diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/cfg/JetControlFlowProcessor.java b/compiler/frontend/src/org/jetbrains/jet/lang/cfg/JetControlFlowProcessor.java
index fa4d265e80f..4a2fd8bb33a 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/cfg/JetControlFlowProcessor.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/cfg/JetControlFlowProcessor.java
@@ -54,7 +54,6 @@ public class JetControlFlowProcessor {
         this.trace = trace;
     }
 
-    //todo
     public Pseudocode generatePseudocode(@NotNull JetDeclaration subroutine) {
         Pseudocode pseudocode = generate(subroutine);
         ((PseudocodeImpl)pseudocode).postProcess();
@@ -64,7 +63,7 @@ public class JetControlFlowProcessor {
         return pseudocode;
     }
 
-    public Pseudocode generate(@NotNull JetDeclaration subroutine) {
+    private Pseudocode generate(@NotNull JetDeclaration subroutine) {
         builder.enterSubroutine(subroutine);
         if (subroutine instanceof JetDeclarationWithBody) {
             JetDeclarationWithBody declarationWithBody = (JetDeclarationWithBody) subroutine;
diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/cfg/pseudocode/PseudocodeImpl.java b/compiler/frontend/src/org/jetbrains/jet/lang/cfg/pseudocode/PseudocodeImpl.java
index 8eb651cf4a0..74beb128229 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/cfg/pseudocode/PseudocodeImpl.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/cfg/pseudocode/PseudocodeImpl.java
@@ -108,12 +108,18 @@ public class PseudocodeImpl implements Pseudocode {
     @Override
     public Set<LocalDeclarationInstruction> getLocalDeclarations() {
         if (localDeclarations == null) {
-            localDeclarations = Sets.newLinkedHashSet();
-            //todo look recursively inside local declarations
-            for (Instruction instruction : instructions) {
-                if (instruction instanceof LocalDeclarationInstruction) {
-                    localDeclarations.add((LocalDeclarationInstruction) instruction);
-                }
+            localDeclarations = getLocalDeclarations(this);
+        }
+        return localDeclarations;
+    }
+
+    @NotNull
+    private static Set<LocalDeclarationInstruction> getLocalDeclarations(@NotNull Pseudocode pseudocode) {
+        Set<LocalDeclarationInstruction> localDeclarations = Sets.newHashSet();
+        for (Instruction instruction : pseudocode.getInstructions()) {
+            if (instruction instanceof LocalDeclarationInstruction) {
+                localDeclarations.add((LocalDeclarationInstruction) instruction);
+                localDeclarations.addAll(getLocalDeclarations(((LocalDeclarationInstruction)instruction).getBody()));
             }
         }
         return localDeclarations;
diff --git a/compiler/testData/diagnostics/tests/controlFlowAnalysis/checkInnerLocalDeclarations.jet b/compiler/testData/diagnostics/tests/controlFlowAnalysis/checkInnerLocalDeclarations.jet
new file mode 100644
index 00000000000..422e57181f6
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/controlFlowAnalysis/checkInnerLocalDeclarations.jet
@@ -0,0 +1,12 @@
+package c
+
+fun test() {
+    val x = 10
+    fun inner1() {
+        fun inner2() {
+            fun inner3() {
+                val <!UNUSED_VARIABLE!>y<!> = x
+            }
+        }
+    }
+}
\ No newline at end of file