diff --git a/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDataClassConverters.kt b/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDataClassConverters.kt
index 575bc3b4d84..d9e28b1fbc3 100644
--- a/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDataClassConverters.kt
+++ b/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDataClassConverters.kt
@@ -253,6 +253,18 @@ internal val KT_DIAGNOSTIC_CONVERTER = KtDiagnosticConverterBuilder.buildConvert
             token,
         )
     }
+    add(FirErrors.INNER_ON_TOP_LEVEL_SCRIPT_CLASS.errorFactory) { firDiagnostic ->
+        InnerOnTopLevelScriptClassErrorImpl(
+            firDiagnostic as KtPsiDiagnostic,
+            token,
+        )
+    }
+    add(FirErrors.INNER_ON_TOP_LEVEL_SCRIPT_CLASS.warningFactory) { firDiagnostic ->
+        InnerOnTopLevelScriptClassWarningImpl(
+            firDiagnostic as KtPsiDiagnostic,
+            token,
+        )
+    }
     add(FirErrors.INVISIBLE_REFERENCE) { firDiagnostic ->
         InvisibleReferenceImpl(
             firSymbolBuilder.buildSymbol(firDiagnostic.a),
diff --git a/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnostics.kt b/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnostics.kt
index 89ef0ce0e93..c10be060dfa 100644
--- a/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnostics.kt
+++ b/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnostics.kt
@@ -217,6 +217,14 @@ sealed interface KtFirDiagnostic<PSI : PsiElement> : KtDiagnosticWithPsi<PSI> {
         val callableId: CallableId
     }
 
+    interface InnerOnTopLevelScriptClassError : KtFirDiagnostic<PsiElement> {
+        override val diagnosticClass get() = InnerOnTopLevelScriptClassError::class
+    }
+
+    interface InnerOnTopLevelScriptClassWarning : KtFirDiagnostic<PsiElement> {
+        override val diagnosticClass get() = InnerOnTopLevelScriptClassWarning::class
+    }
+
     interface InvisibleReference : KtFirDiagnostic<PsiElement> {
         override val diagnosticClass get() = InvisibleReference::class
         val reference: KtSymbol
diff --git a/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnosticsImpl.kt b/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnosticsImpl.kt
index 75cbe0adf58..cf54946094e 100644
--- a/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnosticsImpl.kt
+++ b/analysis/analysis-api-fir/src/org/jetbrains/kotlin/analysis/api/fir/diagnostics/KtFirDiagnosticsImpl.kt
@@ -246,6 +246,16 @@ internal class InvisibleSetterImpl(
     token: KtLifetimeToken,
 ) : KtAbstractFirDiagnostic<PsiElement>(firDiagnostic, token), KtFirDiagnostic.InvisibleSetter
 
+internal class InnerOnTopLevelScriptClassErrorImpl(
+    firDiagnostic: KtPsiDiagnostic,
+    token: KtLifetimeToken,
+) : KtAbstractFirDiagnostic<PsiElement>(firDiagnostic, token), KtFirDiagnostic.InnerOnTopLevelScriptClassError
+
+internal class InnerOnTopLevelScriptClassWarningImpl(
+    firDiagnostic: KtPsiDiagnostic,
+    token: KtLifetimeToken,
+) : KtAbstractFirDiagnostic<PsiElement>(firDiagnostic, token), KtFirDiagnostic.InnerOnTopLevelScriptClassWarning
+
 internal class InvisibleReferenceImpl(
     override val reference: KtSymbol,
     override val visible: Visibility,
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
index 33adc17588d..a6874a9f147 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
@@ -29134,6 +29134,18 @@ public class FirPsiOldFrontendDiagnosticsTestGenerated extends AbstractFirPsiDia
                 runTest("compiler/testData/diagnostics/tests/script/imports.kts");
             }
 
+            @Test
+            @TestMetadata("innerClassError.kts")
+            public void testInnerClassError() throws Exception {
+                runTest("compiler/testData/diagnostics/tests/script/innerClassError.kts");
+            }
+
+            @Test
+            @TestMetadata("innerClassWarning.kts")
+            public void testInnerClassWarning() throws Exception {
+                runTest("compiler/testData/diagnostics/tests/script/innerClassWarning.kts");
+            }
+
             @Test
             @TestMetadata("LateInit.kts")
             public void testLateInit() throws Exception {
diff --git a/compiler/fir/checkers/checkers-component-generator/src/org/jetbrains/kotlin/fir/checkers/generator/diagnostics/FirDiagnosticsList.kt b/compiler/fir/checkers/checkers-component-generator/src/org/jetbrains/kotlin/fir/checkers/generator/diagnostics/FirDiagnosticsList.kt
index b394dacc64d..eabb446473c 100644
--- a/compiler/fir/checkers/checkers-component-generator/src/org/jetbrains/kotlin/fir/checkers/generator/diagnostics/FirDiagnosticsList.kt
+++ b/compiler/fir/checkers/checkers-component-generator/src/org/jetbrains/kotlin/fir/checkers/generator/diagnostics/FirDiagnosticsList.kt
@@ -99,6 +99,7 @@ object DIAGNOSTICS_LIST : DiagnosticList("FirErrors") {
             parameter<Visibility>("visibility")
             parameter<CallableId>("callableId")
         }
+        val INNER_ON_TOP_LEVEL_SCRIPT_CLASS by deprecationError<PsiElement>(LanguageFeature.ProhibitScriptTopLevelInnerClasses)
     }
 
