diff --git a/compiler/frontend/src/org/jetbrains/kotlin/lexer/KtTokens.java b/compiler/frontend/src/org/jetbrains/kotlin/lexer/KtTokens.java
index a2a224c4fcd..66878e19b31 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/lexer/KtTokens.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/lexer/KtTokens.java
@@ -232,6 +232,7 @@ public interface KtTokens {
 
     TokenSet TYPE_MODIFIER_KEYWORDS = TokenSet.create(SUSPEND_KEYWORD);
     TokenSet TYPE_ARGUMENT_MODIFIER_KEYWORDS = TokenSet.create(IN_KEYWORD, OUT_KEYWORD);
+    TokenSet RESERVED_VALUE_PARAMETER_MODIFIER_KEYWORDS = TokenSet.create(OUT_KEYWORD); // lazy, out, ref
 
     TokenSet VISIBILITY_MODIFIERS = TokenSet.create(PRIVATE_KEYWORD, PUBLIC_KEYWORD, INTERNAL_KEYWORD, PROTECTED_KEYWORD);
 
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/parsing/KotlinParsing.java b/compiler/frontend/src/org/jetbrains/kotlin/parsing/KotlinParsing.java
index 56cb6064fe5..f5a6905a9b5 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/parsing/KotlinParsing.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/parsing/KotlinParsing.java
@@ -461,6 +461,10 @@ public class KotlinParsing extends AbstractKotlinParsing {
         return doParseModifierList(tokenConsumer, MODIFIER_KEYWORDS, annotationParsingMode, noModifiersBefore);
     }
 
+    private boolean parseValueParameterModifierList() {
+        return doParseModifierList(null, RESERVED_VALUE_PARAMETER_MODIFIER_KEYWORDS, DEFAULT, NO_MODIFIER_BEFORE_FOR_VALUE_PARAMETER);
+    }
+
     private boolean parseTypeModifierList() {
         return doParseModifierList(null, TYPE_MODIFIER_KEYWORDS, DEFAULT, TokenSet.EMPTY);
     }
@@ -2192,7 +2196,7 @@ public class KotlinParsing extends AbstractKotlinParsing {
                 if (isFunctionTypeContents) {
                     if (!tryParseValueParameter(typeRequired)) {
                         PsiBuilder.Marker valueParameter = mark();
-                        parseModifierList(DEFAULT, NO_MODIFIER_BEFORE_FOR_VALUE_PARAMETER); // lazy, out, ref
+                        parseValueParameterModifierList(); // lazy, out, ref
                         parseTypeRef();
                         closeDeclarationWithCommentBinders(valueParameter, VALUE_PARAMETER, false);
                     }
diff --git a/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.kt b/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.kt
index 4d655274266..ff57cf96d2a 100644
--- a/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.kt
+++ b/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.kt
@@ -13,5 +13,6 @@ typealias Test6 = <!WRONG_MODIFIER_TARGET!>suspend<!> List<() -> Unit>
 typealias Test7 = <!WRONG_MODIFIER_TARGET!>suspend<!> SAM
 typealias Test8 = SuspendFunction0<Unit>
 typealias Test9 = suspend (() -> Unit) -> Unit
-typealias Test10 = suspend (<!UNSUPPORTED!>suspend<!> () -> Unit) -> Unit
-typealias Test11 = suspend () -> (suspend () -> Unit)
\ No newline at end of file
+typealias Test10 = suspend (suspend () -> Unit) -> Unit
+typealias Test11 = suspend () -> (suspend () -> Unit)
+typealias Test12 = suspend (suspend (() -> Unit)) -> Unit
\ No newline at end of file
diff --git a/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.txt b/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.txt
index c9be1175676..f03b58e2e40 100644
--- a/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.txt
+++ b/compiler/testData/diagnostics/tests/coroutines/suspendFunctionType/modifierApplicability.txt
@@ -8,8 +8,9 @@ public interface SAM {
 }
 public typealias Action = () -> kotlin.Unit
 public typealias Test1 = suspend () -> kotlin.Unit
-public typealias Test10 = suspend (() -> kotlin.Unit) -> kotlin.Unit
+public typealias Test10 = suspend (suspend () -> kotlin.Unit) -> kotlin.Unit
 public typealias Test11 = suspend () -> suspend () -> kotlin.Unit
+public typealias Test12 = suspend (suspend () -> kotlin.Unit) -> kotlin.Unit
 public typealias Test2 = suspend kotlin.Int.(kotlin.String) -> kotlin.Unit
 public typealias Test3 = () -> kotlin.Unit
 public typealias Test4 = Action
diff --git a/compiler/testData/psi/TypeModifiers.kt b/compiler/testData/psi/TypeModifiers.kt
index 93284a8342b..e86c2096cab 100644
--- a/compiler/testData/psi/TypeModifiers.kt
+++ b/compiler/testData/psi/TypeModifiers.kt
@@ -14,6 +14,7 @@ val p11: suspend @a a
 val p12: @a suspend a
 val p13: @a suspend @a a
 val p14: @[a] suspend @[a] a
+val p15: suspend (suspend (() -> Unit)) -> Unit
 
