diff --git a/packages/fossflow-lib/src/components/Label/Label.tsx b/packages/fossflow-lib/src/components/Label/Label.tsx
index de2e589d..a4f18e60 100644
--- a/packages/fossflow-lib/src/components/Label/Label.tsx
+++ b/packages/fossflow-lib/src/components/Label/Label.tsx
@@ -1,5 +1,6 @@
 import React, { useRef } from 'react';
 import { Box, SxProps } from '@mui/material';
+import { useUiStateStore } from 'src/stores/uiStateStore';
 
 const CONNECTOR_DOT_SIZE = 3;
 
@@ -11,6 +12,7 @@ export interface Props {
   children: React.ReactNode;
   sx?: SxProps;
   showLine?: boolean;
+  backgroundOpacity?: number;
 }
 
 export const Label = ({
@@ -20,9 +22,16 @@ export const Label = ({
   expandDirection = 'CENTER',
   labelHeight = 0,
   sx,
-  showLine = true
+  showLine = true,
+  backgroundOpacity
 }: Props) => {
   const contentRef = useRef<HTMLDivElement>();
+  const labelSettings = useUiStateStore((state) => {
+    return state.labelSettings;
+  });
+
+  // Use prop value if provided, otherwise fall back to store setting
+  const opacity = backgroundOpacity ?? labelSettings.backgroundOpacity;
 
   return (
     <Box
@@ -60,7 +69,7 @@ export const Label = ({
         sx={{
           position: 'absolute',
           display: 'inline-block',
-          bgcolor: 'common.white',
+          bgcolor: `rgba(255, 255, 255, ${opacity})`,
           border: '1px solid',
           borderColor: 'grey.400',
           borderRadius: 2,
diff --git a/packages/fossflow-lib/src/components/LabelSettings/LabelSettings.tsx b/packages/fossflow-lib/src/components/LabelSettings/LabelSettings.tsx
index 8884b661..5ce83fb9 100644
--- a/packages/fossflow-lib/src/components/LabelSettings/LabelSettings.tsx
+++ b/packages/fossflow-lib/src/components/LabelSettings/LabelSettings.tsx
@@ -1,14 +1,14 @@
 import React from 'react';
-import {
-  Box,
-  Typography,
-  Slider
-} from '@mui/material';
+import { Box, Typography, Slider } from '@mui/material';
 import { useUiStateStore } from 'src/stores/uiStateStore';
 
 export const LabelSettings = () => {
-  const labelSettings = useUiStateStore((state) => state.labelSettings);
-  const setLabelSettings = useUiStateStore((state) => state.actions.setLabelSettings);
+  const labelSettings = useUiStateStore((state) => {
+    return state.labelSettings;
+  });
+  const setLabelSettings = useUiStateStore((state) => {
+    return state.actions.setLabelSettings;
+  });
 
   const handlePaddingChange = (_event: Event, value: number | number[]) => {
     setLabelSettings({
@@ -17,17 +17,57 @@ export const LabelSettings = () => {
     });
   };
 
+  const handleOpacityChange = (_event: Event, value: number | number[]) => {
+    setLabelSettings({
+      ...labelSettings,
+      backgroundOpacity: (value as number) / 100
+    });
+  };
+
   return (
     <Box>
       <Typography variant="body2" color="text.secondary" sx={{ mb: 2 }}>
         Configure label display settings
       </Typography>
 
