPServerDialog({
       let authType: AuthTypeEnum = AuthTypeEnum.None;
       if (server.config.oauth) {
         authType = AuthTypeEnum.OAuth;
-      } else if ('api_key' in server.config) {
+      } else if ('apiKey' in server.config && server.config.apiKey) {
         authType = AuthTypeEnum.ServiceHttp;
       }
 
+      // Extract apiKey config if present
+      const apiKeyConfig = 'apiKey' in server.config ? server.config.apiKey : undefined;
+
       return {
         title: server.config.title || '',
         description: server.config.description || '',
@@ -97,9 +100,12 @@ export default function MCPServerDialog({
         icon: server.config.iconPath || '',
         auth: {
           auth_type: authType,
-          api_key: '',
-          api_key_authorization_type: AuthorizationTypeEnum.Basic,
-          api_key_custom_header: '',
+          api_key: '', // NEVER pre-fill secrets
+          api_key_source: (apiKeyConfig?.source as 'admin' | 'user') || 'admin',
+          api_key_authorization_type:
+            (apiKeyConfig?.authorization_type as AuthorizationTypeEnum) ||
+            AuthorizationTypeEnum.Bearer,
+          api_key_custom_header: apiKeyConfig?.custom_header || '',
           oauth_client_id: server.config.oauth?.client_id || '',
           oauth_client_secret: '', // NEVER pre-fill secrets
           oauth_authorization_url: server.config.oauth?.authorization_url || '',
@@ -119,7 +125,8 @@ export default function MCPServerDialog({
       auth: {
         auth_type: AuthTypeEnum.None,
         api_key: '',
-        api_key_authorization_type: AuthorizationTypeEnum.Basic,
+        api_key_source: 'admin',
+        api_key_authorization_type: AuthorizationTypeEnum.Bearer,
         api_key_custom_header: '',
         oauth_client_id: '',
         oauth_client_secret: '',
@@ -251,6 +258,22 @@ export default function MCPServerDialog({
         }
       }
 
+      // Add API Key if auth type is service_http
+      if (formData.auth.auth_type === AuthTypeEnum.ServiceHttp) {
+        const source = formData.auth.api_key_source || 'admin';
+        const authorizationType = formData.auth.api_key_authorization_type || 'bearer';
+
+        config.apiKey = {
+          source,
+          authorization_type: authorizationType,
+          ...(source === 'admin' && formData.auth.api_key && { key: formData.auth.api_key }),
+          ...(authorizationType === 'custom' &&
+            formData.auth.api_key_custom_header && {
+              custom_header: formData.auth.api_key_custom_header,
+            }),
+        };
+      }
+
       const params: MCPServerCreateParams = {
         config,
       };
diff --git a/client/src/locales/en/translation.json b/client/src/locales/en/translation.json
index 905fda8302..e97f74ad68 100644
--- a/client/src/locales/en/translation.json
+++ b/client/src/locales/en/translation.json
@@ -704,6 +704,11 @@
   "com_ui_analyzing": "Analyzing",
   "com_ui_analyzing_finished": "Finished analyzing",
   "com_ui_api_key": "API Key",
+  "com_ui_api_key_source": "API Key Source",
+  "com_ui_admin_provides_key": "Provide a key for all users",
+  "com_ui_user_provides_key": "Each user provides their own key",
+  "com_ui_user_provides_key_note": "Users will be prompted to enter their API key when connecting to this server.",
+  "com_ui_header_format": "Header Format",
   "com_ui_archive": "Archive",
   "com_ui_archive_delete_error": "Failed to delete archived conversation",
   "com_ui_archive_error": "Failed to archive conversation",
diff --git a/packages/api/src/mcp/registry/MCPServerInspector.ts b/packages/api/src/mcp/registry/MCPServerInspector.ts
index 69aef464c4..d7807e6c95 100644
--- a/packages/api/src/mcp/registry/MCPServerInspector.ts
+++ b/packages/api/src/mcp/registry/MCPServerInspector.ts
@@ -68,6 +68,12 @@ export class MCPServerInspector {
       return;
     }
 
+    // Admin-provided API key means no OAuth flow is needed
+    if (this.config.apiKey?.source === 'admin') {
+      this.config.requiresOAuth = false;
+      return;
+    }
+
     const result = await detectOAuthRequirement(this.config.url);
