diff --git a/compiler/frontend/src/org/jetbrains/kotlin/cfg/ControlFlowProcessor.kt b/compiler/frontend/src/org/jetbrains/kotlin/cfg/ControlFlowProcessor.kt
index 2dfff4186d6..2f89f18d954 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/cfg/ControlFlowProcessor.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/cfg/ControlFlowProcessor.kt
@@ -915,7 +915,14 @@ class ControlFlowProcessor(private val trace: BindingTrace) {
             mark(expression)
             val statements = expression.statements
             for (statement in statements) {
+                val afterClassLabel = (statement as? KtClassOrObject)?.let { builder.createUnboundLabel("after local class") }
+                if (afterClassLabel != null) {
+                    builder.nondeterministicJump(afterClassLabel, statement, null)
+                }
                 generateInstructions(statement)
+                if (afterClassLabel != null) {
+                    builder.bindLabel(afterClassLabel)
+                }
             }
             if (statements.isEmpty()) {
                 builder.loadUnit(expression)
diff --git a/compiler/testData/cfg-variables/bugs/initializationInLocalClass.instructions b/compiler/testData/cfg-variables/bugs/initializationInLocalClass.instructions
new file mode 100644
index 00000000000..6b5f23273a4
--- /dev/null
+++ b/compiler/testData/cfg-variables/bugs/initializationInLocalClass.instructions
@@ -0,0 +1,31 @@
+== foo ==
+fun foo() {
+    var x: String
+    class A {
+        init {
+            x = ""
+        }
+    }
+    x.length
+}
+---------------------
+L0:
+  1 <START>                                                         INIT: in: {} out: {}              USE: in: {length=READ} out: {length=READ}
+  2 mark({ var x: String class A { init { x = "" } } x.length })
+    v(var x: String)                                                INIT: in: {} out: {x=D}
+    jmp?(L2)                                                        INIT: in: {x=D} out: {x=D}        USE: in: {length=READ, x=READ} out: {length=READ, x=READ}
+  3 mark({ x = "" })
+    mark("")
+    r("") -> <v0>                                                                                     USE: in: {length=READ, x=WRITTEN_AFTER_READ} out: {length=READ, x=WRITTEN_AFTER_READ}
+    w(x|<v0>)                                                       INIT: in: {x=D} out: {x=ID}       USE: in: {length=READ, x=READ} out: {length=READ, x=WRITTEN_AFTER_READ}
+L2 [after local class]:
+  2 mark(x.length)                                                  INIT: in: {x=I?D} out: {x=I?D}    USE: in: {length=READ, x=READ} out: {length=READ, x=READ}
+    r(x) -> <v2>                                                                                      USE: in: {length=READ} out: {length=READ, x=READ}
+    r(length|<v2>) -> <v3>                                                                            USE: in: {} out: {length=READ}
+L1:
+  1 <END>                                                           INIT: in: {} out: {}
+error:
+    <ERROR>
+sink:
+    <SINK>                                                                                            USE: in: {} out: {}
+=====================
diff --git a/compiler/testData/cfg-variables/bugs/initializationInLocalClass.kt b/compiler/testData/cfg-variables/bugs/initializationInLocalClass.kt
new file mode 100644
index 00000000000..aebec912bb8
--- /dev/null
+++ b/compiler/testData/cfg-variables/bugs/initializationInLocalClass.kt
@@ -0,0 +1,9 @@
+fun foo() {
+    var x: String
+    class A {
+        init {
+            x = ""
+        }
+    }
+    x.length
+}
diff --git a/compiler/testData/cfg-variables/bugs/initializationInLocalClass.values b/compiler/testData/cfg-variables/bugs/initializationInLocalClass.values
new file mode 100644
index 00000000000..aa4ff9c295c
--- /dev/null
+++ b/compiler/testData/cfg-variables/bugs/initializationInLocalClass.values
@@ -0,0 +1,19 @@
+== foo ==
+fun foo() {
+    var x: String
+    class A {
+        init {
+            x = ""
+        }
+    }
+    x.length
+}
+---------------------