     val UNRESOLVED by object : DiagnosticGroup("Unresolved") {
diff --git a/compiler/fir/checkers/gen/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrors.kt b/compiler/fir/checkers/gen/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrors.kt
index be41781c06d..82d09ff151e 100644
--- a/compiler/fir/checkers/gen/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrors.kt
+++ b/compiler/fir/checkers/gen/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrors.kt
@@ -21,6 +21,7 @@ import org.jetbrains.kotlin.config.LanguageFeature.ProhibitCyclesInAnnotations
 import org.jetbrains.kotlin.config.LanguageFeature.ProhibitImplementingVarByInheritedVal
 import org.jetbrains.kotlin.config.LanguageFeature.ProhibitInvisibleAbstractMethodsInSuperclasses
 import org.jetbrains.kotlin.config.LanguageFeature.ProhibitNonReifiedArraysAsReifiedTypeArguments
+import org.jetbrains.kotlin.config.LanguageFeature.ProhibitScriptTopLevelInnerClasses
 import org.jetbrains.kotlin.config.LanguageFeature.ProhibitUseSiteTargetAnnotationsOnSuperTypes
 import org.jetbrains.kotlin.config.LanguageFeature.RestrictRetentionForExpressionAnnotations
 import org.jetbrains.kotlin.config.LanguageFeature.RestrictionOfValReassignmentViaBackingField
@@ -146,6 +147,7 @@ object FirErrors {
     val VAL_OR_VAR_ON_CATCH_PARAMETER by error1<KtParameter, KtKeywordToken>(SourceElementPositioningStrategies.VAL_OR_VAR_NODE)
     val VAL_OR_VAR_ON_SECONDARY_CONSTRUCTOR_PARAMETER by error1<KtParameter, KtKeywordToken>(SourceElementPositioningStrategies.VAL_OR_VAR_NODE)
     val INVISIBLE_SETTER by error3<PsiElement, FirPropertySymbol, Visibility, CallableId>(SourceElementPositioningStrategies.SELECTOR_BY_QUALIFIED)
+    val INNER_ON_TOP_LEVEL_SCRIPT_CLASS by deprecationError0<PsiElement>(ProhibitScriptTopLevelInnerClasses)
 
     // Unresolved
     val INVISIBLE_REFERENCE by error3<PsiElement, FirBasedSymbol<*>, Visibility, ClassId?>(SourceElementPositioningStrategies.REFERENCE_BY_QUALIFIED)
diff --git a/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirModifierChecker.kt b/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirModifierChecker.kt
index 7aa2af2e2c6..f586443507a 100644
--- a/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirModifierChecker.kt
+++ b/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirModifierChecker.kt
@@ -262,13 +262,17 @@ object FirModifierChecker : FirBasicDeclarationChecker() {
         val possibleParentPredicate = possibleParentTargetPredicateMap[modifierToken] ?: return true
         if (actualParents.any { possibleParentPredicate.isAllowed(it, context.session.languageVersionSettings) }) return true
 
-        reporter.reportOn(
-            modifierSource,
-            FirErrors.WRONG_MODIFIER_CONTAINING_DECLARATION,
-            modifierToken,
-            actualParents.firstOrThis(),
-            context
-        )
+        if (modifierToken == KtTokens.INNER_KEYWORD && parent is FirScript) {
+            reporter.reportOn(modifierSource, FirErrors.INNER_ON_TOP_LEVEL_SCRIPT_CLASS, context)
+        } else {
+            reporter.reportOn(
+                modifierSource,
+                FirErrors.WRONG_MODIFIER_CONTAINING_DECLARATION,
+                modifierToken,
+                actualParents.firstOrThis(),
+                context
+            )
+        }
 