     this.config.requiresOAuth = result.requiresOAuth;
     this.config.oauthMetadata = result.metadata;
diff --git a/packages/api/src/mcp/registry/MCPServersRegistry.ts b/packages/api/src/mcp/registry/MCPServersRegistry.ts
index 32c0c5b52c..eb1ee1d3d6 100644
--- a/packages/api/src/mcp/registry/MCPServersRegistry.ts
+++ b/packages/api/src/mcp/registry/MCPServersRegistry.ts
@@ -95,9 +95,25 @@ export class MCPServersRegistry {
     userId?: string,
   ): Promise<t.ParsedServerConfig> {
     const configRepo = this.getConfigRepository(storageLocation);
+
+    // Merge existing admin API key if not provided in update (needed for inspection)
+    let configForInspection = { ...config };
+    if (config.apiKey?.source === 'admin' && !config.apiKey?.key) {
+      const existingConfig = await configRepo.get(serverName, userId);
+      if (existingConfig?.apiKey?.key) {
+        configForInspection = {
+          ...configForInspection,
+          apiKey: {
+            ...configForInspection.apiKey!,
+            key: existingConfig.apiKey.key,
+          },
+        };
+      }
+    }
+
     let parsedConfig: t.ParsedServerConfig;
     try {
-      parsedConfig = await MCPServerInspector.inspect(serverName, config);
+      parsedConfig = await MCPServerInspector.inspect(serverName, configForInspection);
     } catch (error) {
       logger.error(`[MCPServersRegistry] Failed to inspect server "${serverName}":`, error);
       throw new Error(`MCP_INSPECTION_FAILED: Failed to connect to MCP server "${serverName}"`);
diff --git a/packages/api/src/mcp/registry/__tests__/MCPServerInspector.test.ts b/packages/api/src/mcp/registry/__tests__/MCPServerInspector.test.ts
index 0e4a6ebbe9..72bf57857e 100644
--- a/packages/api/src/mcp/registry/__tests__/MCPServerInspector.test.ts
+++ b/packages/api/src/mcp/registry/__tests__/MCPServerInspector.test.ts
@@ -175,6 +175,55 @@ describe('MCPServerInspector', () => {
       });
     });
 
+    it('should set requiresOAuth to false when apiKey.source is admin', async () => {
+      const rawConfig: t.MCPOptions = {
+        type: 'sse',
+        url: 'https://api.example.com/sse',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'my-api-key',
+        },
+      };
+
+      // OAuth detection should be skipped
+      mockDetectOAuthRequirement.mockResolvedValue({
+        requiresOAuth: true, // This would be returned if called, but it shouldn't be
+        method: 'protected-resource-metadata',
+      });
+
+      const result = await MCPServerInspector.inspect('test_server', rawConfig, mockConnection);
+
+      // Should NOT call OAuth detection
+      expect(mockDetectOAuthRequirement).not.toHaveBeenCalled();
+
+      // requiresOAuth should be false due to admin-provided API key
+      expect(result.requiresOAuth).toBe(false);
+      expect(result.apiKey?.source).toBe('admin');
+    });
+
+    it('should still detect OAuth when apiKey.source is user', async () => {
+      const rawConfig: t.MCPOptions = {
+        type: 'sse',
+        url: 'https://api.example.com/sse',
+        apiKey: {
+          source: 'user',
+          authorization_type: 'bearer',
+        },
+      };
+
+      mockDetectOAuthRequirement.mockResolvedValue({
+        requiresOAuth: true,
+        method: 'protected-resource-metadata',
+      });
+
+      const result = await MCPServerInspector.inspect('test_server', rawConfig, mockConnection);
+
+      // Should call OAuth detection for user-provided API key
+      expect(mockDetectOAuthRequirement).toHaveBeenCalled();
+      expect(result.requiresOAuth).toBe(true);
+    });
+
     it('should fetch capabilities when server has no tools', async () => {
       const rawConfig: t.MCPOptions = {
         type: 'stdio',
diff --git a/packages/api/src/mcp/registry/__tests__/ServerConfigsDB.test.ts b/packages/api/src/mcp/registry/__tests__/ServerConfigsDB.test.ts
index 592f0330e6..857c847c92 100644
--- a/packages/api/src/mcp/registry/__tests__/ServerConfigsDB.test.ts
+++ b/packages/api/src/mcp/registry/__tests__/ServerConfigsDB.test.ts
@@ -265,6 +265,250 @@ describe('ServerConfigsDB', () => {
       expect(retrieved?.oauth?.client_id).toBe('my-client-id');
