diff --git a/compiler/testData/diagnostics/tests/inference/constraints/equalityConstraintOnNullableType.kt b/compiler/testData/diagnostics/tests/inference/constraints/equalityConstraintOnNullableType.kt
new file mode 100644
index 00000000000..4454c3f8fde
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inference/constraints/equalityConstraintOnNullableType.kt
@@ -0,0 +1,21 @@
+// !DIAGNOSTICS: -BASE_WITH_NULLABLE_UPPER_BOUND
+class TypeOf<T>(t: T)
+
+trait A<T>
+
+fun <T> foo(a: A<T>, aN: A<T?>): T = throw Exception("$a $aN")
+
+fun <T> doA(a: A<T>): T = throw Exception("$a")
+
+fun test(a: A<Int>, aN: A<Int?>) {
+    val aa = doA(aN)
+    TypeOf(aa): TypeOf<Int?>
+
+    val nullable = foo(aN, aN)
+    //T = Int?, T? = Int? => T = Int?
+    TypeOf(nullable): TypeOf<Int?>
+
+    val notNullable = foo(a, aN)
+    //T = Int, T? = Int? => T = Int
+    TypeOf(notNullable): TypeOf<Int>
+}
diff --git a/compiler/testData/diagnostics/tests/inference/constraints/notNullConstraintOnNullableType.kt b/compiler/testData/diagnostics/tests/inference/constraints/notNullConstraintOnNullableType.kt
new file mode 100644
index 00000000000..af4c22b6ca5
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inference/constraints/notNullConstraintOnNullableType.kt
@@ -0,0 +1,25 @@
+class TypeOf<T>(t: T)
+
+trait A<T>
+
+trait In<in T>
+
+trait Out<out T>
+
+fun <T: Any> doT(t: T?): T = throw Exception("$t")
+fun <T: Any> doOut(o: Out<T?>): T { throw Exception("$o") }
+fun <T: Any> doIn(i: In<T?>) { throw Exception("$i") }
+fun <T: Any> doA(i: A<T?>) { throw Exception("$i") }
+
+fun test(out: Out<Int>, i: In<Int>, inv: A<Int>) {
+    // T? >: Int => T = Int
+    doT(1)
+    val r = doOut(out)
+    TypeOf(r): TypeOf<Int>
+
+    // T? <: Int => error
+    doIn(<!TYPE_MISMATCH!>i<!>)
+
+    // T? >: Int => error
+    doA(<!TYPE_MISMATCH!>inv<!>)
+}
diff --git a/compiler/testData/diagnostics/tests/inference/constraints/subtypeConstraintOnNullableType.kt b/compiler/testData/diagnostics/tests/inference/constraints/subtypeConstraintOnNullableType.kt
new file mode 100644
index 00000000000..de1d49a45eb
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inference/constraints/subtypeConstraintOnNullableType.kt
@@ -0,0 +1,24 @@
+// !DIAGNOSTICS: -BASE_WITH_NULLABLE_UPPER_BOUND
+class TypeOf<T>(t: T)
+
+trait A<T>
+
+trait Out<out T>
+
+fun <T> foo(a: A<T>, o: Out<T?>): T = throw Exception("$a $o")
+
+fun <T> doOut(o: Out<T?>): T = throw Exception("$o")
+
+fun test(a: A<Int>, aN: A<Int?>, o: Out<Int?>) {
+    val out = doOut(o)
+    //T? >: Int? => T >: Int
+    TypeOf(out): TypeOf<Int>
+
+    val nullable = foo(aN, o)
+    //T = Int?, T? >: Int? => T = Int?
+    TypeOf(nullable): TypeOf<Int?>
+
+    val notNullable = foo(a, o)
+    //T = Int, T? >: Int? => T = Int
+    TypeOf(notNullable): TypeOf<Int>
+}
diff --git a/compiler/testData/diagnostics/tests/inference/constraints/supertypeConstraintOnNullableType.kt b/compiler/testData/diagnostics/tests/inference/constraints/supertypeConstraintOnNullableType.kt
new file mode 100644
index 00000000000..9aacaca6268
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inference/constraints/supertypeConstraintOnNullableType.kt
@@ -0,0 +1,24 @@
+// !DIAGNOSTICS: -BASE_WITH_NULLABLE_UPPER_BOUND
+class TypeOf<T>(t: T)
+
+trait A<T>
+
+trait In<in T>
+
+fun <T> foo(a: A<T>, i: In<T>): T = throw Exception("$a $i")
+
+fun <T> doIn(i: In<T?>): T = throw Exception("$i")
+
+fun test(a: A<Int>, aN: A<Int?>, i: In<Int?>) {
+    val _in = doIn(i)
+    //T? <: Int? => T <: Int?
+    TypeOf(_in): TypeOf<Int?>
+
+    val notNullable = foo(a, i)
+    //T = Int, T? <: Int? => T = Int
+    TypeOf(notNullable): TypeOf<Int>
+
+    val nullable = foo(aN, i)
+    //T = Int?, T? <: Int? => T = Int?
+    TypeOf(nullable): TypeOf<Int?>
+}
diff --git a/compiler/testData/diagnostics/tests/inference/nullableUpperBound.kt b/compiler/testData/diagnostics/tests/inference/nullableUpperBound.kt
new file mode 100644
index 00000000000..358df6853b4
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inference/nullableUpperBound.kt
@@ -0,0 +1,9 @@
+package o
+
+fun foo(): String? {
+    return accept(JV<String?, Unit?>())
+}
+
+fun <R, D> accept(<!UNUSED_PARAMETER!>v<!>: JV<R, D>): R<!BASE_WITH_NULLABLE_UPPER_BOUND!>?<!> = null
+
+open class JV<R, D>()
\ No newline at end of file
diff --git a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
index c32e9754120..994b7a62c75 100644
--- a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
@@ -3038,7 +3038,7 @@ public class JetDiagnosticsTestGenerated extends AbstractDiagnosticsTestWithEage
         }
         