         return false
     }
diff --git a/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrorsDefaultMessages.kt b/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrorsDefaultMessages.kt
index 518bbd1bd01..ad62b106a2b 100644
--- a/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrorsDefaultMessages.kt
+++ b/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/diagnostics/FirErrorsDefaultMessages.kt
@@ -301,6 +301,7 @@ import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INLINE_SUSPEND_FU
 import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INNER_CLASS_CONSTRUCTOR_NO_RECEIVER
 import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INNER_CLASS_INSIDE_VALUE_CLASS
 import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INNER_CLASS_OF_GENERIC_THROWABLE_SUBCLASS
+import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INNER_ON_TOP_LEVEL_SCRIPT_CLASS
 import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INSTANCE_ACCESS_BEFORE_SUPER_CALL
 import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INTERFACE_AS_FUNCTION
 import org.jetbrains.kotlin.fir.analysis.diagnostics.FirErrors.INTERFACE_WITH_SUPERCLASS
@@ -714,6 +715,7 @@ object FirErrorsDefaultMessages : BaseDiagnosticRendererFactory() {
             VISIBILITY,
             NAME_OF_CONTAINING_DECLARATION_OR_FILE
         )
+        map.put(INNER_ON_TOP_LEVEL_SCRIPT_CLASS, "Top level script class cannot be inner.")
         map.put(UNRESOLVED_REFERENCE, "Unresolved reference: {0}", NULLABLE_STRING)
         map.put(UNRESOLVED_IMPORT, "Unresolved reference: {0}", NULLABLE_STRING) // &
         map.put(UNRESOLVED_LABEL, "Unresolved label")
diff --git a/compiler/fir/raw-fir/psi2fir/src/org/jetbrains/kotlin/fir/builder/PsiRawFirBuilder.kt b/compiler/fir/raw-fir/psi2fir/src/org/jetbrains/kotlin/fir/builder/PsiRawFirBuilder.kt
index b3cf3329bf5..555d2d6839f 100644
--- a/compiler/fir/raw-fir/psi2fir/src/org/jetbrains/kotlin/fir/builder/PsiRawFirBuilder.kt
+++ b/compiler/fir/raw-fir/psi2fir/src/org/jetbrains/kotlin/fir/builder/PsiRawFirBuilder.kt
@@ -1023,7 +1023,7 @@ open class PsiRawFirBuilder(
             val status = FirDeclarationStatusImpl(explicitVisibility ?: defaultVisibility(), Modality.FINAL).apply {
                 isExpect = this@toFirConstructor?.hasExpectModifier() == true || this@PsiRawFirBuilder.context.containerIsExpect
                 isActual = this@toFirConstructor?.hasActualModifier() == true
-                isInner = owner.hasModifier(INNER_KEYWORD)
+                isInner = owner.parent.parent !is KtScript && owner.hasModifier(INNER_KEYWORD) // a warning about inner script class is reported on the class itself
                 isFromSealedClass = owner.hasModifier(SEALED_KEYWORD) && explicitVisibility !== Visibilities.Private
                 isFromEnumClass = owner.hasModifier(ENUM_KEYWORD)
             }
@@ -1244,6 +1244,7 @@ open class PsiRawFirBuilder(
             // NB: enum entry nested classes are considered local by FIR design (see discussion in KT-45115)
             val isLocal = classOrObject.isLocal || classOrObject.getStrictParentOfType<KtEnumEntry>() != null
             val classIsExpect = classOrObject.hasExpectModifier() || context.containerIsExpect
+            val sourceElement = classOrObject.toFirSourceElement()
             return withChildClassName(
                 classOrObject.nameAsSafeName,
                 isExpect = classIsExpect,
@@ -1265,7 +1266,7 @@ open class PsiRawFirBuilder(
                 ).apply {
                     isExpect = classIsExpect
                     isActual = classOrObject.hasActualModifier()
-                    isInner = classOrObject.hasModifier(INNER_KEYWORD)
+                    isInner = classOrObject.hasModifier(INNER_KEYWORD) && classOrObject.parent.parent !is KtScript
                     isCompanion = (classOrObject as? KtObjectDeclaration)?.isCompanion() == true
                     isData = classOrObject.hasModifier(DATA_KEYWORD)
                     isInline = classOrObject.hasModifier(INLINE_KEYWORD) || classOrObject.hasModifier(VALUE_KEYWORD)
@@ -1273,10 +1274,10 @@ open class PsiRawFirBuilder(
                     isExternal = classOrObject.hasModifier(EXTERNAL_KEYWORD)
                 }
 