       expect(retrieved?.oauth?.client_secret).toBeUndefined();
     });
+
+    it('should encrypt apiKey.key when saving admin-provided API key', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'Admin API Key Server',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'my-secret-api-key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Verify the key is encrypted in DB (not plaintext)
+      const MCPServer = mongoose.models.MCPServer;
+      const server = await MCPServer.findOne({ serverName: created.serverName });
+      expect(server?.config?.apiKey?.key).not.toBe('my-secret-api-key');
+      expect(server?.config?.apiKey?.source).toBe('admin');
+      expect(server?.config?.apiKey?.authorization_type).toBe('bearer');
+
+      // Verify the key is decrypted when accessed via get()
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      expect(retrieved?.apiKey?.key).toBe('my-secret-api-key');
+    });
+
+    it('should preserve apiKey.key when not provided in update (admin mode)', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Preserve Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'original-api-key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Update without providing the key
+      const updatedConfig: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Preserve Test',
+        description: 'Updated description',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          // key not provided - should be preserved
+        },
+      };
+      await serverConfigsDB.update(created.serverName, updatedConfig, userId);
+
+      // Verify the key is still available and decrypted
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      expect(retrieved?.apiKey?.key).toBe('original-api-key');
+      expect(retrieved?.description).toBe('Updated description');
+    });
+
+    it('should allow updating apiKey.key when explicitly provided', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Update Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'old-api-key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Update with new key
+      const updatedConfig: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Update Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'new-api-key',
+        },
+      };
+      await serverConfigsDB.update(created.serverName, updatedConfig, userId);
+
+      // Verify the key is updated
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      expect(retrieved?.apiKey?.key).toBe('new-api-key');
+    });
+
+    it('should preserve apiKey.key when authorization_type changes (bearer to custom)', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Auth Type Change Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'my-api-key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Update: change from bearer to custom header, without providing key
+      const updatedConfig: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Auth Type Change Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'custom',
+          custom_header: 'X-My-Api-Key',
+          // key not provided - should be preserved
+        },
+      };
+      await serverConfigsDB.update(created.serverName, updatedConfig, userId);
+
+      // Verify the key is preserved and authorization_type/custom_header updated
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      expect(retrieved?.apiKey?.key).toBe('my-api-key');
+      expect(retrieved?.apiKey?.authorization_type).toBe('custom');
+      expect(retrieved?.apiKey?.custom_header).toBe('X-My-Api-Key');
+    });
+
+    it('should NOT preserve apiKey.key when switching from admin to user source', async () => {
+      // Create server with admin-provided API key
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'Source Switch Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'admin-secret-key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Update to user-provided mode (no key should be preserved)
+      const updatedConfig: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'Source Switch Test',
+        apiKey: {
+          source: 'user',
+          authorization_type: 'bearer',
+        },
