diff --git a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosisCompilerTestFE10TestdataTestGenerated.java b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosisCompilerTestFE10TestdataTestGenerated.java
index 59847a43942..67dba8d9f27 100644
--- a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosisCompilerTestFE10TestdataTestGenerated.java
+++ b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosisCompilerTestFE10TestdataTestGenerated.java
@@ -30141,6 +30141,12 @@ public class DiagnosisCompilerTestFE10TestdataTestGenerated extends AbstractDiag
                     runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByMultipleLambdas.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedByNested.kt")
+                public void testCapturedByNested() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt");
+                }
+
                 @Test
                 @TestMetadata("doWhileWithMiddleBreak.kt")
                 public void testDoWhileWithMiddleBreak() throws Exception {
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsTestGenerated.java
index 59394aeb9fb..8f162dde7fe 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsTestGenerated.java
@@ -30141,6 +30141,12 @@ public class FirOldFrontendDiagnosticsTestGenerated extends AbstractFirDiagnosti
                     runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByMultipleLambdas.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedByNested.kt")
+                public void testCapturedByNested() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt");
+                }
+
                 @Test
                 @TestMetadata("doWhileWithMiddleBreak.kt")
                 public void testDoWhileWithMiddleBreak() throws Exception {
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsWithLightTreeTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsWithLightTreeTestGenerated.java
index d839e7d7d22..76ba3f4a97f 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsWithLightTreeTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirOldFrontendDiagnosticsWithLightTreeTestGenerated.java
@@ -30141,6 +30141,12 @@ public class FirOldFrontendDiagnosticsWithLightTreeTestGenerated extends Abstrac
                     runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByMultipleLambdas.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedByNested.kt")
+                public void testCapturedByNested() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt");
+                }
+
                 @Test
                 @TestMetadata("doWhileWithMiddleBreak.kt")
                 public void testDoWhileWithMiddleBreak() throws Exception {
diff --git a/compiler/fir/resolve/src/org/jetbrains/kotlin/fir/resolve/dfa/FirLocalVariableAssignmentAnalyzer.kt b/compiler/fir/resolve/src/org/jetbrains/kotlin/fir/resolve/dfa/FirLocalVariableAssignmentAnalyzer.kt
index 91d60dfad37..c7b6227db4f 100644
--- a/compiler/fir/resolve/src/org/jetbrains/kotlin/fir/resolve/dfa/FirLocalVariableAssignmentAnalyzer.kt
+++ b/compiler/fir/resolve/src/org/jetbrains/kotlin/fir/resolve/dfa/FirLocalVariableAssignmentAnalyzer.kt
@@ -112,14 +112,15 @@ internal class FirLocalVariableAssignmentAnalyzer(
     }
 
     fun exitLocalFunction(function: FirFunction) {
-        val eventOccurrencesRange: EventOccurrencesRange? = (function as? FirAnonymousFunction)?.invocationKind
         concurrentlyAssignedLocalVariablesStack.removeLast()
-        when (eventOccurrencesRange) {
+        when ((function as? FirAnonymousFunction)?.invocationKind) {
             EventOccurrencesRange.UNKNOWN, null ->
                 // The function may be stored and then called later, so any access to the variables it touches
                 // is no longer smartcastable ever.
                 assignedLocalVariablesByFunction[function.symbol]?.insideLocalFunction?.let {
-                    concurrentlyAssignedLocalVariablesStack.last() += it
+                    for (outerScope in concurrentlyAssignedLocalVariablesStack) {
+                        outerScope += it
+                    }
                 }
             else -> {} // The function is only called inline; this is handled by CFG construction by visiting the function body.
         }
@@ -358,8 +359,9 @@ internal class FirLocalVariableAssignmentAnalyzer(
             class MiniCfgData(var flow: MiniFlow?) {
                 val variableDeclarations: ArrayDeque<MutableMap<Name, FirProperty>> = ArrayDeque(listOf(mutableMapOf()))
                 val localFunctionToAssignedLocalVariables: MutableMap<FirFunctionSymbol<*>, AssignedLocalVariables> = mutableMapOf()
+
                 fun resolveLocalVariable(name: Name): FirProperty? {
-                    return variableDeclarations.asReversed().firstNotNullOfOrNull { it[name] }
+                    return variableDeclarations.lastOrNull { name in it }?.getValue(name)
                 }
             }
         }
diff --git a/compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt b/compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt
new file mode 100644
index 00000000000..cc713e13c9a
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt
@@ -0,0 +1,22 @@
+// FIR_IDENTICAL
+import kotlin.contracts.*
+
+@Suppress("OPT_IN_USAGE_ERROR", "OPT_IN_USAGE_FUTURE_ERROR")
+fun exactlyOnce(f: () -> Unit) {
+    contract {
+        callsInPlace(f, InvocationKind.EXACTLY_ONCE)
+    }
+    f()
+}
+
+fun test() {
+    var s: String? = ""
+    if (s != null) {
+        val block: () -> Unit
+        exactlyOnce {
+            block = { s = null }
+        }
+        block()
+        <!SMARTCAST_IMPOSSIBLE!>s<!>.length
+    }
+}
diff --git a/compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.txt b/compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.txt
new file mode 100644
index 00000000000..d837c4679dd
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.txt
@@ -0,0 +1,6 @@
+package
+
+@kotlin.Suppress(names = {"OPT_IN_USAGE_ERROR", "OPT_IN_USAGE_FUTURE_ERROR"}) public fun exactlyOnce(/*0*/ f: () -> kotlin.Unit): kotlin.Unit
+    CallsInPlace(f, EXACTLY_ONCE)
+
+public fun test(): kotlin.Unit
diff --git a/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java b/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
index c8a629058f7..c438b7f364a 100644
--- a/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
+++ b/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
@@ -30231,6 +30231,12 @@ public class DiagnosticTestGenerated extends AbstractDiagnosticTest {
                     runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByMultipleLambdas.kt");
                 }
 
+                @Test
+                @TestMetadata("capturedByNested.kt")
+                public void testCapturedByNested() throws Exception {
+                    runTest("compiler/testData/diagnostics/tests/smartCasts/variables/capturedByNested.kt");
+                }
+
                 @Test
                 @TestMetadata("doWhileWithMiddleBreak.kt")
                 public void testDoWhileWithMiddleBreak() throws Exception {