+""                                                       <v0>: String              NEW: r("") -> <v0>
+x = ""                                                   !<v1>: *
+{ x = "" }                                               !<v1>: *                  COPY
+x                                                        <v2>: {<: CharSequence}   NEW: r(x) -> <v2>
+length                                                   <v3>: *                   NEW: r(length|<v2>) -> <v3>
+x.length                                                 <v3>: *                   COPY
+{ var x: String class A { init { x = "" } } x.length }   <v3>: *                   COPY
+=====================
diff --git a/compiler/testData/cfg-variables/lexicalScopes/localClass.instructions b/compiler/testData/cfg-variables/lexicalScopes/localClass.instructions
index 405f085c8e8..7e8aaa742b4 100644
--- a/compiler/testData/cfg-variables/lexicalScopes/localClass.instructions
+++ b/compiler/testData/cfg-variables/lexicalScopes/localClass.instructions
@@ -17,6 +17,7 @@ L0:
   2 mark({ "before" class A(val x: Int) { init { val a = x } fun foo() { val b = x } } "after" })
     mark("before")
     r("before") -> <v0>
+    jmp?(L2)
     v(val x: Int)                                                                                    INIT: in: {} out: {x=D}
     magic[FAKE_INITIALIZER](val x: Int) -> <v1>                                                      INIT: in: {x=D} out: {x=D}
     w(x|<v1>)                                                                                        INIT: in: {x=D} out: {x=ID}
@@ -25,9 +26,10 @@ L0:
     magic[IMPLICIT_RECEIVER](x) -> <v2>                                                              INIT: in: {a=D, x=ID} out: {a=D, x=ID}
     r(x|<v2>) -> <v3>
     w(a|<v3>)                                                                                        INIT: in: {a=D, x=ID} out: {a=ID, x=ID}
-  2 jmp?(L2)                                                                                         INIT: in: {x=ID} out: {x=ID}
+  2 jmp?(L3)                                                                                         INIT: in: {x=ID} out: {x=ID}
     d(fun foo() { val b = x })                                                                                                                  USE: in: {x=READ} out: {x=READ}
-L2 [after local declaration]:
+L2 [after local class]:
+L3 [after local declaration]:
     mark("after")
     r("after") -> <v4>
 L1:
@@ -42,14 +44,14 @@ fun foo() {
             val b = x
         }
 ---------------------
-L3:
+L4:
   3 <START>                                INIT: in: {x=ID} out: {x=ID}
   4 mark({ val b = x })
     v(val b = x)                           INIT: in: {x=ID} out: {b=D, x=ID}
     magic[IMPLICIT_RECEIVER](x) -> <v0>    INIT: in: {b=D, x=ID} out: {b=D, x=ID}     USE: in: {x=READ} out: {x=READ}
     r(x|<v0>) -> <v1>                                                                 USE: in: {} out: {x=READ}
     w(b|<v1>)                              INIT: in: {b=D, x=ID} out: {b=ID, x=ID}
-L4:
+L5:
   3 <END>                                  INIT: in: {x=ID} out: {x=ID}
 error:
     <ERROR>                                INIT: in: {} out: {}
diff --git a/compiler/testData/cfg-variables/lexicalScopes/localObject.instructions b/compiler/testData/cfg-variables/lexicalScopes/localObject.instructions
index 9d8f9fbecd0..a379fa0e05b 100644
--- a/compiler/testData/cfg-variables/lexicalScopes/localObject.instructions
+++ b/compiler/testData/cfg-variables/lexicalScopes/localObject.instructions
@@ -17,13 +17,15 @@ L0:
   2 mark({ "before" object A { init { val a = 1 } fun foo() { val b = 2 } } "after" })
     mark("before")
     r("before") -> <v0>
+    jmp?(L2)
   3 mark({ val a = 1 })
     v(val a = 1)                                                                          INIT: in: {} out: {a=D}
     r(1) -> <v1>                                                                          INIT: in: {a=D} out: {a=D}
     w(a|<v1>)                                                                             INIT: in: {a=D} out: {a=ID}
