diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/types/inference/ConstraintSystemImpl.java b/compiler/frontend/src/org/jetbrains/jet/lang/types/inference/ConstraintSystemImpl.java
index e9984635f3a..ed5e49d499c 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/types/inference/ConstraintSystemImpl.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/types/inference/ConstraintSystemImpl.java
@@ -73,9 +73,11 @@ public class ConstraintSystemImpl implements ConstraintSystem {
 
         @Nullable
         public abstract KnownType getValue();
+        
+        public abstract boolean equate(TypeValue other);
     }
 
-    private static class UnknownType extends TypeValue {
+    private class UnknownType extends TypeValue {
 
         private final TypeParameterDescriptor typeParameterDescriptor;
         private final Variance positionVariance;
@@ -87,6 +89,24 @@ public class ConstraintSystemImpl implements ConstraintSystem {
             this.positionVariance = positionVariance;
         }
 
+        @Override
+        public void addUpperBound(@NotNull TypeValue bound) {
+            addBound(bound, getLowerBounds());
+            super.addUpperBound(bound);
+        }
+
+        @Override
+        public void addLowerBound(@NotNull TypeValue bound) {
+            addBound(bound, getUpperBounds());
+            super.addLowerBound(bound);
+        }
+
+        private void addBound(TypeValue bound, Set<TypeValue> oppositeBounds) {
+            if (oppositeBounds.contains(bound)) {
+                this.equate(bound);
+            }
+        }
+
         @NotNull
         public TypeParameterDescriptor getTypeParameterDescriptor() {
             return typeParameterDescriptor;
@@ -139,6 +159,18 @@ public class ConstraintSystemImpl implements ConstraintSystem {
             return value;
         }
 
+        @Override
+        public boolean equate(TypeValue other) {
+            if (other instanceof KnownType) {
+                KnownType knownType = (KnownType) other;
+                return setValue(knownType);
+            }
+
+            assert other instanceof UnknownType;
+            mergeUnknowns((UnknownType) other, this);
+            return true;
+        }
+
         public boolean setValue(@NotNull KnownType value) {
             if (this.value != null) {
                 // If we have already assigned a value to this unknown,
@@ -186,6 +218,15 @@ public class ConstraintSystemImpl implements ConstraintSystem {
         public String toString() {
             return type.toString();
         }
+
+        @Override
+        public boolean equate(TypeValue other) {
+            if (other instanceof KnownType) {
+                KnownType knownType = (KnownType) other;
+                return TypeUtils.equalTypes(type, knownType.getType());
+            }
+            return other.equate(this);
+        }
     }
 
     private final Map<JetType, KnownType> knownTypes = Maps.newHashMap();
@@ -233,25 +274,7 @@ public class ConstraintSystemImpl implements ConstraintSystem {
             TypeValue aValue = getTypeValueFor(a);
             TypeValue bValue = getTypeValueFor(b);
 
-            if (aValue instanceof UnknownType) {
-                UnknownType aUnknown = (UnknownType) aValue;
-                if (bValue instanceof UnknownType) {
-                    UnknownType bUnknown = (UnknownType) bValue;
-                    mergeUnknowns(aUnknown, bUnknown);
-                }
-                else {
-                    if (!aUnknown.setValue((KnownType) bValue)) return false;
-                }
-            }
-            else if (bValue instanceof UnknownType) {
-                UnknownType bUnknown = (UnknownType) bValue;
-                if (!bUnknown.setValue((KnownType) aValue)) return false;
-            }
-            else {
-              return TypeUtils.equalTypes(a, b);
-            }
-
-            return true;
+            return aValue.equate(bValue);
         }
 
         @Override
diff --git a/compiler/testData/checkerWithErrorTypes/quick/regressions/kt688.jet b/compiler/testData/checkerWithErrorTypes/quick/regressions/kt688.jet
new file mode 100644
index 00000000000..045dddc7d8f
--- /dev/null
+++ b/compiler/testData/checkerWithErrorTypes/quick/regressions/kt688.jet
@@ -0,0 +1,14 @@
+// KT-668 Failed to resolve generic parameter
+open class A()
+open class B() : A() {
+  fun b(): B = B()
+}
+
+
+class C() {
+  fun a<T>(x: fun(T):T, y: T): T {
+    return x(x(y))
+  }
+
+  val x: B = a({it.b()}, B())
+}
\ No newline at end of file