+      };
+      await serverConfigsDB.update(created.serverName, updatedConfig, userId);
+
+      // Verify the old admin key is NOT preserved (would be a security issue)
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      expect(retrieved?.apiKey?.source).toBe('user');
+      expect(retrieved?.apiKey?.key).toBeUndefined();
+    });
+
+    it('should NOT preserve apiKey.key when switching from user to admin without providing key', async () => {
+      // Create server with user-provided API key mode
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'User to Admin Switch Test',
+        apiKey: {
+          source: 'user',
+          authorization_type: 'bearer',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Update to admin mode without providing a key
+      const updatedConfig: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'User to Admin Switch Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          // key not provided - should NOT try to preserve from user mode
+        },
+      };
+      await serverConfigsDB.update(created.serverName, updatedConfig, userId);
+
+      // Verify no key is present (user mode doesn't store keys)
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      expect(retrieved?.apiKey?.source).toBe('admin');
+      expect(retrieved?.apiKey?.key).toBeUndefined();
+    });
+
+    it('should transform user-provided API key config with customUserVars and headers', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'User API Key Server',
+        apiKey: {
+          source: 'user',
+          authorization_type: 'bearer',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      // Cast to access headers (SSE config has headers)
+      const retrievedWithHeaders = retrieved as ParsedServerConfig & {
+        headers?: Record<string, string>;
+      };
+
+      // Should have customUserVars with MCP_API_KEY
+      expect(retrieved?.customUserVars).toBeDefined();
+      expect(retrieved?.customUserVars?.MCP_API_KEY).toEqual({
+        title: 'API Key',
+        description: 'Your API key for this MCP server',
+      });
+
+      // Should have headers with placeholder
+      expect(retrievedWithHeaders?.headers).toBeDefined();
+      expect(retrievedWithHeaders?.headers?.Authorization).toBe('Bearer {{MCP_API_KEY}}');
+
+      // Key should be undefined (user provides it)
+      expect(retrieved?.apiKey?.key).toBeUndefined();
+    });
+
+    it('should transform user-provided API key with custom header', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'Custom Header API Key Server',
+        apiKey: {
+          source: 'user',
+          authorization_type: 'custom',
+          custom_header: 'X-My-Api-Key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+      // Cast to access headers (SSE config has headers)
+      const retrievedWithHeaders = retrieved as ParsedServerConfig & {
+        headers?: Record<string, string>;
+      };
+
+      // Should have headers with custom header name
+      expect(retrievedWithHeaders?.headers?.['X-My-Api-Key']).toBe('{{MCP_API_KEY}}');
+      expect(retrievedWithHeaders?.headers?.Authorization).toBeUndefined();
+    });
   });
 
   describe('remove()', () => {
@@ -997,5 +1241,36 @@ describe('ServerConfigsDB', () => {
       expect(result[created2.serverName]?.oauth?.client_id).toBe('client-2');
       expect(result[created2.serverName]?.oauth?.client_secret).toBeUndefined();
     });
+
+    it('should return config without apiKey.key when decryption fails (graceful degradation)', async () => {
+      const config: ParsedServerConfig = {
+        type: 'sse',
+        url: 'https://example.com/mcp',
+        title: 'API Key Decryption Failure Test',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'test-api-key',
+        },
+      };
+      const created = await serverConfigsDB.add('temp-name', config, userId);
+
+      // Directly corrupt the encrypted key in the database to simulate decryption failure
+      const MCPServer = mongoose.models.MCPServer;
+      await MCPServer.updateOne(
+        { serverName: created.serverName },
+        { $set: { 'config.apiKey.key': 'invalid:corrupted:encrypted:value' } },
