diff --git a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java
index 69f0cf57e02..1b98640c239 100644
--- a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java
+++ b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/DiagnosticCompilerTestFE10TestdataTestGenerated.java
@@ -21188,6 +21188,12 @@ public class DiagnosticCompilerTestFE10TestdataTestGenerated extends AbstractDia
         runTest("compiler/testData/diagnostics/tests/inline/valueClasses.kt");
       }
 
+      @Test
+      @TestMetadata("valueOfKFunctionTypeAsArgumentOfInlineFunction.kt")
+      public void testValueOfKFunctionTypeAsArgumentOfInlineFunction() {
+        runTest("compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt");
+      }
+
       @Test
       @TestMetadata("vararg.kt")
       public void testVararg() {
diff --git a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java
index 43485bf3c32..2addb0f1dfa 100644
--- a/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java
+++ b/analysis/low-level-api-fir/tests/org/jetbrains/kotlin/analysis/low/level/api/fir/diagnostic/compiler/based/LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated.java
@@ -21188,6 +21188,12 @@ public class LLFirPreresolvedReversedDiagnosticCompilerFE10TestDataTestGenerated
         runTest("compiler/testData/diagnostics/tests/inline/valueClasses.kt");
       }
 
+      @Test
+      @TestMetadata("valueOfKFunctionTypeAsArgumentOfInlineFunction.kt")
+      public void testValueOfKFunctionTypeAsArgumentOfInlineFunction() {
+        runTest("compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt");
+      }
+
       @Test
       @TestMetadata("vararg.kt")
       public void testVararg() {
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java
index 986bc7baea9..c871d617294 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirLightTreeOldFrontendDiagnosticsTestGenerated.java
@@ -21182,6 +21182,12 @@ public class FirLightTreeOldFrontendDiagnosticsTestGenerated extends AbstractFir
         runTest("compiler/testData/diagnostics/tests/inline/valueClasses.kt");
       }
 
+      @Test
+      @TestMetadata("valueOfKFunctionTypeAsArgumentOfInlineFunction.kt")
+      public void testValueOfKFunctionTypeAsArgumentOfInlineFunction() {
+        runTest("compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt");
+      }
+
       @Test
       @TestMetadata("vararg.kt")
       public void testVararg() {
diff --git a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
index f70c15e6448..e09c19e7106 100644
--- a/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
+++ b/compiler/fir/analysis-tests/tests-gen/org/jetbrains/kotlin/test/runners/FirPsiOldFrontendDiagnosticsTestGenerated.java
@@ -21188,6 +21188,12 @@ public class FirPsiOldFrontendDiagnosticsTestGenerated extends AbstractFirPsiDia
         runTest("compiler/testData/diagnostics/tests/inline/valueClasses.kt");
       }
 
+      @Test
+      @TestMetadata("valueOfKFunctionTypeAsArgumentOfInlineFunction.kt")
+      public void testValueOfKFunctionTypeAsArgumentOfInlineFunction() {
+        runTest("compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt");
+      }
+
       @Test
       @TestMetadata("vararg.kt")
       public void testVararg() {
diff --git a/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirInlineDeclarationChecker.kt b/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirInlineDeclarationChecker.kt
index cd1ef818e34..d2668f055bd 100644
--- a/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirInlineDeclarationChecker.kt
+++ b/compiler/fir/checkers/src/org/jetbrains/kotlin/fir/analysis/checkers/declaration/FirInlineDeclarationChecker.kt
@@ -457,7 +457,7 @@ object FirInlineDeclarationChecker : FirFunctionChecker(MppCheckerKind.Common) {
             function.valueParameters.any { param ->
                 val type = param.returnTypeRef.coneType
                 !param.isNoinline && !type.isNullable
-                        && (type.isBasicFunctionType(session) || type.isSuspendOrKSuspendFunctionType(session))
+                        && type.isNonKFunctionType(session)
             }
         if (hasInlinableParameters) return
         if (function.isInlineOnly(session)) return
diff --git a/compiler/fir/providers/src/org/jetbrains/kotlin/fir/types/FunctionalTypeUtils.kt b/compiler/fir/providers/src/org/jetbrains/kotlin/fir/types/FunctionalTypeUtils.kt
index 0010ebe33d8..90df61a53c2 100644
--- a/compiler/fir/providers/src/org/jetbrains/kotlin/fir/types/FunctionalTypeUtils.kt
+++ b/compiler/fir/providers/src/org/jetbrains/kotlin/fir/types/FunctionalTypeUtils.kt
@@ -59,6 +59,11 @@ fun ConeKotlinType.isBasicFunctionType(session: FirSession): Boolean {
     return isFunctionTypeWithPredicate(session) { it == FunctionTypeKind.Function }
 }
 
