diff --git a/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeResolver.kt b/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeResolver.kt
index 2ac29920c94..cc1321d5ccb 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeResolver.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/resolve/TypeResolver.kt
@@ -31,6 +31,7 @@ import org.jetbrains.kotlin.resolve.PossiblyBareType.type
 import org.jetbrains.kotlin.resolve.TypeResolver.FlexibleTypeCapabilitiesProvider
 import org.jetbrains.kotlin.resolve.bindingContextUtil.recordScope
 import org.jetbrains.kotlin.resolve.calls.tasks.DynamicCallableDescriptors
+import org.jetbrains.kotlin.resolve.descriptorUtil.parentsWithSelf
 import org.jetbrains.kotlin.resolve.lazy.ForceResolveUtil
 import org.jetbrains.kotlin.resolve.lazy.LazyEntity
 import org.jetbrains.kotlin.resolve.scopes.LazyScopeAdapter
@@ -299,7 +300,7 @@ public class TypeResolver(
 
         val projectionFromAllQualifierParts = qualifierResolutionResult.allProjections
         val parameters = typeConstructor.parameters
-        if (c.allowBareTypes && projectionFromAllQualifierParts.isEmpty() && parameters.isNotEmpty()) {
+        if (c.allowBareTypes && projectionFromAllQualifierParts.isEmpty() && isPossibleToSpecifyTypeArgumentsFor(classDescriptor)) {
             // See docs for PossiblyBareType
             return PossiblyBareType.bare(typeConstructor, false)
         }
@@ -357,6 +358,24 @@ public class TypeResolver(
         return type(resultingType)
     }
 
+    // Returns true in case when at least one argument for this class could be specified
+    // It could be always equal to 'typeConstructor.parameters.isNotEmpty()' unless local classes could captured type parameters
+    // from enclosing functions. In such cases you can not specify any argument:
+    // fun <E> foo(x: Any?) {
+    //    class C
+    //    if (x is C) { // 'C' should not be treated as bare type here
+    //       ...
+    //    }
+    // }
+    //
+    // It's needed to determine whether this particular type could be bare
+    private fun isPossibleToSpecifyTypeArgumentsFor(classDescriptor: ClassDescriptor): Boolean {
+        // First parameter relates to the innermost declaration
+        // If it's declared in function there
+        val firstTypeParameter = classDescriptor.typeConstructor.parameters.firstOrNull() ?: return false
+        return firstTypeParameter.original.containingDeclaration is ClassDescriptor
+    }
+
     private fun collectArgumentsForClassTypeConstructor(
             c: TypeResolutionContext,
             classDescriptor: ClassDescriptor,
@@ -406,7 +425,9 @@ public class TypeResolver(
 