+      <Box sx={{ mb: 3 }}>
+        <Typography variant="body1" gutterBottom>
+          Background Opacity
+        </Typography>
+        <Typography
+          variant="caption"
+          color="text.secondary"
+          sx={{ mb: 1, display: 'block' }}
+        >
+          Adjust label background transparency to see nodes behind labels
+        </Typography>
+        <Slider
+          value={Math.round(labelSettings.backgroundOpacity * 100)}
+          onChange={handleOpacityChange}
+          min={0}
+          max={100}
+          step={10}
+          marks
+          valueLabelDisplay="auto"
+          valueLabelFormat={(value) => {
+            return `${value}%`;
+          }}
+          sx={{ mt: 2 }}
+        />
+        <Typography variant="caption" color="text.secondary">
+          Current: {Math.round(labelSettings.backgroundOpacity * 100)}%
+        </Typography>
+      </Box>
+
       <Box sx={{ mb: 3 }}>
         <Typography variant="body1" gutterBottom>
           Expand Button Padding
         </Typography>
-        <Typography variant="caption" color="text.secondary" sx={{ mb: 1, display: 'block' }}>
+        <Typography
+          variant="caption"
+          color="text.secondary"
+          sx={{ mb: 1, display: 'block' }}
+        >
           Bottom padding when expand button is visible (prevents text overlap)
         </Typography>
         <Slider
diff --git a/packages/fossflow-lib/src/components/LabelSettings/__tests__/LabelSettings.test.tsx b/packages/fossflow-lib/src/components/LabelSettings/__tests__/LabelSettings.test.tsx
new file mode 100644
index 00000000..0546553f
--- /dev/null
+++ b/packages/fossflow-lib/src/components/LabelSettings/__tests__/LabelSettings.test.tsx
@@ -0,0 +1,60 @@
+import React from 'react';
+import { render, screen } from '@testing-library/react';
+import { LabelSettings } from '../LabelSettings';
+
+const mockSetLabelSettings = jest.fn();
+const mockLabelSettings = {
+  expandButtonPadding: 0,
+  backgroundOpacity: 1.0
+};
+
+jest.mock('../../../stores/uiStateStore', () => {
+  return {
+    useUiStateStore: jest.fn((selector) => {
+      const state = {
+        labelSettings: mockLabelSettings,
+        actions: {
+          setLabelSettings: mockSetLabelSettings
+        }
+      };
+      return selector ? selector(state) : state;
+    })
+  };
+});
+
+describe('LabelSettings', () => {
+  beforeEach(() => {
+    jest.clearAllMocks();
+    mockLabelSettings.backgroundOpacity = 1.0;
+    mockLabelSettings.expandButtonPadding = 0;
+  });
+
+  it('should render background opacity slider', () => {
+    render(<LabelSettings />);
+
+    expect(screen.getByText('Background Opacity')).toBeInTheDocument();
+    expect(
+      screen.getByText(
+        'Adjust label background transparency to see nodes behind labels'
+      )
+    ).toBeInTheDocument();
+  });
+
+  it('should render expand button padding slider', () => {
+    render(<LabelSettings />);
+
+    expect(screen.getByText('Expand Button Padding')).toBeInTheDocument();
+  });
+
+  it('should display current opacity percentage', () => {
+    render(<LabelSettings />);
+
+    expect(screen.getByText('Current: 100%')).toBeInTheDocument();
+  });
+
+  it('should display current padding value', () => {
+    render(<LabelSettings />);
+
+    expect(screen.getByText('Current: 0 theme units')).toBeInTheDocument();
+  });
+});
diff --git a/packages/fossflow-lib/src/config/labelSettings.ts b/packages/fossflow-lib/src/config/labelSettings.ts
index aacfe8b4..fe533abc 100644
--- a/packages/fossflow-lib/src/config/labelSettings.ts
+++ b/packages/fossflow-lib/src/config/labelSettings.ts
@@ -1,7 +1,9 @@
 export interface LabelSettings {
   expandButtonPadding: number; // Padding in theme units when expand button is visible
+  backgroundOpacity: number; // Background opacity (0-1), default 1.0
 }
 
 export const DEFAULT_LABEL_SETTINGS: LabelSettings = {
-  expandButtonPadding: 0 // Default 0 theme units (no extra padding)
+  expandButtonPadding: 0, // Default 0 theme units (no extra padding)
+  backgroundOpacity: 1.0 // Default fully opaque
 };
diff --git a/packages/fossflow-lib/src/interaction/useInteractionManager.ts b/packages/fossflow-lib/src/interaction/useInteractionManager.ts
index c1a6496c..b19acefa 100644
--- a/packages/fossflow-lib/src/interaction/useInteractionManager.ts
+++ b/packages/fossflow-lib/src/interaction/useInteractionManager.ts
@@ -3,7 +3,13 @@ import { useModelStore } from 'src/stores/modelStore';
 import { useUiStateStore } from 'src/stores/uiStateStore';
 import { ModeActions, State, SlimMouseEvent } from 'src/types';
 import { DialogTypeEnum } from 'src/types/ui';
-import { getMouse, getItemAtTile, generateId, incrementZoom, decrementZoom } from 'src/utils';
+import {
+  getMouse,
+  getItemAtTile,
+  generateId,
+  incrementZoom,
+  decrementZoom
+} from 'src/utils';
 import { useResizeObserver } from 'src/hooks/useResizeObserver';
 import { useScene } from 'src/hooks/useScene';
 import { useHistory } from 'src/hooks/useHistory';
@@ -60,7 +66,10 @@ export const useInteractionManager = () => {
   const { size: rendererSize } = useResizeObserver(uiState.rendererEl);
   const { undo, redo, canUndo, canRedo } = useHistory();
   const { createTextBox } = scene;
-  const { handleMouseDown: handlePanMouseDown, handleMouseUp: handlePanMouseUp } = usePanHandlers();
+  const {
+    handleMouseDown: handlePanMouseDown,
+    handleMouseUp: handlePanMouseUp
+  } = usePanHandlers();
 