+// Function, SuspendFunction, KSuspendFunction, [Custom]Function, K[Custom]Function
+fun ConeKotlinType.isNonKFunctionType(session: FirSession): Boolean {
+    return isFunctionTypeWithPredicate(session) { it != FunctionTypeKind.KFunction }
+}
+
 // SuspendFunction, KSuspendFunction
 fun ConeKotlinType.isSuspendOrKSuspendFunctionType(session: FirSession): Boolean {
     return isFunctionTypeWithPredicate(session) {
diff --git a/compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt b/compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt
new file mode 100644
index 00000000000..6844605a802
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt
@@ -0,0 +1,7 @@
+// FIR_IDENTICAL
+// ISSUE: KT-65959
+import kotlin.reflect.KFunction0
+
+<!NOTHING_TO_INLINE!>inline<!> fun foo(block: KFunction0<Unit>) {
+    block()
+}
diff --git a/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java b/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
index 39c3a850220..f55b2893207 100644
--- a/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
+++ b/compiler/tests-common-new/tests-gen/org/jetbrains/kotlin/test/runners/DiagnosticTestGenerated.java
@@ -21188,6 +21188,12 @@ public class DiagnosticTestGenerated extends AbstractDiagnosticTest {
         runTest("compiler/testData/diagnostics/tests/inline/valueClasses.kt");
       }
 
+      @Test
+      @TestMetadata("valueOfKFunctionTypeAsArgumentOfInlineFunction.kt")
+      public void testValueOfKFunctionTypeAsArgumentOfInlineFunction() {
+        runTest("compiler/testData/diagnostics/tests/inline/valueOfKFunctionTypeAsArgumentOfInlineFunction.kt");
+      }
+
       @Test
       @TestMetadata("vararg.kt")
       public void testVararg() {
diff --git a/plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.fir.txt b/plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.fir.txt
new file mode 100644
index 00000000000..bdcb12a4061
--- /dev/null
+++ b/plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.fir.txt
@@ -0,0 +1,4 @@
+FILE: ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.kt
+    @R|org/jetbrains/kotlin/fir/plugin/MyComposable|() public final inline fun <T> inlineFunction(block: R|@R|org/jetbrains/kotlin/fir/plugin/MyComposable|()  some/MyComposableFunction0<T>|): R|T| {
+        ^inlineFunction R|<local>/block|.R|SubstitutionOverride<some/MyComposableFunction0.invoke: R|T|>|()
+    }
diff --git a/plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.kt b/plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.kt
new file mode 100644
index 00000000000..95bc951b885
--- /dev/null
+++ b/plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.kt
@@ -0,0 +1,8 @@
+// ISSUE: KT-65959
+
+import org.jetbrains.kotlin.fir.plugin.MyComposable
+
+@MyComposable
+inline fun <T> inlineFunction(block: @MyComposable () -> T): T {
+    return block()
+}
diff --git a/plugins/fir-plugin-prototype/tests-gen/org/jetbrains/kotlin/fir/plugin/runners/FirPsiPluginDiagnosticTestGenerated.java b/plugins/fir-plugin-prototype/tests-gen/org/jetbrains/kotlin/fir/plugin/runners/FirPsiPluginDiagnosticTestGenerated.java
index 1ffb8d9315c..5b73e9522c3 100644
--- a/plugins/fir-plugin-prototype/tests-gen/org/jetbrains/kotlin/fir/plugin/runners/FirPsiPluginDiagnosticTestGenerated.java
+++ b/plugins/fir-plugin-prototype/tests-gen/org/jetbrains/kotlin/fir/plugin/runners/FirPsiPluginDiagnosticTestGenerated.java
@@ -62,6 +62,12 @@ public class FirPsiPluginDiagnosticTestGenerated extends AbstractFirPsiPluginDia
     public void testSimple() {
       runTest("plugins/fir-plugin-prototype/testData/diagnostics/checkers/simple.kt");
     }
+
+    @Test
+    @TestMetadata("ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.kt")
+    public void testValueOfCustomFunctionTypeAsArgumentOfInlineFunction() {
+      runTest("plugins/fir-plugin-prototype/testData/diagnostics/checkers/ValueOfCustomFunctionTypeAsArgumentOfInlineFunction.kt");
+    }
   }
 
   @Nested