diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TypeHierarchyResolver.java b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TypeHierarchyResolver.java
index 6e79618b9ac..1d3d2c4c9dd 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TypeHierarchyResolver.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TypeHierarchyResolver.java
@@ -524,7 +524,7 @@ public class TypeHierarchyResolver {
                     createClassDescriptorForSingleton(objectDeclaration, getClassObjectName(container.getName()), ClassKind.CLASS_OBJECT);
 
             PackageLikeBuilder.ClassObjectStatus status =
-                    isEnumEntry(container) || isObject(container) ?
+                    isEnumEntry(container) || isObject(container) || c.getTopDownAnalysisParameters().isDeclaredLocally() ?
                     PackageLikeBuilder.ClassObjectStatus.NOT_ALLOWED :
                     owner.setClassObjectDescriptor(classObjectDescriptor);
 
diff --git a/compiler/testData/diagnostics/tests/classObjects/classObjectInLocalClass.kt b/compiler/testData/diagnostics/tests/classObjects/classObjectInLocalClass.kt
new file mode 100644
index 00000000000..e3b310edb4a
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/classObjects/classObjectInLocalClass.kt
@@ -0,0 +1,9 @@
+fun test() {
+    class A {
+        <!CLASS_OBJECT_NOT_ALLOWED!>class object {}<!>
+    }
+
+    object {
+        <!CLASS_OBJECT_NOT_ALLOWED!>class object {}<!>
+    }
+}
\ 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 b94c92e5ae0..c7fb0e5d6ae 100644
--- a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
@@ -1439,6 +1439,11 @@ public class JetDiagnosticsTestGenerated extends AbstractJetDiagnosticsTest {
                 doTest("compiler/testData/diagnostics/tests/classObjects/ClassObjectCannotAccessClassFields.kt");
             }
             
+            @TestMetadata("classObjectInLocalClass.kt")
+            public void testClassObjectInLocalClass() throws Exception {
+                doTest("compiler/testData/diagnostics/tests/classObjects/classObjectInLocalClass.kt");
+            }
+            
             @TestMetadata("ClassObjectVisibility.kt")
             public void testClassObjectVisibility() throws Exception {
                 doTest("compiler/testData/diagnostics/tests/classObjects/ClassObjectVisibility.kt");