diff --git a/Changes b/Changes
index 8ff7323eb..6abef0bd2 100644
--- a/Changes
+++ b/Changes
@@ -149,6 +149,7 @@ Verilator 5.051 devel
 * Fix crash on forward-referencing parameters (#8175). [Geza Lore, Testorrent USA, Inc.]
 * Fix crash on empty `#()` parameter list on class instance (#8182). [Geza Lore, Testorrent USA, Inc.]
 * Fix crash on multiple missing type parameters (#8184). [Geza Lore, Testorrent USA, Inc.]
+* Fix internal on backslash quoted strings (#8198). [Henry Hsieh]
 
 
 Verilator 5.050 2026-07-01
diff --git a/src/V3File.cpp b/src/V3File.cpp
index f6f063c47..18f6eb050 100644
--- a/src/V3File.cpp
+++ b/src/V3File.cpp
@@ -768,6 +768,8 @@ void V3OutFormatter::putns(const AstNode* nodep, const char* strg) {
             if (wordstart && m_lang == LA_VERILOG && !notstart && tokenStart(cp)) indentInc();
             if (wordstart && m_lang == LA_VERILOG && tokenEnd(cp)) indentDec();
         }
+        const bool wasInBackslash = m_inBackslash;
+        m_inBackslash = false;
         switch (*cp) {
         case '\n':
             ++m_lineno;
@@ -785,7 +787,11 @@ void V3OutFormatter::putns(const AstNode* nodep, const char* strg) {
         case '\t': wordstart = true; break;
         case '"':
             wordstart = false;
-            m_inStringLiteral = !m_inStringLiteral;
+            if (!wasInBackslash) m_inStringLiteral = !m_inStringLiteral;
+            break;
+        case '\\':
+            wordstart = false;
+            if (!wasInBackslash) m_inBackslash = true;
             break;
         case '/':
             if (m_lang == LA_C || m_lang == LA_VERILOG) {
diff --git a/src/V3File.h b/src/V3File.h
index 66b3d60f3..954b0773c 100644
--- a/src/V3File.h
+++ b/src/V3File.h
@@ -118,7 +118,8 @@ private:
     int m_sourceLastLineno = 0;
     int m_sourceLastFilenameno = 0;
     bool m_prependIndent = true;
-    bool m_inStringLiteral = false;
+    bool m_inStringLiteral = false;  // Inside a quote
+    bool m_inBackslash = false;  // Inside a backslash
     int m_indentLevel = 0;  // Current {} indentation
     std::stack<int> m_parenVec;  // Stack of columns where last ( was
     int m_bracketLevel = 0;  // Indenting = { block, indicates number of {'s seen.
diff --git a/test_regress/t/t_display_brace.v b/test_regress/t/t_display_brace.v
index 16f8b5b47..c191378a1 100644
--- a/test_regress/t/t_display_brace.v
+++ b/test_regress/t/t_display_brace.v
@@ -28,12 +28,25 @@ class ahb_seq_item;
 
 endclass
 
-
 module top;
 
+  class c;
+    string m_buf;
+
+    // Issue #8198
+    function void f(string s);
+      m_buf = "\"";
+      if (s[0] == "\"") m_buf = "\\\"";
+    endfunction
+  endclass
+
   initial begin
     ahb_seq_item tr;
 
+    automatic c o = new();
+    o.f("a");
+    $display("%0s", o.m_buf);
+
     tr = new();
     tr.data = '{'h11, 'h22, 'h33, 'h44, 'h55, 'h66};
     $display(" tr(bytes, LE) @0x10: %0s", tr.to_string());