diff --git a/src/mudlib/render/colors.py b/src/mudlib/render/colors.py
new file mode 100644
index 0000000..d28d527
--- /dev/null
+++ b/src/mudlib/render/colors.py
@@ -0,0 +1,116 @@
+"""Color markup engine for prompt templates."""
+
+import re
+
+from mudlib.render import ansi
+
+# Tag to ANSI code mapping for 16-color mode
+COLOR_TAGS_16 = {
+    "red": ansi.RED,
+    "green": ansi.GREEN,
+    "yellow": ansi.YELLOW,
+    "blue": ansi.BLUE,
+    "magenta": ansi.MAGENTA,
+    "cyan": ansi.CYAN,
+    "white": ansi.WHITE,
+    "black": ansi.BLACK,
+    "RED": "\033[91m",
+    "GREEN": "\033[92m",
+    "YELLOW": "\033[93m",
+    "BLUE": "\033[94m",
+    "MAGENTA": "\033[95m",
+    "CYAN": "\033[96m",
+    "WHITE": "\033[97m",
+    "BLACK": "\033[90m",
+    "bold": ansi.BOLD,
+    "dim": "\033[2m",
+    "/": ansi.RESET,
+    "reset": ansi.RESET,
+}
+
+# Tag to ANSI code mapping for 256-color mode
+COLOR_TAGS_256 = {
+    "red": ansi.fg_256(196),
+    "green": ansi.fg_256(46),
+    "yellow": ansi.fg_256(226),
+    "blue": ansi.fg_256(33),
+    "magenta": ansi.fg_256(201),
+    "cyan": ansi.fg_256(51),
+    "white": ansi.fg_256(231),
+    "black": ansi.fg_256(16),
+    "RED": ansi.fg_256(9),
+    "GREEN": ansi.fg_256(10),
+    "YELLOW": ansi.fg_256(11),
+    "BLUE": ansi.fg_256(12),
+    "MAGENTA": ansi.fg_256(13),
+    "CYAN": ansi.fg_256(14),
+    "WHITE": ansi.fg_256(15),
+    "BLACK": ansi.fg_256(8),
+    "bold": ansi.BOLD,
+    "dim": "\033[2m",
+    "/": ansi.RESET,
+    "reset": ansi.RESET,
+}
+
+# Tag to ANSI code mapping for truecolor mode
+COLOR_TAGS_TRUECOLOR = {
+    "red": ansi.fg_rgb(244, 67, 54),
+    "green": ansi.fg_rgb(76, 175, 80),
+    "yellow": ansi.fg_rgb(255, 235, 59),
+    "blue": ansi.fg_rgb(33, 150, 243),
+    "magenta": ansi.fg_rgb(156, 39, 176),
+    "cyan": ansi.fg_rgb(0, 188, 212),
+    "white": ansi.fg_rgb(255, 255, 255),
+    "black": ansi.fg_rgb(0, 0, 0),
+    "RED": ansi.fg_rgb(255, 82, 82),
+    "GREEN": ansi.fg_rgb(105, 240, 174),
+    "YELLOW": ansi.fg_rgb(255, 255, 130),
+    "BLUE": ansi.fg_rgb(68, 138, 255),
+    "MAGENTA": ansi.fg_rgb(224, 64, 251),
+    "CYAN": ansi.fg_rgb(0, 229, 255),
+    "WHITE": ansi.fg_rgb(255, 255, 255),
+    "BLACK": ansi.fg_rgb(96, 96, 96),
+    "bold": ansi.BOLD,
+    "dim": "\033[2m",
+    "/": ansi.RESET,
+    "reset": ansi.RESET,
+}
+
+
+def colorize(text: str, color_depth: str | None) -> str:
+    """Convert color markup tags to ANSI codes based on client color depth.
+
+    Processes markup tags like {red}, {bold}, {/} in template strings and
+    converts them to ANSI escape codes. Unknown tags that don't match known
+    color tags are preserved (assumed to be template variables like {hp}).
+
+    Args:
+        text: String with color markup tags
+        color_depth: Color mode - "16", "256", "truecolor", or None/empty to strip
+
+    Returns:
+        Text with markup tags replaced by ANSI codes (or stripped if no color support)
+    """
+    # If no color support, strip all known color tags
+    if not color_depth:
+        # Build pattern of all known tag names
+        known_tags = set(COLOR_TAGS_16.keys())
+        pattern = r"\{(" + "|".join(re.escape(tag) for tag in known_tags) + r")\}"
+        return re.sub(pattern, "", text)
+
+    # Select tag mapping based on color depth
+    if color_depth == "truecolor":
+        tag_map = COLOR_TAGS_TRUECOLOR
+    elif color_depth == "256":
+        tag_map = COLOR_TAGS_256
+    else:  # default to 16-color
+        tag_map = COLOR_TAGS_16
+
+    # Replace known color tags with ANSI codes
+    def replace_tag(match):
+        return tag_map[match.group(1)]
+
+    # Pattern matches {tagname} where tagname is in our known tags
+    known_tags = "|".join(re.escape(tag) for tag in tag_map)
+    pattern = r"\{(" + known_tags + r")\}"
+    return re.sub(pattern, replace_tag, text)
diff --git a/tests/test_colors.py b/tests/test_colors.py
new file mode 100644
index 0000000..0addaa2
--- /dev/null
+++ b/tests/test_colors.py
@@ -0,0 +1,128 @@
+"""Tests for color markup engine."""
