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 c8e5854075b..623d330aab2 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/cfg/JetControlFlowProcessor.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/cfg/JetControlFlowProcessor.java
@@ -72,9 +72,6 @@ public class JetControlFlowProcessor {
     public Pseudocode generatePseudocode(@NotNull JetElement subroutine) {
         Pseudocode pseudocode = generate(subroutine);
         ((PseudocodeImpl) pseudocode).postProcess();
-        for (LocalFunctionDeclarationInstruction localFunctionDeclarationInstruction : pseudocode.getLocalDeclarations()) {
-            ((PseudocodeImpl) localFunctionDeclarationInstruction.getBody()).postProcess();
-        }
         return pseudocode;
     }
 
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 d75761cb4b0..248b5c06c5b 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
@@ -114,7 +114,7 @@ public class PseudocodeImpl implements Pseudocode {
     @NotNull
     private static Set<LocalFunctionDeclarationInstruction> getLocalDeclarations(@NotNull Pseudocode pseudocode) {
         Set<LocalFunctionDeclarationInstruction> localDeclarations = Sets.newLinkedHashSet();
-        for (Instruction instruction : pseudocode.getInstructions()) {
+        for (Instruction instruction : ((PseudocodeImpl)pseudocode).mutableInstructionList) {
             if (instruction instanceof LocalFunctionDeclarationInstruction) {
                 localDeclarations.add((LocalFunctionDeclarationInstruction) instruction);
                 localDeclarations.addAll(getLocalDeclarations(((LocalFunctionDeclarationInstruction)instruction).getBody()));
@@ -263,9 +263,23 @@ public class PseudocodeImpl implements Pseudocode {
         postPrecessed = true;
         errorInstruction.setSink(getSinkInstruction());
         exitInstruction.setSink(getSinkInstruction());
-        for (int i = 0, instructionsSize = mutableInstructionList.size(); i < instructionsSize; i++) {
-            processInstruction(mutableInstructionList.get(i), i);
+        int index = 0;
+        for (Instruction instruction : mutableInstructionList) {
+            //recursively invokes 'postProcess' for local declarations
+            processInstruction(instruction, index);
+            index++;
         }
+        if (getParent() != null) return;
+
+        // Collecting reachable instructions should be done after processing all instructions
+        // (including instructions in local declarations) to avoid being in incomplete state.
+        collectAndCacheReachableInstructions();
+        for (LocalFunctionDeclarationInstruction localFunctionDeclarationInstruction : getLocalDeclarations()) {
+            ((PseudocodeImpl) localFunctionDeclarationInstruction.getBody()).collectAndCacheReachableInstructions();
+        }
+    }
+
+    private void collectAndCacheReachableInstructions() {
         Set<Instruction> reachableInstructions = collectReachableInstructions();
         for (Instruction instruction : mutableInstructionList) {
             if (reachableInstructions.contains(instruction)) {
diff --git a/compiler/testData/cfg/bugs/jumpToOuterScope.instructions b/compiler/testData/cfg/bugs/jumpToOuterScope.instructions
new file mode 100644
index 00000000000..6d39db0a067
--- /dev/null
+++ b/compiler/testData/cfg/bugs/jumpToOuterScope.instructions
@@ -0,0 +1,54 @@
+== foo ==
+fun foo(c: Collection<Int>) {
+    for (e in c) {
+        {
+            break
+        }
+    }
+}
+---------------------
+L0:
+  1 <START>
+    v(c: Collection<Int>)
+    w(c)
+  2 mark({ for (e in c) { { break } } })
+  3 mark(for (e in c) { { break } })
+    r(c)
+    v(e)
+L3:
+    jmp?(L2)                                NEXT:[read (Unit), w(e)]
+L4 [loop entry point]:
+L5 [body entry point]:
+    w(e)                                    PREV:[jmp?(L2), jmp?(L4 [loop entry point])]
+  4 mark({ { break } })
+    mark({ break })
+    jmp?(L6)                                NEXT:[r({ break }), d({ break })]
+    d({ break })                            NEXT:[<SINK>]
+L6:
+    r({ break })                            PREV:[jmp?(L6)]
+  3 jmp?(L4 [loop entry point])             NEXT:[w(e), read (Unit)]
+L2:
+    read (Unit)                             PREV:[jmp?(L2), jmp(L2), jmp?(L4 [loop entry point])]
+L1:
+  1 <END>                                   NEXT:[<SINK>]
+error:
+    <ERROR>                                 PREV:[]
+sink:
+    <SINK>                                  PREV:[<ERROR>, <END>, d({ break })]
+=====================
+== anonymous_0 ==
+{
+            break
+        }
+---------------------
+L7:
+  5 <START>
+  6 mark(break)
+    jmp(L2)        NEXT:[read (Unit)]
+L8:
+  5 <END>          NEXT:[<SINK>]         PREV:[]
+error:
+    <ERROR>        PREV:[]
+sink:
+    <SINK>         PREV:[<ERROR>, <END>]
+=====================
diff --git a/compiler/testData/cfg/bugs/jumpToOuterScope.kt b/compiler/testData/cfg/bugs/jumpToOuterScope.kt
new file mode 100644
index 00000000000..781490c016e
--- /dev/null
+++ b/compiler/testData/cfg/bugs/jumpToOuterScope.kt
@@ -0,0 +1,7 @@
+fun foo(c: Collection<Int>) {
+    for (e in c) {
+        {
+            break
+        }
+    }
+}
diff --git a/compiler/tests/org/jetbrains/jet/cfg/ControlFlowTestGenerated.java b/compiler/tests/org/jetbrains/jet/cfg/ControlFlowTestGenerated.java
index 511da135d36..d509cddf1d4 100644
--- a/compiler/tests/org/jetbrains/jet/cfg/ControlFlowTestGenerated.java
+++ b/compiler/tests/org/jetbrains/jet/cfg/ControlFlowTestGenerated.java
@@ -31,7 +31,7 @@ import org.jetbrains.jet.cfg.AbstractControlFlowTest;
 /** This class is generated by {@link org.jetbrains.jet.generators.tests.TestsPackage}. DO NOT MODIFY MANUALLY */
 @SuppressWarnings("all")
 @TestMetadata("compiler/testData/cfg")
-@InnerTestClasses({ControlFlowTestGenerated.Arrays.class, ControlFlowTestGenerated.Basic.class, ControlFlowTestGenerated.ControlStructures.class, ControlFlowTestGenerated.Conventions.class, ControlFlowTestGenerated.DeadCode.class, ControlFlowTestGenerated.Declarations.class, ControlFlowTestGenerated.Expressions.class, ControlFlowTestGenerated.TailCalls.class})
+@InnerTestClasses({ControlFlowTestGenerated.Arrays.class, ControlFlowTestGenerated.Basic.class, ControlFlowTestGenerated.Bugs.class, ControlFlowTestGenerated.ControlStructures.class, ControlFlowTestGenerated.Conventions.class, ControlFlowTestGenerated.DeadCode.class, ControlFlowTestGenerated.Declarations.class, ControlFlowTestGenerated.Expressions.class, ControlFlowTestGenerated.TailCalls.class})
 public class ControlFlowTestGenerated extends AbstractControlFlowTest {
     public void testAllFilesPresentInCfg() throws Exception {
         JetTestUtils.assertAllTestsPresentByMetadata(this.getClass(), "org.jetbrains.jet.generators.tests.TestsPackage", new File("compiler/testData/cfg"), Pattern.compile("^(.+)\\.kt$"), true);
@@ -93,6 +93,19 @@ public class ControlFlowTestGenerated extends AbstractControlFlowTest {
         
