diff --git a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java
index 0c9fdb15a8a..cb7138032a6 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java
@@ -614,6 +614,8 @@ public interface Errors {
     DiagnosticFactory1<PsiElement, ClassDescriptor> INACCESSIBLE_OUTER_CLASS_EXPRESSION = DiagnosticFactory1.create(ERROR);
     DiagnosticFactory0<JetClass> NESTED_CLASS_NOT_ALLOWED = DiagnosticFactory0.create(ERROR, DECLARATION_NAME);
 
+    DiagnosticFactory0<JetClass> INNER_CLASS_IN_TRAIT = DiagnosticFactory0.create(ERROR, PositioningStrategies.INNER_MODIFIER);
+
     //Inline and inlinable parameters
     DiagnosticFactory2<JetElement, DeclarationDescriptor, DeclarationDescriptor> INVISIBLE_MEMBER_FROM_INLINE = DiagnosticFactory2.create(ERROR, CALL_ELEMENT);
     DiagnosticFactory3<JetElement, JetElement, DeclarationDescriptor, DeclarationDescriptor> NON_LOCAL_RETURN_NOT_ALLOWED = DiagnosticFactory3.create(ERROR, CALL_ELEMENT);
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/PositioningStrategies.kt b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/PositioningStrategies.kt
index cbd461e9010..9e17d56173a 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/PositioningStrategies.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/PositioningStrategies.kt
@@ -159,6 +159,8 @@ public object PositioningStrategies {
 
     public val ABSTRACT_MODIFIER: PositioningStrategy<JetModifierListOwner> = modifierSetPosition(JetTokens.ABSTRACT_KEYWORD)
 
+    public val INNER_MODIFIER: PositioningStrategy<JetModifierListOwner> = modifierSetPosition(JetTokens.INNER_KEYWORD)
+
     public val OVERRIDE_MODIFIER: PositioningStrategy<JetModifierListOwner> = modifierSetPosition(JetTokens.OVERRIDE_KEYWORD)
 
     public val FINAL_MODIFIER: PositioningStrategy<JetModifierListOwner> = modifierSetPosition(JetTokens.FINAL_KEYWORD)
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java
index 6be59581ced..89de65d92f2 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java
@@ -325,6 +325,8 @@ public class DefaultErrorMessages {
         MAP.put(INACCESSIBLE_OUTER_CLASS_EXPRESSION, "Expression is inaccessible from a nested class ''{0}'', use ''inner'' keyword to make the class inner", NAME);
         MAP.put(NESTED_CLASS_NOT_ALLOWED, "Nested class is not allowed here, use ''inner'' keyword to make the class inner");
 
+        MAP.put(INNER_CLASS_IN_TRAIT, "Inner classes are not allowed in traits");
+
         MAP.put(HAS_NEXT_MISSING, "hasNext() cannot be called on iterator() of type ''{0}''", RENDER_TYPE);
         MAP.put(HAS_NEXT_FUNCTION_AMBIGUITY, "hasNext() is ambiguous for iterator() of type ''{0}''", RENDER_TYPE);
         MAP.put(HAS_NEXT_FUNCTION_NONE_APPLICABLE, "None of the hasNext() functions is applicable for iterator() of type ''{0}''", RENDER_TYPE);
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/resolve/ModifiersChecker.java b/compiler/frontend/src/org/jetbrains/kotlin/resolve/ModifiersChecker.java
index abc640b8fa1..a1880da739f 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/resolve/ModifiersChecker.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/resolve/ModifiersChecker.java
@@ -26,7 +26,7 @@ import org.jetbrains.annotations.NotNull;
 import org.jetbrains.annotations.Nullable;
 import org.jetbrains.kotlin.descriptors.*;
 import org.jetbrains.kotlin.descriptors.annotations.AnnotationDescriptor;
-import org.jetbrains.kotlin.diagnostics.Errors;
+import org.jetbrains.kotlin.diagnostics.*;
 import org.jetbrains.kotlin.lexer.JetModifierKeywordToken;
 import org.jetbrains.kotlin.lexer.JetTokens;
 import org.jetbrains.kotlin.name.FqName;
@@ -195,8 +195,17 @@ public class ModifiersChecker {
 
     private void checkInnerModifier(@NotNull JetModifierListOwner modifierListOwner, @NotNull DeclarationDescriptor descriptor) {
         if (modifierListOwner.hasModifier(INNER_KEYWORD)) {
-            if (isIllegalInner(descriptor)) {
-                checkIllegalInThisContextModifiers(modifierListOwner, Collections.singletonList(INNER_KEYWORD));
+            switch (checkIllegalInner(descriptor)) {
+                case ALLOWED:
+                    break;
+                case ILLEGAL_POSITION:
+                    checkIllegalInThisContextModifiers(modifierListOwner, Collections.singletonList(INNER_KEYWORD));
+                    break;
+                case IN_TRAIT:
+                    if (modifierListOwner instanceof JetClass) {
+                        trace.report(INNER_CLASS_IN_TRAIT.on((JetClass) modifierListOwner));
+                    }
+                    break;
             }
             return;
         }
@@ -210,12 +219,28 @@ public class ModifiersChecker {
     }
 
     public static boolean isIllegalInner(@NotNull DeclarationDescriptor descriptor) {
-        if (!(descriptor instanceof ClassDescriptor)) return true;
+        return checkIllegalInner(descriptor) != InnerModifierCheckResult.ALLOWED;
+    }
+
+    private enum InnerModifierCheckResult {
+        ALLOWED,
+        ILLEGAL_POSITION,
+        IN_TRAIT
+    }
+
+    @NotNull
+    private static InnerModifierCheckResult checkIllegalInner(DeclarationDescriptor descriptor) {
+        if (!(descriptor instanceof ClassDescriptor)) return InnerModifierCheckResult.ILLEGAL_POSITION;
         ClassDescriptor classDescriptor = (ClassDescriptor) descriptor;
-        if (classDescriptor.getKind() != ClassKind.CLASS) return true;
+        if (classDescriptor.getKind() != ClassKind.CLASS) return InnerModifierCheckResult.ILLEGAL_POSITION;
         DeclarationDescriptor containingDeclaration = classDescriptor.getContainingDeclaration();
-        if (!(containingDeclaration instanceof ClassDescriptor)) return true;
-        return ((ClassDescriptor) containingDeclaration).getKind() == ClassKind.TRAIT;
+        if (!(containingDeclaration instanceof ClassDescriptor)) return InnerModifierCheckResult.ILLEGAL_POSITION;
+        if (((ClassDescriptor) containingDeclaration).getKind() == ClassKind.TRAIT) {
+            return InnerModifierCheckResult.IN_TRAIT;
+        }
+        else {
+            return InnerModifierCheckResult.ALLOWED;
+        }
     }
 
     private static boolean isIllegalNestedClass(@NotNull DeclarationDescriptor descriptor) {
diff --git a/compiler/testData/diagnostics/tests/inner/illegalModifier.kt b/compiler/testData/diagnostics/tests/inner/illegalModifier.kt
index 2c98ac6fead..dc82914fe3c 100644
--- a/compiler/testData/diagnostics/tests/inner/illegalModifier.kt
+++ b/compiler/testData/diagnostics/tests/inner/illegalModifier.kt
@@ -23,7 +23,7 @@ enum class H {
 }
 
 trait K {
-    <!ILLEGAL_MODIFIER!>inner<!> class L
+    <!INNER_CLASS_IN_TRAIT!>inner<!> class L
 }
 
 object N {