+      );
+
+      // Get should return config without the key (graceful degradation)
+      const retrieved = await serverConfigsDB.get(created.serverName, userId);
+
+      expect(retrieved).toBeDefined();
+      expect(retrieved?.title).toBe('API Key Decryption Failure Test');
+      expect(retrieved?.apiKey?.source).toBe('admin');
+      expect(retrieved?.apiKey?.authorization_type).toBe('bearer');
+      // Key should be removed due to decryption failure
+      expect(retrieved?.apiKey?.key).toBeUndefined();
+    });
   });
 });
diff --git a/packages/api/src/mcp/registry/db/ServerConfigsDB.ts b/packages/api/src/mcp/registry/db/ServerConfigsDB.ts
index d8121557ad..e2eb8d6974 100644
--- a/packages/api/src/mcp/registry/db/ServerConfigsDB.ts
+++ b/packages/api/src/mcp/registry/db/ServerConfigsDB.ts
@@ -95,8 +95,10 @@ export class ServerConfigsDB implements IServerConfigsRepositoryInterface {
         '[ServerConfigsDB.add] User ID is required to create a database-stored MCP server.',
       );
     }
+    // Transform user-provided API key config (adds customUserVars and headers)
+    const transformedConfig = this.transformUserApiKeyConfig(config);
     // Encrypt sensitive fields before storing in database
-    const encryptedConfig = await this.encryptConfig(config);
+    const encryptedConfig = await this.encryptConfig(transformedConfig);
     const createdServer = await this._dbMethods.createMCPServer({
       config: encryptedConfig,
       author: userId,
@@ -132,25 +134,44 @@ export class ServerConfigsDB implements IServerConfigsRepositoryInterface {
       );
     }
 
-    // Handle secret preservation and encryption
     const existingServer = await this._dbMethods.findMCPServerById(serverName);
-    let configToSave: ParsedServerConfig;
+    let configToSave: ParsedServerConfig = { ...config };
 
+    // Transform user-provided API key config (adds customUserVars and headers)
+    configToSave = this.transformUserApiKeyConfig(configToSave);
+
+    // Encrypt NEW secrets only (secrets provided in this update)
+    // We must do this BEFORE preserving existing encrypted secrets
+    configToSave = await this.encryptConfig(configToSave);
+
+    // Preserve existing OAuth client_secret if not provided in update (already encrypted)
     if (!config.oauth?.client_secret && existingServer?.config?.oauth?.client_secret) {
-      // No new secret provided - preserve the existing encrypted secret from DB (don't re-encrypt)
       configToSave = {
-        ...config,
+        ...configToSave,
         oauth: {
-          ...config.oauth,
+          ...configToSave.oauth,
           client_secret: existingServer.config.oauth.client_secret,
         },
       };
-    } else if (config.oauth?.client_secret) {
-      // New secret provided - encrypt it
-      configToSave = await this.encryptConfig(config);
-    } else {
-      // No secret in config or DB - nothing to encrypt
-      configToSave = config;
+    }
+
+    // Preserve existing API key if not provided in update (already encrypted)
+    // Only preserve if both old and new configs use admin mode to avoid cross-mode key leakage
+    if (
+      config.apiKey?.source === 'admin' &&
+      !config.apiKey?.key &&
+      existingServer?.config?.apiKey?.source === 'admin' &&
+      existingServer?.config?.apiKey?.key
+    ) {
+      configToSave = {
+        ...configToSave,
+        apiKey: {
+          source: configToSave.apiKey!.source,
+          authorization_type: configToSave.apiKey!.authorization_type,
+          custom_header: configToSave.apiKey?.custom_header,
+          key: existingServer.config.apiKey.key,
+        },
+      };
     }
 
     // specific user permissions for action permission will be handled in the controller calling the  update method of the registry
@@ -366,56 +387,149 @@ export class ServerConfigsDB implements IServerConfigsRepositoryInterface {
     return await this.decryptConfig(config);
   }
 
+  /**
+   * Transforms user-provided API key config by auto-generating customUserVars and headers.
+   * This is a config transformation, not encryption.