 @a fun @a a.f1() {}
 fun (@a a.(a) -> a).f2() {}
diff --git a/compiler/testData/psi/TypeModifiers.txt b/compiler/testData/psi/TypeModifiers.txt
index 6ae01c6494b..71fafa70579 100644
--- a/compiler/testData/psi/TypeModifiers.txt
+++ b/compiler/testData/psi/TypeModifiers.txt
@@ -479,6 +479,46 @@ JetFile: TypeModifiers.kt
       USER_TYPE
         REFERENCE_EXPRESSION
           PsiElement(IDENTIFIER)('a')
+  PsiWhiteSpace('\n')
+  PROPERTY
+    PsiElement(val)('val')
+    PsiWhiteSpace(' ')
+    PsiElement(IDENTIFIER)('p15')
+    PsiElement(COLON)(':')
+    PsiWhiteSpace(' ')
+    TYPE_REFERENCE
+      MODIFIER_LIST
+        PsiElement(suspend)('suspend')
+      PsiWhiteSpace(' ')
+      FUNCTION_TYPE
+        VALUE_PARAMETER_LIST
+          PsiElement(LPAR)('(')
+          VALUE_PARAMETER
+            TYPE_REFERENCE
+              MODIFIER_LIST
+                PsiElement(suspend)('suspend')
+              PsiWhiteSpace(' ')
+              PsiElement(LPAR)('(')
+              FUNCTION_TYPE
+                VALUE_PARAMETER_LIST
+                  PsiElement(LPAR)('(')
+                  PsiElement(RPAR)(')')
+                PsiWhiteSpace(' ')
+                PsiElement(ARROW)('->')
+                PsiWhiteSpace(' ')
+                TYPE_REFERENCE
+                  USER_TYPE
+                    REFERENCE_EXPRESSION
+                      PsiElement(IDENTIFIER)('Unit')
+              PsiElement(RPAR)(')')
+          PsiElement(RPAR)(')')
+        PsiWhiteSpace(' ')
+        PsiElement(ARROW)('->')
+        PsiWhiteSpace(' ')
+        TYPE_REFERENCE
+          USER_TYPE
+            REFERENCE_EXPRESSION
+              PsiElement(IDENTIFIER)('Unit')
   PsiWhiteSpace('\n\n')
   FUN
     MODIFIER_LIST
diff --git a/compiler/testData/psi/TypeModifiers_ERR.txt b/compiler/testData/psi/TypeModifiers_ERR.txt
index da41428c7fe..ec2f5ab0a69 100644
--- a/compiler/testData/psi/TypeModifiers_ERR.txt
+++ b/compiler/testData/psi/TypeModifiers_ERR.txt
@@ -80,10 +80,10 @@ JetFile: TypeModifiers_ERR.kt
         VALUE_PARAMETER_LIST
           PsiElement(LPAR)('(')
           VALUE_PARAMETER
-            MODIFIER_LIST
-              PsiElement(suspend)('suspend')
-            PsiWhiteSpace(' ')
             TYPE_REFERENCE
+              MODIFIER_LIST
+                PsiElement(suspend)('suspend')
+              PsiWhiteSpace(' ')
               PsiErrorElement:Type expected
                 PsiElement(ARROW)('->')
           PsiErrorElement:Expecting comma or ')'