         val parameters = classDescriptor.typeConstructor.parameters
         if (result.size < parameters.size) {
-            if (parameters.subList(result.size, parameters.size).any { parameter -> !parameter.isDeclaredInScope(c) }) {
+            val typeParametersToSpecify =
+                    parameters.subList(result.size, parameters.size).takeWhile { it.original.containingDeclaration is ClassDescriptor }
+            if (typeParametersToSpecify.any { parameter -> !parameter.isDeclaredInScope(c) }) {
                 c.trace.report(WRONG_NUMBER_OF_TYPE_ARGUMENTS.on(qualifierParts.last().expression, parameters.size))
                 return null
             }
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.kt b/compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.kt
new file mode 100644
index 00000000000..52b4443fdb8
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.kt
@@ -0,0 +1,33 @@
+// !CHECK_TYPE
+private class Outer<E> {
+    private inner class Inner<out F> {
+        private fun <G> foo() = {
+            fun baz() = {
+                class Local {
+                    val e: E = magic()
+                    val f: F = magic()
+                    val g: G = magic()
+                }
+                Local()
+            }
+            baz()()
+        }
+
+        private var doubleCharSequenceInt = Outer<Double>().Inner<CharSequence>().foo<Int>()()
+        private var doubleStringNumber = Outer<Double>().Inner<String>().foo<Number>()()
+        private var doubleStringInt = Outer<Double>().Inner<String>().foo<Int>()()
+
+        private fun bar() {
+            doubleCharSequenceInt = <!TYPE_MISMATCH!>doubleStringNumber<!>
+            doubleCharSequenceInt = doubleStringInt
+
+            doubleStringInt = Outer<Double>().Inner<String>().foo<Int>()()
+
+            doubleStringInt.e.checkType { _<Double>() }
+            doubleStringInt.f.checkType { _<String>() }
+            doubleStringInt.g.checkType { _<Int>() }
+        }
+    }
+}
+
+fun <T> magic(): T = null!!
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.txt b/compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.txt
new file mode 100644
index 00000000000..420a908ca0f
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.txt
@@ -0,0 +1,22 @@
+package
+
+public fun </*0*/ T> magic(): T
+
+private final class Outer</*0*/ E> {
+    public constructor Outer</*0*/ E>()
+    public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
+    public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
+    public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
+
+    private final inner class Inner</*0*/ out F> /*captured type parameters: /*1*/ E*/ {
+        public constructor Inner</*0*/ out F>()
+        private final var doubleCharSequenceInt: Outer.Inner.foo.<anonymous>.baz.<anonymous>.Local<kotlin.Int, kotlin.CharSequence, kotlin.Double>
+        private final var doubleStringInt: Outer.Inner.foo.<anonymous>.baz.<anonymous>.Local<kotlin.Int, kotlin.String, kotlin.Double>
+        private final var doubleStringNumber: Outer.Inner.foo.<anonymous>.baz.<anonymous>.Local<kotlin.Number, kotlin.String, kotlin.Double>
+        private final fun bar(): kotlin.Unit
+        public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
+        private final fun </*0*/ G> foo(): () -> Outer.Inner.foo.<anonymous>.baz.<anonymous>.Local<G, F, E>
+        public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
+        public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
+    }
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.kt b/compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.kt
new file mode 100644
index 00000000000..71aa61d27c7
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.kt
@@ -0,0 +1,24 @@
+// !CHECK_TYPE
+
+fun <T> magic(): T = null!!
+
+class Q {
+    private fun <E> foo() = {
+        class C {
+            val prop: E = magic()
+        }
+        C()
+    }
+
+    private var x = foo<CharSequence>()()
+    private var y = foo<String>()()
+
+    fun bar() {
+        x = <!TYPE_MISMATCH!>y<!>
+        x = foo<CharSequence>()()
+        y = foo<String>()()
+
+        x.prop.checkType { _<CharSequence>() }
+        y.prop.checkType { _<String>() }
+    }
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.txt b/compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.txt
new file mode 100644
index 00000000000..19c4a5bb2a2
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.txt
@@ -0,0 +1,14 @@
+package
+
+public fun </*0*/ T> magic(): T
+
+public final class Q {
+    public constructor Q()
+    private final var x: Q.foo.<anonymous>.C<kotlin.CharSequence>
+    private final var y: Q.foo.<anonymous>.C<kotlin.String>
+    public final fun bar(): kotlin.Unit