+   * @param config - The server config to transform
+   * @returns The transformed config with customUserVars and headers set up
+   */
+  private transformUserApiKeyConfig(config: ParsedServerConfig): ParsedServerConfig {
+    if (!config.apiKey || config.apiKey.source !== 'user') {
+      return config;
+    }
+
+    const result = { ...config };
+    const headerName =
+      result.apiKey!.authorization_type === 'custom'
+        ? result.apiKey!.custom_header || 'X-Api-Key'
+        : 'Authorization';
+
+    let headerValue: string;
+    if (result.apiKey!.authorization_type === 'basic') {
+      headerValue = 'Basic {{MCP_API_KEY}}';
+    } else if (result.apiKey!.authorization_type === 'bearer') {
+      headerValue = 'Bearer {{MCP_API_KEY}}';
+    } else {
+      headerValue = '{{MCP_API_KEY}}';
+    }
+
+    result.customUserVars = {
+      ...result.customUserVars,
+      MCP_API_KEY: {
+        title: 'API Key',
+        description: 'Your API key for this MCP server',
+      },
+    };
+
+    // Cast to access headers property (not available on Stdio type)
+    const resultWithHeaders = result as ParsedServerConfig & {
+      headers?: Record<string, string>;
+    };
+    resultWithHeaders.headers = {
+      ...resultWithHeaders.headers,
+      [headerName]: headerValue,
+    };
+
+    // Remove key field since it's user-provided (destructure to omit, not set to undefined)
+    // eslint-disable-next-line @typescript-eslint/no-unused-vars
+    const { key: _removed, ...apiKeyWithoutKey } = result.apiKey!;
+    result.apiKey = apiKeyWithoutKey;
+
+    return result;
+  }
+
   /**
    * Encrypts sensitive fields in config before database storage.
-   * Currently encrypts only oauth.client_secret.
+   * Encrypts oauth.client_secret and apiKey.key (when source === 'admin').
    * Throws on failure to prevent storing plaintext secrets.
    */
   private async encryptConfig(config: ParsedServerConfig): Promise<ParsedServerConfig> {
-    if (!config.oauth?.client_secret) {
-      return config;
+    let result = { ...config };
+
+    // Encrypt admin-provided API key
+    if (result.apiKey?.source === 'admin' && result.apiKey.key) {
+      try {
+        result.apiKey = {
+          ...result.apiKey,
+          key: await encryptV2(result.apiKey.key),
+        };
+      } catch (error) {
+        logger.error('[ServerConfigsDB.encryptConfig] Failed to encrypt apiKey.key', error);
+        throw new Error('Failed to encrypt MCP server configuration');
+      }
     }
-    try {
-      return {
-        ...config,
-        oauth: {
-          ...config.oauth,
-          client_secret: await encryptV2(config.oauth.client_secret),
-        },
-      };
-    } catch (error) {
-      logger.error('[ServerConfigsDB.encryptConfig] Failed to encrypt client_secret', error);
-      throw new Error('Failed to encrypt MCP server configuration');
+
+    // Encrypt OAuth client_secret
+    if (result.oauth?.client_secret) {
+      try {
+        result = {
+          ...result,
+          oauth: {
+            ...result.oauth,
+            client_secret: await encryptV2(result.oauth.client_secret),
+          },
+        };
+      } catch (error) {
+        logger.error('[ServerConfigsDB.encryptConfig] Failed to encrypt client_secret', error);
+        throw new Error('Failed to encrypt MCP server configuration');
+      }
     }
+
+    return result;
   }
 
   /**
    * Decrypts sensitive fields in config after database retrieval.
+   * Decrypts oauth.client_secret and apiKey.key (when source === 'admin').
    * Returns config without secret on failure (graceful degradation).