-                withCapturedTypeParameters(status.isInner || isLocal, classOrObject.toFirSourceElement(), listOf()) {
+                withCapturedTypeParameters(status.isInner || isLocal, sourceElement, listOf()) {
                     var delegatedFieldsMap: Map<Int, FirFieldSymbol>?
                     buildRegularClass {
-                        source = classOrObject.toFirSourceElement()
+                        source = sourceElement
                         moduleData = baseModuleData
                         origin = FirDeclarationOrigin.Source
                         name = classOrObject.nameAsSafeName
diff --git a/compiler/testData/diagnostics/tests/script/NestedInnerClass.fir.kts b/compiler/testData/diagnostics/tests/script/NestedInnerClass.fir.kts
index d20c27c2f57..b96f8f27d0c 100644
--- a/compiler/testData/diagnostics/tests/script/NestedInnerClass.fir.kts
+++ b/compiler/testData/diagnostics/tests/script/NestedInnerClass.fir.kts
@@ -10,7 +10,7 @@ class Nested {
 }
 
 
-<!WRONG_MODIFIER_CONTAINING_DECLARATION!>inner<!> class Inner {
+<!INNER_ON_TOP_LEVEL_SCRIPT_CLASS_WARNING!>inner<!> class Inner {
     fun innerFun() = function()
     val innerProp = property
     fun innerThisFun() = this<!UNRESOLVED_LABEL!>@NestedInnerClass<!>.function()
diff --git a/compiler/testData/diagnostics/tests/script/innerClassError.fir.kts b/compiler/testData/diagnostics/tests/script/innerClassError.fir.kts
new file mode 100644
index 00000000000..bca175cb8e5
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/script/innerClassError.fir.kts
@@ -0,0 +1,4 @@
+// TARGET_BACKEND: JVM_IR
+// !LANGUAGE: +ProhibitScriptTopLevelInnerClasses
+
+<!INNER_ON_TOP_LEVEL_SCRIPT_CLASS_ERROR!>inner<!> class A
diff --git a/compiler/testData/diagnostics/tests/script/innerClassError.kts b/compiler/testData/diagnostics/tests/script/innerClassError.kts
new file mode 100644
index 00000000000..8fda5582bc0
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/script/innerClassError.kts
@@ -0,0 +1,3 @@
+// TARGET_BACKEND: JVM_IR
+
+inner class A
diff --git a/compiler/testData/diagnostics/tests/script/innerClassWarning.fir.kts b/compiler/testData/diagnostics/tests/script/innerClassWarning.fir.kts
new file mode 100644
index 00000000000..1afecf4192b
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/script/innerClassWarning.fir.kts
@@ -0,0 +1,4 @@
+// TARGET_BACKEND: JVM_IR
+// !LANGUAGE: -ProhibitScriptTopLevelInnerClasses
+
+<!INNER_ON_TOP_LEVEL_SCRIPT_CLASS_WARNING!>inner<!> class A
diff --git a/compiler/testData/diagnostics/tests/script/innerClassWarning.kts b/compiler/testData/diagnostics/tests/script/innerClassWarning.kts
new file mode 100644
index 00000000000..8fda5582bc0
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/script/innerClassWarning.kts
@@ -0,0 +1,3 @@
+// TARGET_BACKEND: JVM_IR
+
+inner class A
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 e2bb5a0e0a0..ed4e5132fa2 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
@@ -29972,6 +29972,18 @@ public class DiagnosticTestGenerated extends AbstractDiagnosticTest {
                 runTest("compiler/testData/diagnostics/tests/script/imports.kts");
             }
 
+            @Test
+            @TestMetadata("innerClassError.kts")
+            public void testInnerClassError() throws Exception {
+                runTest("compiler/testData/diagnostics/tests/script/innerClassError.kts");
+            }
+
+            @Test
+            @TestMetadata("innerClassWarning.kts")
+            public void testInnerClassWarning() throws Exception {
+                runTest("compiler/testData/diagnostics/tests/script/innerClassWarning.kts");
+            }
+
             @Test
             @TestMetadata("LateInit.kts")
             public void testLateInit() throws Exception {
diff --git a/compiler/util/src/org/jetbrains/kotlin/config/LanguageVersionSettings.kt b/compiler/util/src/org/jetbrains/kotlin/config/LanguageVersionSettings.kt
index 7183dbd0748..55dec0c5c41 100644
--- a/compiler/util/src/org/jetbrains/kotlin/config/LanguageVersionSettings.kt
+++ b/compiler/util/src/org/jetbrains/kotlin/config/LanguageVersionSettings.kt
@@ -332,6 +332,11 @@ enum class LanguageFeature(
     // When this feature is enabled, no such errors are reported.
     NoAdditionalErrorsInK1DiagnosticReporter(sinceVersion = null, kind = OTHER),
 
+    // top-level script inner classes never made any sense, but used for some time to overcome the capturing logic limitations
+    // Now capturing logic works properly, therefore the warning is reported in K2
+    // this feature will eventually switch this warning to an error
+    ProhibitScriptTopLevelInnerClasses(sinceVersion = null, kind = OTHER),
+
     // Experimental features
 
     BreakContinueInInlineLambdas(null), // KT-1436