         @TestMetadata("compiler/testData/diagnostics/tests/inference")
-        @InnerTestClasses({Inference.NestedCalls.class, Inference.Regressions.class, Inference.ReportingImprovements.class, Inference.UpperBounds.class, Inference.Varargs.class})
+        @InnerTestClasses({Inference.Constraints.class, Inference.NestedCalls.class, Inference.Regressions.class, Inference.ReportingImprovements.class, Inference.UpperBounds.class, Inference.Varargs.class})
         public static class Inference extends AbstractDiagnosticsTestWithEagerResolve {
             public void testAllFilesPresentInInference() throws Exception {
                 JetTestUtils.assertAllTestsPresentByMetadata(this.getClass(), "org.jetbrains.jet.generators.tests.GenerateTests", new File("compiler/testData/diagnostics/tests/inference"), Pattern.compile("^(.+)\\.kt$"), true);
@@ -3154,6 +3154,11 @@ public class JetDiagnosticsTestGenerated extends AbstractDiagnosticsTestWithEage
                 doTest("compiler/testData/diagnostics/tests/inference/noInformationForParameter.kt");
             }
             
+            @TestMetadata("nullableUpperBound.kt")
+            public void testNullableUpperBound() throws Exception {
+                doTest("compiler/testData/diagnostics/tests/inference/nullableUpperBound.kt");
+            }
+            
             @TestMetadata("opposite.kt")
             public void testOpposite() throws Exception {
                 doTest("compiler/testData/diagnostics/tests/inference/opposite.kt");
@@ -3179,6 +3184,34 @@ public class JetDiagnosticsTestGenerated extends AbstractDiagnosticsTestWithEage
                 doTest("compiler/testData/diagnostics/tests/inference/useFunctionLiteralsToInferType.kt");
             }
             
