diff --git a/internal/compiler/compiler_test.go b/internal/compiler/compiler_test.go
index 8ba41d8..aeca3e0 100644
--- a/internal/compiler/compiler_test.go
+++ b/internal/compiler/compiler_test.go
@@ -423,6 +423,222 @@ func TestExecuteMacro_StringParameter(t *testing.T) {
 	}
 }
 
+func TestExecuteMacro_LocalVariableExpansion(t *testing.T) {
+	pragma := preproc.NewPragma()
+	ctx := NewCompilerContext(pragma)
+
+	// Add a local variable in function scope "testfunc"
+	ctx.SymbolTable.AddVar("myvar", "testfunc", KindByte, 0)
+
+	// Enter the function scope by declaring the function
+	_, err := ctx.FunctionHandler.HandleFuncDecl(makeLine("FUNC testfunc"))
+	if err != nil {
+		t.Fatalf("HandleFuncDecl failed: %v", err)
+	}
+
+	// Register a macro that uses |%s| pattern - the ACTUAL use case
+	// The macro parameter 'varname' receives "myvar", then |%s| % varname
+	// produces |myvar| in the output, which should then be expanded
+	ctx.ScriptMacros["load_var"] = &ScriptMacro{
+		Name:   "load_var",
+		Params: []string{"varname"},
+		Body: []string{
+			"print('  lda |%s|' % varname)",
+		},
+	}
+
+	// Execute macro with "myvar" as argument - should expand |myvar| to testfunc_myvar
+	output, err := ExecuteMacro("load_var", []string{"myvar"}, ctx)
+	if err != nil {
+		t.Fatalf("ExecuteMacro failed: %v", err)
+	}
+
+	if len(output) != 1 {
+		t.Fatalf("expected 1 output line, got %d: %v", len(output), output)
+	}
+
+	expected := "  lda testfunc_myvar"
+	if output[0] != expected {
+		t.Errorf("expected %q, got %q", expected, output[0])
+	}
+}
+
+func TestExecuteMacro_LocalVariableExpansion_MultipleVars(t *testing.T) {
+	pragma := preproc.NewPragma()
+	ctx := NewCompilerContext(pragma)
+
+	// Add local variables in function scope
+	ctx.SymbolTable.AddVar("color_index", "myfunc", KindByte, 0)
+	ctx.SymbolTable.AddVar("row_color", "myfunc", KindWord, 0)
+
+	// Add a global table (no function scope)
+	ctx.SymbolTable.AddVar("scroll_color_table", "", KindWord, 0)
+
+	// Enter the function scope
+	_, err := ctx.FunctionHandler.HandleFuncDecl(makeLine("FUNC myfunc"))
+	if err != nil {
+		t.Fatalf("HandleFuncDecl failed: %v", err)
+	}
+
+	// Register a macro using |%s| pattern - matches actual usage:
+	// SCRIPT MACRO table_lookup(table, index, dest)
+	//     print("  ldx |%s|" % index)
+	//     print("  lda %s,x" % table)
+	//     print("  sta |%s|" % dest)
+	// ENDSCRIPT
+	ctx.ScriptMacros["table_lookup"] = &ScriptMacro{
+		Name:   "table_lookup",
+		Params: []string{"table", "index", "dest"},
+		Body: []string{
+			"print('  ldx |%s|' % index)",
+			"print('  lda %s,x' % table)",
+			"print('  sta |%s|' % dest)",
+		},
+	}
+
+	// Execute macro with actual variable names as arguments
+	output, err := ExecuteMacro("table_lookup", []string{"scroll_color_table", "color_index", "row_color"}, ctx)
+	if err != nil {
+		t.Fatalf("ExecuteMacro failed: %v", err)
+	}
+
+	expectedLines := []string{
+		"  ldx myfunc_color_index",    // local var expanded with scope
+		"  lda scroll_color_table,x",  // global var (no pipes) stays as-is
+		"  sta myfunc_row_color",      // local var expanded with scope
+	}
+
+	if len(output) != len(expectedLines) {
+		t.Fatalf("expected %d output lines, got %d: %v", len(expectedLines), len(output), output)
+	}
+
+	for i, expected := range expectedLines {
+		if output[i] != expected {
+			t.Errorf("line %d: expected %q, got %q", i, expected, output[i])
+		}
+	}
+}
+
+func TestExecuteScript_LocalVariableExpansion(t *testing.T) {
+	pragma := preproc.NewPragma()
+	ctx := NewCompilerContext(pragma)
+
+	// Add a local variable in function scope
+	ctx.SymbolTable.AddVar("counter", "loopfunc", KindByte, 0)
+
+	// Enter the function scope
+	_, err := ctx.FunctionHandler.HandleFuncDecl(makeLine("FUNC loopfunc"))
+	if err != nil {
+		t.Fatalf("HandleFuncDecl failed: %v", err)