+    public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
+    private final fun </*0*/ E> foo(): () -> Q.foo.<anonymous>.C<E>
+    public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
+    public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.kt b/compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.kt
new file mode 100644
index 00000000000..a7ff90eb7b9
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.kt
@@ -0,0 +1,22 @@
+// !CHECK_TYPE
+
+fun <T> magic(): T = null!!
+
+class Q {
+    private fun <E, F> foo() = {
+        class C<G> {
+            val e: E = magic()
+            val f: F = magic()
+            val g: G = magic()
+        }
+        C<F>()
+    }
+
+    private var x = foo<CharSequence, Number>()()
+
+    fun bar() {
+        x.e.checkType { _<CharSequence>() }
+        x.f.checkType { _<Number>() }
+        x.g.checkType { _<Number>() }
+    }
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.txt b/compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.txt
new file mode 100644
index 00000000000..a8123b81aa1
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.txt
@@ -0,0 +1,13 @@
+package
+
+public fun </*0*/ T> magic(): T
+
+public final class Q {
+    public constructor Q()
+    private final var x: Q.foo.<anonymous>.C<kotlin.Number, kotlin.CharSequence, kotlin.Number>
+    public final fun bar(): kotlin.Unit
+    public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
+    private final fun </*0*/ E, /*1*/ F> foo(): () -> Q.foo.<anonymous>.C<F, E, F>
+    public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
+    public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.kt b/compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.kt
new file mode 100644
index 00000000000..5da8b8f602f
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.kt
@@ -0,0 +1,22 @@
+// !CHECK_TYPE
+
+fun <T> magic(): T = null!!
+
+class Q {
+    private fun <E> foo() =
+        object {
+            val prop: E = magic()
+        }
+
+    private var x = foo<CharSequence>()
+    private var y = foo<String>()
+
+    fun bar() {
+        x = <!TYPE_MISMATCH!>y<!>
+        x = foo<CharSequence>()
+        y = foo<String>()
+
+        x.prop.checkType { _<CharSequence>() }
+        y.prop.checkType { _<String>() }
+    }
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.txt b/compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.txt
new file mode 100644
index 00000000000..fc221827e71
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.txt
@@ -0,0 +1,14 @@
+package
+
+public fun </*0*/ T> magic(): T
+
+public final class Q {
+    public constructor Q()
+    private final var x: Q.foo.<no name provided><kotlin.CharSequence>
+    private final var y: Q.foo.<no name provided><kotlin.String>
+    public final fun bar(): kotlin.Unit
+    public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
+    private final fun </*0*/ E> foo(): Q.foo.<no name provided><E>
+    public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
+    public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.kt b/compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.kt
new file mode 100644
index 00000000000..dea38f0a6b3
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.kt
@@ -0,0 +1,37 @@
+fun <E> foo(x: Any, y: Any) : Any {
+    class C
+    // without E?
+    if(x is <!CANNOT_CHECK_FOR_ERASED!>C<!>) {
+        return x
+    }
+
+    if (1 == 2) {
+        <!UNCHECKED_CAST!>x as C<!>
+    }
+
+    if (2 == 3) {
+        <!UNCHECKED_CAST!>x as? C<!>
+    }
+
+    class Outer<F> {
+        inner class Inner
+    }
+
+    // bare type
+    if (y is <!NO_TYPE_ARGUMENTS_ON_RHS!>Outer.Inner<!>) {
+        return y
+    }
+
+    <!UNCHECKED_CAST!>y as Outer<*>.Inner<!>
+
+    return C()
+}
+
+fun noTypeParameters(x: Any) : Any {
+    class C
+    if(x is C) {
+        return x
+    }
+
+    return C()
+}
diff --git a/compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.txt b/compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.txt
new file mode 100644
index 00000000000..d8c15c8fd6a
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.txt
@@ -0,0 +1,4 @@
+package
+
+public fun </*0*/ E> foo(/*0*/ x: kotlin.Any, /*1*/ y: kotlin.Any): kotlin.Any
+public fun noTypeParameters(/*0*/ x: kotlin.Any): kotlin.Any
diff --git a/compiler/testData/diagnostics/tests/inference/substitutions/substitutionIntoAnonymousClass.txt b/compiler/testData/diagnostics/tests/inference/substitutions/substitutionIntoAnonymousClass.txt
index 3d89067fba2..762b3151846 100644
--- a/compiler/testData/diagnostics/tests/inference/substitutions/substitutionIntoAnonymousClass.txt
+++ b/compiler/testData/diagnostics/tests/inference/substitutions/substitutionIntoAnonymousClass.txt
@@ -2,7 +2,7 @@ package
 