+
+from mudlib.render.colors import colorize
+
+
+class TestColorize:
+    """Test the colorize markup processor."""
+
+    def test_basic_color_16(self):
+        """Test basic color tag in 16-color mode."""
+        result = colorize("{red}hello{/}", "16")
+        assert result == "\033[31mhello\033[0m"
+
+    def test_bold_16(self):
+        """Test bold tag in 16-color mode."""
+        result = colorize("{bold}test{/}", "16")
+        assert result == "\033[1mtest\033[0m"
+
+    def test_multiple_colors_16(self):
+        """Test multiple color tags in sequence."""
+        result = colorize("{green}hp{/} {red}sp{/}", "16")
+        assert result == "\033[32mhp\033[0m \033[31msp\033[0m"
+
+    def test_no_color_support(self):
+        """Test stripping tags when color_depth is None."""
+        result = colorize("{red}danger{/}", None)
+        assert result == "danger"
+
+    def test_nested_tags(self):
+        """Test nested tags - bold and red together."""
+        result = colorize("{bold}{red}critical{/}", "16")
+        assert result == "\033[1m\033[31mcritical\033[0m"
+
+    def test_plain_text_passthrough(self):
+        """Test plain text without tags passes through unchanged."""
+        result = colorize("plain text", "16")
+        assert result == "plain text"
+
+    def test_unknown_tags_preserved(self):
+        """Test unknown tags are preserved for template substitution."""
+        result = colorize("{fake}text{/}", "16")
+        assert result == "{fake}text\033[0m"
+
+    def test_multiple_resets(self):
+        """Test multiple reset tags work correctly."""
+        result = colorize("{red}one{/}{green}two{/}", "16")
+        assert result == "\033[31mone\033[0m\033[32mtwo\033[0m"
+
+    def test_reset_always_ansi_reset(self):
+        """Test {/} always maps to ANSI reset code."""
+        result = colorize("{/}", "16")
+        assert result == "\033[0m"
+
+    def test_256_color_mode(self):
+        """Test color tag works in 256-color mode."""
+        result = colorize("{green}hp{/}", "256")
+        # Should contain ANSI code (exact code may vary by implementation)
+        assert "\033[" in result
+        assert "hp" in result
+        assert "\033[0m" in result
+
+    def test_template_variables_preserved(self):
+        """Test that non-color tags like {stamina_pct} are preserved."""
+        result = colorize("{red}HP:{/} {hp_current}/{hp_max}", "16")
+        assert result == "\033[31mHP:\033[0m {hp_current}/{hp_max}"
+
+    def test_all_basic_colors(self):
+        """Test all basic color tags work."""
+        colors = ["red", "green", "yellow", "blue", "magenta", "cyan", "white", "black"]
+        for color in colors:
+            result = colorize(f"{{{color}}}text{{/}}", "16")
+            assert "\033[" in result
+            assert "text" in result
+            assert "\033[0m" in result
+
+    def test_dim_style(self):
+        """Test dim style tag."""
+        result = colorize("{dim}faded{/}", "16")
+        assert "\033[2m" in result
+        assert "faded" in result
+
+    def test_no_closing_tag(self):
+        """Test unclosed tag is handled gracefully."""
+        result = colorize("{red}no close", "16")
+        # Should process the opening tag even without close
+        assert "\033[31m" in result
+        assert "no close" in result
+
+    def test_color_depth_empty_string(self):
+        """Test empty string color_depth strips tags like None."""
+        result = colorize("{red}danger{/}", "")
+        assert result == "danger"
+
+    def test_reset_alias(self):
+        """Test {reset} works the same as {/}."""
+        result = colorize("{reset}", "16")
+        assert result == "\033[0m"
+        # Test in context
+        result2 = colorize("{red}text{reset}", "16")
+        assert result2 == "\033[31mtext\033[0m"
+
+    def test_bright_red_16(self):
+        """Test bright red in 16-color mode."""
+        result = colorize("{RED}bright{/}", "16")
+        assert result == "\033[91mbright\033[0m"
+
+    def test_all_bright_colors_16(self):
+        """Test all bright color variants work."""
+        bright_colors = [
+            "RED",
+            "GREEN",
+            "YELLOW",
+            "BLUE",
+            "MAGENTA",
+            "CYAN",
+            "WHITE",
+            "BLACK",
+        ]
+        for color in bright_colors:
+            result = colorize(f"{{{color}}}text{{/}}", "16")
+            assert "\033[" in result
+            assert "text" in result
+            assert "\033[0m" in result
+
+    def test_bright_colors_no_support(self):
+        """Test bright colors get stripped when no color support."""
+        result = colorize("{RED}bright{/} {GREEN}text{/}", None)
+        assert result == "bright text"