   // Keyboard shortcuts for undo/redo
   useEffect(() => {
@@ -81,8 +90,10 @@ export const useInteractionManager = () => {
 
           // Check if connection is in progress
           const isConnectionInProgress =
-            (uiState.connectorInteractionMode === 'click' && connectorMode.isConnecting) ||
-            (uiState.connectorInteractionMode === 'drag' && connectorMode.id !== null);
+            (uiState.connectorInteractionMode === 'click' &&
+              connectorMode.isConnecting) ||
+            (uiState.connectorInteractionMode === 'drag' &&
+              connectorMode.id !== null);
 
           if (isConnectionInProgress && connectorMode.id) {
             // Delete the temporary connector
@@ -139,12 +150,29 @@ export const useInteractionManager = () => {
         uiState.actions.setDialog(DialogTypeEnum.HELP);
       }
 
+      // Toggle label transparency with ] key
+      if (e.key === ']') {
+        e.preventDefault();
+        const currentOpacity = uiState.labelSettings.backgroundOpacity;
+        // Toggle between full opacity (1.0) and semi-transparent (0.3)
+        const newOpacity = currentOpacity > 0.5 ? 0.3 : 1.0;
+        uiState.actions.setLabelSettings({
+          ...uiState.labelSettings,
+          backgroundOpacity: newOpacity
+        });
+      }
+
       // Tool hotkeys
       const hotkeyMapping = HOTKEY_PROFILES[uiState.hotkeyProfile];
       const key = e.key.toLowerCase();
 
       // Quick icon selection for selected node (when ItemControls is an ItemReference with type 'ITEM')
-      if (key === 'i' && uiState.itemControls && 'id' in uiState.itemControls && uiState.itemControls.type === 'ITEM') {
+      if (
+        key === 'i' &&
+        uiState.itemControls &&
+        'id' in uiState.itemControls &&
+        uiState.itemControls.type === 'ITEM'
+      ) {
         e.preventDefault();
         // Trigger icon change mode
         const event = new CustomEvent('quickIconChange');
@@ -211,7 +239,10 @@ export const useInteractionManager = () => {
           selection: null,
           isDragging: false
         });
-      } else if (hotkeyMapping.freehandLasso && key === hotkeyMapping.freehandLasso) {
+      } else if (
+        hotkeyMapping.freehandLasso &&
+        key === hotkeyMapping.freehandLasso
+      ) {
         e.preventDefault();
         uiState.actions.setMode({
           type: 'FREEHAND_LASSO',
@@ -227,7 +258,21 @@ export const useInteractionManager = () => {
     return () => {
       return window.removeEventListener('keydown', handleKeyDown);
     };
-  }, [undo, redo, canUndo, canRedo, uiState.hotkeyProfile, uiState.actions, createTextBox, uiState.mouse.position.tile, scene, uiState.itemControls, uiState.mode, uiState.connectorInteractionMode]);
+  }, [
+    undo,
+    redo,
+    canUndo,
+    canRedo,
+    uiState.hotkeyProfile,
+    uiState.actions,
+    createTextBox,
+    uiState.mouse.position.tile,
+    scene,
+    uiState.itemControls,
+    uiState.mode,
+    uiState.connectorInteractionMode,
+    uiState.labelSettings
+  ]);
 
   const onMouseEvent = useCallback(
     (e: SlimMouseEvent) => {
@@ -380,8 +425,10 @@ export const useInteractionManager = () => {
 
         // The point under the cursor in world space (before zoom)
         // World coordinates = (screen coordinates - scroll offset) / zoom
-        const worldX = (mouseRelativeToCenterX - uiState.scroll.position.x) / oldZoom;
-        const worldY = (mouseRelativeToCenterY - uiState.scroll.position.y) / oldZoom;
+        const worldX =
+          (mouseRelativeToCenterX - uiState.scroll.position.x) / oldZoom;
+        const worldY =
+          (mouseRelativeToCenterY - uiState.scroll.position.y) / oldZoom;
 
         // After zooming, to keep the same world point under the cursor:
         // screen coordinates = world coordinates * newZoom + scroll offset