+	}
+
+	// Script that uses |varname| syntax
+	scriptLines := []string{
+		"print('  inc |counter|')",
+	}
+
+	output, err := executeScript(scriptLines, ctx, false)
+	if err != nil {
+		t.Fatalf("executeScript failed: %v", err)
+	}
+
+	if len(output) != 1 {
+		t.Fatalf("expected 1 output line, got %d: %v", len(output), output)
+	}
+
+	expected := "  inc loopfunc_counter"
+	if output[0] != expected {
+		t.Errorf("expected %q, got %q", expected, output[0])
+	}
+}
+
+func TestExecuteScript_Library_GlobalVariableExpansion(t *testing.T) {
+	pragma := preproc.NewPragma()
+	ctx := NewCompilerContext(pragma)
+
+	// Add a global variable
+	ctx.SymbolTable.AddVar("global_counter", "", KindByte, 0)
+
+	// Library script that uses |varname| syntax at global scope
+	// Should expand to the global name (unchanged since it's already global)
+	libraryLines := []string{
+		"def inc_global():",
+		"  print('  inc |global_counter|')",
+	}
+
+	_, err := executeScript(libraryLines, ctx, true)
+	if err != nil {
+		t.Fatalf("library script failed: %v", err)
+	}
+
+	// Now call the library function from a regular script
+	scriptLines := []string{
+		"inc_global()",
+	}
+
+	output, err := executeScript(scriptLines, ctx, false)
+	if err != nil {
+		t.Fatalf("executeScript failed: %v", err)
+	}
+
+	if len(output) != 1 {
+		t.Fatalf("expected 1 output line, got %d: %v", len(output), output)
+	}
+
+	// Global variable should stay as-is (no function prefix)
+	expected := "  inc global_counter"
+	if output[0] != expected {
+		t.Errorf("expected %q, got %q", expected, output[0])
+	}
+}
+
+func TestExecuteScript_Library_VariableExpansionAtDefinitionTime(t *testing.T) {
+	pragma := preproc.NewPragma()
+	ctx := NewCompilerContext(pragma)
+
+	// Add a local variable in a function scope
+	ctx.SymbolTable.AddVar("local_var", "caller", KindByte, 0)
+
+	// Library is defined at GLOBAL scope (not inside any function)
+	// So |varname| expansion happens at global scope during library definition
+	libraryLines := []string{
+		"def use_local():",
+		"  print('  lda |local_var|')", // This expands at library definition time
+	}
+
+	// Library defined at global scope - |local_var| won't find caller's local
+	_, err := executeScript(libraryLines, ctx, true)
+	if err != nil {
+		t.Fatalf("library script failed: %v", err)
+	}
+
+	// Now enter the function scope and call the library function
+	_, err = ctx.FunctionHandler.HandleFuncDecl(makeLine("FUNC caller"))
+	if err != nil {
+		t.Fatalf("HandleFuncDecl failed: %v", err)
+	}
+
+	scriptLines := []string{
+		"use_local()",
+	}
+
+	output, err := executeScript(scriptLines, ctx, false)
+	if err != nil {
+		t.Fatalf("executeScript failed: %v", err)
+	}
+
+	if len(output) != 1 {
+		t.Fatalf("expected 1 output line, got %d: %v", len(output), output)
+	}
+
+	// Variable expansion happened at library definition time (global scope),
+	// so local_var was NOT found and stays as literal "local_var"
+	expected := "  lda local_var"
+	if output[0] != expected {
+		t.Errorf("expected %q, got %q (library expands |vars| at definition time, not call time)", expected, output[0])
+	}
+}
+
 func TestParseMacroInvocation(t *testing.T) {
 	tests := []struct {
 		input    string
diff --git a/internal/compiler/scriptexec.go b/internal/compiler/scriptexec.go
index 923c0d1..ef52758 100644
--- a/internal/compiler/scriptexec.go
+++ b/internal/compiler/scriptexec.go
@@ -164,6 +164,11 @@ func ExecuteMacro(macroName string, args []string, ctx *CompilerContext) ([]stri
 	if outputStr == "" {
 		return []string{}, nil
 	}
+
+	// Expand |varname| -> actual variable names in the OUTPUT
+	// This happens at call site, so local variables are resolved using caller's scope
+	outputStr = expandVariables(outputStr, ctx)
+
 	return strings.Split(strings.TrimRight(outputStr, "\n"), "\n"), nil
 }