     }
     
+    @TestMetadata("compiler/testData/cfg/bugs")
+    public static class Bugs extends AbstractControlFlowTest {
+        public void testAllFilesPresentInBugs() throws Exception {
+            JetTestUtils.assertAllTestsPresentByMetadata(this.getClass(), "org.jetbrains.jet.generators.tests.TestsPackage", new File("compiler/testData/cfg/bugs"), Pattern.compile("^(.+)\\.kt$"), true);
+        }
+        
+        @TestMetadata("jumpToOuterScope.kt")
+        public void testJumpToOuterScope() throws Exception {
+            doTest("compiler/testData/cfg/bugs/jumpToOuterScope.kt");
+        }
+        
+    }
+    
     @TestMetadata("compiler/testData/cfg/controlStructures")
     public static class ControlStructures extends AbstractControlFlowTest {
         public void testAllFilesPresentInControlStructures() throws Exception {
@@ -416,6 +429,7 @@ public class ControlFlowTestGenerated extends AbstractControlFlowTest {
         suite.addTestSuite(ControlFlowTestGenerated.class);
         suite.addTestSuite(Arrays.class);
         suite.addTestSuite(Basic.class);
+        suite.addTestSuite(Bugs.class);
         suite.addTestSuite(ControlStructures.class);
         suite.addTestSuite(Conventions.class);
         suite.addTestSuite(DeadCode.class);