    */
   private async decryptConfig(config: ParsedServerConfig): Promise<ParsedServerConfig> {
-    if (!config.oauth?.client_secret) {
-      return config;
+    let result = { ...config };
+
+    // Handle API key decryption (admin-provided only)
+    if (result.apiKey?.source === 'admin' && result.apiKey.key) {
+      try {
+        result.apiKey = {
+          ...result.apiKey,
+          key: await decryptV2(result.apiKey.key),
+        };
+      } catch (error) {
+        logger.warn(
+          '[ServerConfigsDB.decryptConfig] Failed to decrypt apiKey.key, returning config without key',
+          error,
+        );
+        // eslint-disable-next-line @typescript-eslint/no-unused-vars
+        const { key: _removedKey, ...apiKeyWithoutKey } = result.apiKey;
+        result.apiKey = apiKeyWithoutKey;
+      }
     }
-    try {
-      return {
-        ...config,
-        oauth: {
-          ...config.oauth,
-          client_secret: await decryptV2(config.oauth.client_secret),
-        },
-      };
-    } catch (error) {
-      logger.warn(
-        '[ServerConfigsDB.decryptConfig] Failed to decrypt client_secret, returning config without secret',
-        error,
-      );
-      // eslint-disable-next-line @typescript-eslint/no-unused-vars
-      const { client_secret: _removed, ...oauthWithoutSecret } = config.oauth;
-      return {
-        ...config,
-        oauth: oauthWithoutSecret,
-      };
+
+    // Handle OAuth client_secret decryption
+    if (result.oauth?.client_secret) {
+      // Cast oauth to type with client_secret since we've verified it exists
+      const oauthConfig = result.oauth as { client_secret: string } & typeof result.oauth;
+      try {
+        result = {
+          ...result,
+          oauth: {
+            ...oauthConfig,
+            client_secret: await decryptV2(oauthConfig.client_secret),
+          },
+        };
+      } catch (error) {
+        logger.warn(
+          '[ServerConfigsDB.decryptConfig] Failed to decrypt client_secret, returning config without secret',
+          error,
+        );
+        // eslint-disable-next-line @typescript-eslint/no-unused-vars
+        const { client_secret: _removed, ...oauthWithoutSecret } = oauthConfig;
+        result = {
+          ...result,
+          oauth: oauthWithoutSecret,
+        };
+      }
     }
+
+    return result;
   }
 }
diff --git a/packages/api/src/utils/env.spec.ts b/packages/api/src/utils/env.spec.ts
index e7515de2c3..426afd1970 100644
--- a/packages/api/src/utils/env.spec.ts
+++ b/packages/api/src/utils/env.spec.ts
@@ -1377,4 +1377,157 @@ describe('processMCPEnv', () => {
       }
     });
   });
+
+  describe('admin-provided API key header injection', () => {
+    it('should apply admin-provided bearer API key to Authorization header', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'my-secret-api-key',
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        expect(result.headers?.Authorization).toBe('Bearer my-secret-api-key');
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+
+    it('should apply admin-provided basic API key to Authorization header', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'basic',
+          key: 'base64encodedcreds',
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        expect(result.headers?.Authorization).toBe('Basic base64encodedcreds');
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+
+    it('should apply admin-provided custom API key to custom header', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'custom',
+          custom_header: 'X-Api-Key',
+          key: 'my-custom-api-key',
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        expect(result.headers?.['X-Api-Key']).toBe('my-custom-api-key');
+        expect(result.headers?.Authorization).toBeUndefined();
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+
+    it('should use default X-Api-Key header when custom_header is not provided', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'custom',
+          key: 'my-api-key',
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        expect(result.headers?.['X-Api-Key']).toBe('my-api-key');
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+
+    it('should not apply user-provided API key (handled via placeholders)', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        apiKey: {
+          source: 'user',
+          authorization_type: 'bearer',
+        },
+        headers: {
+          Authorization: 'Bearer {{MCP_API_KEY}}',