 public final class Foo</*0*/ R> {
     public constructor Foo</*0*/ R>()
-    private final fun </*0*/ T> bar(): Foo.bar.<no name provided>
+    private final fun </*0*/ T> bar(): Foo.bar.<no name provided><T, R>
     public open override /*1*/ /*fake_override*/ fun equals(/*0*/ other: kotlin.Any?): kotlin.Boolean
     public final fun getR(/*0*/ r: R): R
     public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
@@ -16,5 +16,5 @@ public final class Test {
     public open override /*1*/ /*fake_override*/ fun hashCode(): kotlin.Int
     public final fun test(): kotlin.Unit
     public open override /*1*/ /*fake_override*/ fun toString(): kotlin.String
-    private final fun </*0*/ T : kotlin.Any> T.self(): Test.self.<no name provided>
+    private final fun </*0*/ T : kotlin.Any> T.self(): Test.self.<no name provided><T>
 }
diff --git a/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java
index cd93ce42f0b..a59dac91724 100644
--- a/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java
@@ -6795,6 +6795,45 @@ public class DiagnosticsTestGenerated extends AbstractDiagnosticsTest {
                 doTest(fileName);
             }
 
+            @TestMetadata("compiler/testData/diagnostics/tests/generics/capturedParameters")
+            @TestDataPath("$PROJECT_ROOT")
+            @RunWith(JUnit3RunnerWithInners.class)
+            public static class CapturedParameters extends AbstractDiagnosticsTest {
+                public void testAllFilesPresentInCapturedParameters() throws Exception {
+                    KotlinTestUtils.assertAllTestsPresentByMetadata(this.getClass(), new File("compiler/testData/diagnostics/tests/generics/capturedParameters"), Pattern.compile("^(.+)\\.kt$"), true);
+                }
+
+                @TestMetadata("innerLocalClass.kt")
+                public void testInnerLocalClass() throws Exception {
+                    String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/generics/capturedParameters/innerLocalClass.kt");
+                    doTest(fileName);
+                }
+
+                @TestMetadata("localClass.kt")
+                public void testLocalClass() throws Exception {
+                    String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/generics/capturedParameters/localClass.kt");
+                    doTest(fileName);
+                }
+
+                @TestMetadata("localWithTypeParameter.kt")
+                public void testLocalWithTypeParameter() throws Exception {
+                    String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/generics/capturedParameters/localWithTypeParameter.kt");
+                    doTest(fileName);
+                }
+
+                @TestMetadata("objectLiteral.kt")
+                public void testObjectLiteral() throws Exception {
+                    String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/generics/capturedParameters/objectLiteral.kt");
+                    doTest(fileName);
+                }
+
+                @TestMetadata("uncheckedCast.kt")
+                public void testUncheckedCast() throws Exception {
+                    String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/generics/capturedParameters/uncheckedCast.kt");
+                    doTest(fileName);
+                }
+            }
+
             @TestMetadata("compiler/testData/diagnostics/tests/generics/cyclicBounds")
             @TestDataPath("$PROJECT_ROOT")
             @RunWith(JUnit3RunnerWithInners.class)
diff --git a/core/descriptors/src/org/jetbrains/kotlin/descriptors/typeParameterUtils.kt b/core/descriptors/src/org/jetbrains/kotlin/descriptors/typeParameterUtils.kt
index bc5d6c920fc..35a05bb5fbb 100644
--- a/core/descriptors/src/org/jetbrains/kotlin/descriptors/typeParameterUtils.kt
+++ b/core/descriptors/src/org/jetbrains/kotlin/descriptors/typeParameterUtils.kt
@@ -17,18 +17,26 @@
 package org.jetbrains.kotlin.descriptors
 
 import org.jetbrains.kotlin.resolve.DescriptorUtils
+import org.jetbrains.kotlin.resolve.descriptorUtil.parents
 import org.jetbrains.kotlin.types.*
 import org.jetbrains.kotlin.types.error.MissingDependencyErrorClass
-import java.util.*
+import org.jetbrains.kotlin.utils.addToStdlib.firstIsInstanceOrNull
 
 fun ClassDescriptor.computeConstructorTypeParameters(): List<TypeParameterDescriptor> {
     val declaredParameters = declaredTypeParameters
 
-    if (!isInner) return declaredParameters
-    val containingTypeConstructor = (containingDeclaration as? ClassDescriptor)?.typeConstructor ?: return emptyList()
+    if (!isInner && containingDeclaration !is CallableDescriptor) return declaredParameters
 
-    val additional = containingTypeConstructor.parameters.map { it.capturedCopyForInnerDeclaration(this, declaredParameters.size) }
-    if (additional.isEmpty()) return declaredParameters
+    val parametersFromContainingFunctions =
+            parents.takeWhile { it is CallableDescriptor }
+                   .flatMap { (it as CallableDescriptor).typeParameters.asSequence() }.toList()
+
+    val containingClassTypeConstructorParameters = parents.firstIsInstanceOrNull<ClassDescriptor>()?.typeConstructor?.parameters.orEmpty()
+    if (parametersFromContainingFunctions.isEmpty() && containingClassTypeConstructorParameters.isEmpty()) return declaredTypeParameters
+
+    val additional =
+            (parametersFromContainingFunctions + containingClassTypeConstructorParameters)
+                .map { it.capturedCopyForInnerDeclaration(this, declaredParameters.size) }
 
     return declaredParameters + additional
 }
@@ -69,14 +77,15 @@ private fun KotlinType.buildPossiblyInnerType(classDescriptor: ClassDescriptor?,
     if (classDescriptor == null || ErrorUtils.isError(classDescriptor)) return null
 
     val toIndex = classDescriptor.declaredTypeParameters.size + index
-    val argumentsSubList = arguments.subList(index, toIndex)
-
     if (!classDescriptor.isInner) {
-        assert(toIndex == arguments.size) { "${arguments.size - toIndex} trailing arguments were found in $this type" }
+        assert(toIndex == arguments.size || DescriptorUtils.isLocal(classDescriptor)) {
+            "${arguments.size - toIndex} trailing arguments were found in $this type"
+        }
 
-        return PossiblyInnerType(classDescriptor, argumentsSubList, null)
+        return PossiblyInnerType(classDescriptor, arguments.subList(index, arguments.size), null)
     }
 
+    val argumentsSubList = arguments.subList(index, toIndex)
     return PossiblyInnerType(
             classDescriptor, argumentsSubList,
             buildPossiblyInnerType(classDescriptor.containingDeclaration as? ClassDescriptor, toIndex))