diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java b/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java
index 40808f2a796..841bf5e3d07 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java
@@ -28,6 +28,7 @@ import org.jetbrains.jet.lang.descriptors.impl.*;
 import org.jetbrains.jet.lang.psi.*;
 import org.jetbrains.jet.lang.resolve.*;
 import org.jetbrains.jet.lang.resolve.calls.CallResolverUtil;
+import org.jetbrains.jet.lang.resolve.name.LabelName;
 import org.jetbrains.jet.lang.resolve.name.Name;
 import org.jetbrains.jet.lang.resolve.scopes.JetScope;
 import org.jetbrains.jet.lang.types.*;
@@ -99,6 +100,11 @@ public class ClosureExpressionsTypingVisitor extends ExpressionTypingVisitor {
         JetBlockExpression bodyExpression = expression.getFunctionLiteral().getBodyExpression();
         if (bodyExpression == null) return null;
 
+        Name callerName = getCallerName(expression);
+        if (callerName != null) {
+            context.labelResolver.enterLabeledElement(new LabelName(callerName.asString()), expression);
+        }
+
         JetType expectedType = context.expectedType;
         boolean functionTypeExpected = expectedType != NO_EXPECTED_TYPE && KotlinBuiltIns.getInstance().isFunctionOrExtensionFunctionType(
                 expectedType);
@@ -115,9 +121,49 @@ public class ClosureExpressionsTypingVisitor extends ExpressionTypingVisitor {
             // all checks were done before
             return JetTypeInfo.create(resultType, context.dataFlowInfo);
         }
+
+        if (callerName != null) {
+            context.labelResolver.exitLabeledElement(expression);
+        }
+
         return DataFlowUtils.checkType(resultType, expression, context, context.dataFlowInfo);
     }
 
+    @Nullable
+    private static Name getCallerName(@NotNull JetFunctionLiteralExpression expression) {
+        JetCallExpression callExpression = getContainingCallExpression(expression);
+        if (callExpression == null) return null;
+
+        JetExpression calleeExpression = callExpression.getCalleeExpression();
+        if (calleeExpression instanceof JetSimpleNameExpression) {
+            JetSimpleNameExpression nameExpression = (JetSimpleNameExpression) calleeExpression;
+            return nameExpression.getReferencedNameAsName();
+        }
+
+        return null;
+    }
+
+    @Nullable
+    private static JetCallExpression getContainingCallExpression(JetFunctionLiteralExpression expression) {
+        PsiElement parent = expression.getParent();
+        if (parent instanceof JetCallExpression) {
+            // f {}
+            return (JetCallExpression) parent;
+        }
+
+        if (parent instanceof JetValueArgument) {
+            // f ({}) or f(p = {})
+            JetValueArgument argument = (JetValueArgument) parent;
+            PsiElement argList = argument.getParent();
+            if (argList == null) return null;
+            PsiElement call = argList.getParent();
+            if (call instanceof JetCallExpression) {
+                return (JetCallExpression) call;
+            }
+        }
+        return null;
+    }
+
     @NotNull
     private static AnonymousFunctionDescriptor createFunctionDescriptor(
             @NotNull JetFunctionLiteralExpression expression,
diff --git a/compiler/testData/codegen/box/closures/localReturnWithAutolabel.kt b/compiler/testData/codegen/box/closures/localReturnWithAutolabel.kt
new file mode 100644
index 00000000000..ac4b10aabf4
--- /dev/null
+++ b/compiler/testData/codegen/box/closures/localReturnWithAutolabel.kt
@@ -0,0 +1,19 @@
+fun box(): String {
+    val a = 1
+    val explicitlyReturned = run1 {(): String ->
+        if (a > 0)
+          return@run1 "OK"
+        else "Fail 1"
+    }
+    if (explicitlyReturned != "OK") return explicitlyReturned
+
+    val implicitlyReturned = run1 {(): String ->
+        if (a < 0)
+          return@run1 "Fail 2"
+        else "OK"
+    }
+    if (implicitlyReturned != "OK") return implicitlyReturned
+    return "OK"
+}
+
+fun run1<T>(f: () -> T): T { return f() }
\ No newline at end of file
diff --git a/compiler/testData/diagnostics/tests/functionLiterals/return/AutoLabels.kt b/compiler/testData/diagnostics/tests/functionLiterals/return/AutoLabels.kt
new file mode 100644
index 00000000000..1cb5d2d3816
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/functionLiterals/return/AutoLabels.kt
@@ -0,0 +1,23 @@
+fun f() {
+    foo {(): Int ->
+        return@foo 1
+    }
+    foo({(): Int ->
+        return@foo 1
+    }
+    )
+    foo(a = {(): Int ->
+        return@foo 1
+    })
+
+    foo {(): Int ->
+        foo {
+            (): Int ->
+            return@foo 1
+        }
+        return@foo 1
+    }
+}
+
+fun foo(<!UNUSED_PARAMETER!>a<!>: Any) {}
+
diff --git a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
index 20e237ce7ad..4afcba8d7b8 100644
--- a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
@@ -2432,6 +2432,11 @@ public class JetDiagnosticsTestGenerated extends AbstractDiagnosticsTestWithEage
                     JetTestUtils.assertAllTestsPresentByMetadata(this.getClass(), "org.jetbrains.jet.generators.tests.GenerateTests", new File("compiler/testData/diagnostics/tests/functionLiterals/return"), Pattern.compile("^(.+)\\.kt$"), true);
                 }
                 
+                @TestMetadata("AutoLabels.kt")
+                public void testAutoLabels() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/functionLiterals/return/AutoLabels.kt");
+                }
+                
                 @TestMetadata("ForbiddenNonLocalReturnNoType.kt")
                 public void testForbiddenNonLocalReturnNoType() throws Exception {
                     doTest("compiler/testData/diagnostics/tests/functionLiterals/return/ForbiddenNonLocalReturnNoType.kt");
diff --git a/compiler/tests/org/jetbrains/jet/codegen/generated/BlackBoxCodegenTestGenerated.java b/compiler/tests/org/jetbrains/jet/codegen/generated/BlackBoxCodegenTestGenerated.java
index f32e86f7732..9db6fba5f59 100644
--- a/compiler/tests/org/jetbrains/jet/codegen/generated/BlackBoxCodegenTestGenerated.java
+++ b/compiler/tests/org/jetbrains/jet/codegen/generated/BlackBoxCodegenTestGenerated.java
@@ -1204,6 +1204,11 @@ public class BlackBoxCodegenTestGenerated extends AbstractBlackBoxCodegenTest {
             doTest("compiler/testData/codegen/box/closures/localReturn.kt");
         }
         
+        @TestMetadata("localReturnWithAutolabel.kt")
+        public void testLocalReturnWithAutolabel() throws Exception {
+            doTest("compiler/testData/codegen/box/closures/localReturnWithAutolabel.kt");
+        }
+        
         @TestMetadata("recursiveClosure.kt")
         public void testRecursiveClosure() throws Exception {
             doTest("compiler/testData/codegen/box/closures/recursiveClosure.kt");