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        // User-provided key should NOT be injected - placeholder remains
+        expect(result.headers?.Authorization).toBe('Bearer {{MCP_API_KEY}}');
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+
+    it('should merge admin API key header with existing headers', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        headers: {
+          'Content-Type': 'application/json',
+          'X-Custom-Header': 'custom-value',
+        },
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          key: 'my-api-key',
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        expect(result.headers?.['Content-Type']).toBe('application/json');
+        expect(result.headers?.['X-Custom-Header']).toBe('custom-value');
+        expect(result.headers?.Authorization).toBe('Bearer my-api-key');
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+
+    it('should not inject header when apiKey.key is missing', () => {
+      const options: MCPOptions = {
+        type: 'streamable-http',
+        url: 'https://api.example.com',
+        apiKey: {
+          source: 'admin',
+          authorization_type: 'bearer',
+          // key is missing
+        },
+      };
+
+      const result = processMCPEnv({ options });
+
+      if (isStreamableHTTPOptions(result)) {
+        expect(result.headers?.Authorization).toBeUndefined();
+      } else {
+        throw new Error('Expected streamable-http options');
+      }
+    });
+  });
 });
diff --git a/packages/api/src/utils/env.ts b/packages/api/src/utils/env.ts
index 3a22d897e6..c69c57bd22 100644
--- a/packages/api/src/utils/env.ts
+++ b/packages/api/src/utils/env.ts
@@ -205,6 +205,38 @@ export function processMCPEnv(params: {
 
   const newObj: MCPOptions = structuredClone(options);
 
+  // Apply admin-provided API key to headers at runtime
+  // Note: User-provided keys use {{MCP_API_KEY}} placeholder in headers,
+  // which is processed later via customUserVars replacement
+  if ('apiKey' in newObj && newObj.apiKey) {
+    const apiKeyConfig = newObj.apiKey as {
+      key?: string;
+      source: 'admin' | 'user';
+      authorization_type: 'basic' | 'bearer' | 'custom';
+      custom_header?: string;
+    };
+
+    if (apiKeyConfig.source === 'admin' && apiKeyConfig.key) {
+      const { key, authorization_type, custom_header } = apiKeyConfig;
+      const headerName =
+        authorization_type === 'custom' ? custom_header || 'X-Api-Key' : 'Authorization';
+
+      let headerValue = key;
+      if (authorization_type === 'basic') {
+        headerValue = `Basic ${key}`;
+      } else if (authorization_type === 'bearer') {
+        headerValue = `Bearer ${key}`;
+      }
+
+      // Initialize headers if needed and add the API key header (overwrites if header already exists)
+      const objWithHeaders = newObj as { headers?: Record<string, string> };
+      if (!objWithHeaders.headers) {
+        objWithHeaders.headers = {};
+      }
+      objWithHeaders.headers[headerName] = headerValue;
+    }
+  }
+
   if ('env' in newObj && newObj.env) {
     const processedEnv: Record<string, string> = {};
     for (const [key, originalValue] of Object.entries(newObj.env)) {
diff --git a/packages/data-provider/src/mcp.ts b/packages/data-provider/src/mcp.ts
index 66d3abd3df..53ca235de5 100644
--- a/packages/data-provider/src/mcp.ts
+++ b/packages/data-provider/src/mcp.ts
@@ -73,6 +73,23 @@ const BaseOptionsSchema = z.object({
     .optional(),
   /** Custom headers to send with OAuth requests (registration, discovery, token exchange, etc.) */
   oauth_headers: z.record(z.string(), z.string()).optional(),
+  /**
+   * API Key authentication configuration for SSE and Streamable HTTP transports
+   * - source: 'admin' means the key is provided by admin and shared by all users
+   * - source: 'user' means each user provides their own key via customUserVars
+   */
+  apiKey: z
+    .object({
+      /** API key value (only for admin-provided mode, stored encrypted) */
+      key: z.string().optional(),
+      /** Whether key is provided by admin or each user */
+      source: z.enum(['admin', 'user']),
+      /** How to format the authorization header */
+      authorization_type: z.enum(['basic', 'bearer', 'custom']),
+      /** Custom header name when authorization_type is 'custom' */
+      custom_header: z.string().optional(),
+    })
+    .optional(),
   customUserVars: z
     .record(
       z.string(),