+            @TestMetadata("compiler/testData/diagnostics/tests/inference/constraints")
+            public static class Constraints extends AbstractDiagnosticsTestWithEagerResolve {
+                public void testAllFilesPresentInConstraints() throws Exception {
+                    JetTestUtils.assertAllTestsPresentByMetadata(this.getClass(), "org.jetbrains.jet.generators.tests.GenerateTests", new File("compiler/testData/diagnostics/tests/inference/constraints"), Pattern.compile("^(.+)\\.kt$"), true);
+                }
+                
+                @TestMetadata("equalityConstraintOnNullableType.kt")
+                public void testEqualityConstraintOnNullableType() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/inference/constraints/equalityConstraintOnNullableType.kt");
+                }
+                
+                @TestMetadata("notNullConstraintOnNullableType.kt")
+                public void testNotNullConstraintOnNullableType() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/inference/constraints/notNullConstraintOnNullableType.kt");
+                }
+                
+                @TestMetadata("subtypeConstraintOnNullableType.kt")
+                public void testSubtypeConstraintOnNullableType() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/inference/constraints/subtypeConstraintOnNullableType.kt");
+                }
+                
+                @TestMetadata("supertypeConstraintOnNullableType.kt")
+                public void testSupertypeConstraintOnNullableType() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/inference/constraints/supertypeConstraintOnNullableType.kt");
+                }
+                
+            }
+            
             @TestMetadata("compiler/testData/diagnostics/tests/inference/nestedCalls")
             public static class NestedCalls extends AbstractDiagnosticsTestWithEagerResolve {
                 public void testAllFilesPresentInNestedCalls() throws Exception {
@@ -3537,6 +3570,7 @@ public class JetDiagnosticsTestGenerated extends AbstractDiagnosticsTestWithEage
             public static Test innerSuite() {
                 TestSuite suite = new TestSuite("Inference");
                 suite.addTestSuite(Inference.class);
+                suite.addTestSuite(Constraints.class);
                 suite.addTestSuite(NestedCalls.class);
                 suite.addTestSuite(Regressions.class);
                 suite.addTestSuite(ReportingImprovements.class);
diff --git a/core/descriptors/src/org/jetbrains/jet/lang/resolve/calls/inference/ConstraintSystemImpl.java b/core/descriptors/src/org/jetbrains/jet/lang/resolve/calls/inference/ConstraintSystemImpl.java
index 0e6c1932a77..9423426ac42 100644
--- a/core/descriptors/src/org/jetbrains/jet/lang/resolve/calls/inference/ConstraintSystemImpl.java
+++ b/core/descriptors/src/org/jetbrains/jet/lang/resolve/calls/inference/ConstraintSystemImpl.java
@@ -336,11 +336,21 @@ public class ConstraintSystemImpl implements ConstraintSystem {
         TypeConstraintsImpl typeConstraints = getTypeConstraints(parameterType);
         assert typeConstraints != null : "constraint should be generated only for type variables";
 
-        if (parameterType.isNullable()) {
-            // For parameter type T constraint T? <: Int? should transform to T <: Int
-            constrainingType = TypeUtils.makeNotNullable(constrainingType);
+        if (!parameterType.isNullable() || !constrainingType.isNullable()) {
+            typeConstraints.addBound(boundKind, constrainingType);
+            return;
+        }
+        // For parameter type T:
+        // constraint T? =  Int? should transform to T >: Int and T <: Int?
+        // constraint T? >: Int? should transform to T >: Int
+        JetType notNullConstrainingType = TypeUtils.makeNotNullable(constrainingType);
+        if (boundKind == EXACT_BOUND || boundKind == LOWER_BOUND) {
+            typeConstraints.addBound(LOWER_BOUND, notNullConstrainingType);
+        }
+        // constraint T? <: Int? should transform to T <: Int?
+        if (boundKind == EXACT_BOUND || boundKind == UPPER_BOUND) {
+            typeConstraints.addBound(UPPER_BOUND, constrainingType);
         }
-        typeConstraints.addBound(boundKind, constrainingType);
     }
 
     public void processDeclaredBoundConstraints() {