-  2 jmp?(L2)                                                                              INIT: in: {} out: {}
+  2 jmp?(L3)                                                                              INIT: in: {} out: {}
     d(fun foo() { val b = 2 })
-L2 [after local declaration]:
+L2 [after local class]:
+L3 [after local declaration]:
     mark("after")
     r("after") -> <v2>
 L1:
@@ -38,13 +40,13 @@ fun foo() {
             val b = 2
         }
 ---------------------
-L3:
+L4:
   3 <START>                INIT: in: {} out: {}
   4 mark({ val b = 2 })
     v(val b = 2)           INIT: in: {} out: {b=D}
     r(2) -> <v0>           INIT: in: {b=D} out: {b=D}
     w(b|<v0>)              INIT: in: {b=D} out: {b=ID}
-L4:
+L5:
   3 <END>                  INIT: in: {} out: {}
 error:
     <ERROR>
diff --git a/compiler/testData/cfg-variables/lexicalScopes/propertyAccessorScope.instructions b/compiler/testData/cfg-variables/lexicalScopes/propertyAccessorScope.instructions
index 79bd6c32213..2a54292eac2 100644
--- a/compiler/testData/cfg-variables/lexicalScopes/propertyAccessorScope.instructions
+++ b/compiler/testData/cfg-variables/lexicalScopes/propertyAccessorScope.instructions
@@ -14,14 +14,16 @@ fun foo() {
 L0:
   1 <START>                                                                               INIT: in: {} out: {}
   2 mark({ class A { var a : Int get() { return field } set(v: Int) { field = v } } })
+    jmp?(L2)
     v(var a : Int get() { return field } set(v: Int) { field = v })                       INIT: in: {} out: {a=D}
-    jmp?(L2)                                                                              INIT: in: {a=D} out: {a=D}                      USE: in: {field=ONLY_WRITTEN_NEVER_READ, field=READ} out: {field=ONLY_WRITTEN_NEVER_READ, field=READ}
+    jmp?(L3)                                                                              INIT: in: {a=D} out: {a=D}                      USE: in: {field=ONLY_WRITTEN_NEVER_READ, field=READ} out: {field=ONLY_WRITTEN_NEVER_READ, field=READ}
     d(get() { return field })                                                                                                             USE: in: {field=READ} out: {field=READ}
-L2 [after local declaration]:
-    jmp?(L5)
+L3 [after local declaration]:
+    jmp?(L6)
     d(set(v: Int) { field = v })                                                          INIT: in: {a=D, field=I} out: {a=D, field=I}    USE: in: {field=ONLY_WRITTEN_NEVER_READ} out: {field=ONLY_WRITTEN_NEVER_READ}
 L1:
-L5 [after local declaration]:
+L2 [after local class]:
+L6 [after local declaration]:
   1 <END>                                                                                 INIT: in: {} out: {}
 error:
     <ERROR>
@@ -33,12 +35,12 @@ get() {
               return field
           }
 ---------------------
-L3:
+L4:
   3 <START>                   INIT: in: {a=D} out: {a=D}
   4 mark({ return field })                                  USE: in: {field=READ} out: {field=READ}
     r(field) -> <v0>                                        USE: in: {} out: {field=READ}
-    ret(*|<v0>) L4
-L4:
+    ret(*|<v0>) L5
+L5:
   3 <END>
 error:
     <ERROR>                   INIT: in: {} out: {}
@@ -50,7 +52,7 @@ set(v: Int) {
               field = v
           }
 ---------------------
-L6:
+L7:
   3 <START>                                    INIT: in: {a=D} out: {a=D}
     v(v: Int)                                  INIT: in: {a=D} out: {a=D, v=D}
     magic[FAKE_INITIALIZER](v: Int) -> <v0>    INIT: in: {a=D, v=D} out: {a=D, v=D}
@@ -58,7 +60,7 @@ L6:
   4 mark({ field = v })                        INIT: in: {a=D, v=ID} out: {a=D, v=ID}                      USE: in: {field=ONLY_WRITTEN_NEVER_READ, v=READ} out: {field=ONLY_WRITTEN_NEVER_READ, v=READ}
     r(v) -> <v1>                                                                                           USE: in: {field=ONLY_WRITTEN_NEVER_READ} out: {field=ONLY_WRITTEN_NEVER_READ, v=READ}
     w(field|<v1>)                              INIT: in: {a=D, v=ID} out: {a=D, field=I, v=ID}             USE: in: {} out: {field=ONLY_WRITTEN_NEVER_READ}
-L7:
+L8:
   3 <END>                                      INIT: in: {a=D, field=I, v=ID} out: {a=D, field=I, v=ID}
 error:
     <ERROR>                                    INIT: in: {} out: {}
diff --git a/compiler/testData/cfg/declarations/local/localClass.instructions b/compiler/testData/cfg/declarations/local/localClass.instructions
index ea7ec9ebaee..84afadfcfbd 100644
--- a/compiler/testData/cfg/declarations/local/localClass.instructions
+++ b/compiler/testData/cfg/declarations/local/localClass.instructions
@@ -14,11 +14,13 @@ fun f() {
 L0:
   1 <START>
   2 mark({ class LocalClass() { fun f() { val x = "" fun loc() { val x3 = "" } } } })
-    jmp?(L2)                                                                             NEXT:[<END>, d(fun f() { val x = "" fun loc() { val x3 = "" } })]
+    jmp?(L2)                                                                             NEXT:[<END>, jmp?(L3)]
+    jmp?(L3)                                                                             NEXT:[<END>, d(fun f() { val x = "" fun loc() { val x3 = "" } })]
     d(fun f() { val x = "" fun loc() { val x3 = "" } })                                  NEXT:[<SINK>]
 L1:
-L2 [after local declaration]:
-  1 <END>                                                                                NEXT:[<SINK>]                                                                               PREV:[jmp?(L2)]
+L2 [after local class]:
+L3 [after local declaration]:
+  1 <END>                                                                                NEXT:[<SINK>]                                                                               PREV:[jmp?(L2), jmp?(L3)]
 error:
     <ERROR>                                                                              PREV:[]
 sink:
@@ -33,18 +35,18 @@ fun f() {
             }
         }
 ---------------------
-L3:
+L4:
   3 <START>
   4 mark({ val x = "" fun loc() { val x3 = "" } })
     v(val x = "")
     mark("")
     r("") -> <v0>
     w(x|<v0>)
-    jmp?(L5)                                          NEXT:[<END>, d(fun loc() { val x3 = "" })]
+    jmp?(L6)                                          NEXT:[<END>, d(fun loc() { val x3 = "" })]
     d(fun loc() { val x3 = "" })                      NEXT:[<SINK>]
-L4:
-L5 [after local declaration]:
-  3 <END>                                             NEXT:[<SINK>]                                            PREV:[jmp?(L5)]
+L5:
+L6 [after local declaration]:
+  3 <END>                                             NEXT:[<SINK>]                                            PREV:[jmp?(L6)]
 error:
     <ERROR>                                           PREV:[]
 sink:
@@ -55,17 +57,17 @@ fun loc() {
                 val x3 = ""
             }
 ---------------------
-L6:
+L7:
   5 <START>
   6 mark({ val x3 = "" })
     v(val x3 = "")
     mark("")
     r("") -> <v0>
     w(x3|<v0>)
-L7:
+L8:
   5 <END>                    NEXT:[<SINK>]
 error:
     <ERROR>                  PREV:[]
 sink:
     <SINK>                   PREV:[<ERROR>, <END>]
-=====================
\ No newline at end of file
+=====================
diff --git a/compiler/testData/cfg/declarations/local/localProperty.instructions b/compiler/testData/cfg/declarations/local/localProperty.instructions
index ba91e1ed178..40e2332480c 100644
--- a/compiler/testData/cfg/declarations/local/localProperty.instructions
+++ b/compiler/testData/cfg/declarations/local/localProperty.instructions
@@ -12,12 +12,14 @@ fun foo() {
 L0:
   1 <START>
   2 mark({ class B { val a: Int get() { val b: Int return b } } })
+    jmp?(L2)                                                          NEXT:[<END>, v(val a: Int get() { val b: Int return b })]
     v(val a: Int get() { val b: Int return b })
-    jmp?(L2)                                                          NEXT:[<END>, d(get() { val b: Int return b })]
+    jmp?(L3)                                                          NEXT:[<END>, d(get() { val b: Int return b })]
     d(get() { val b: Int return b })                                  NEXT:[<SINK>]
 L1:
-L2 [after local declaration]:
-  1 <END>                                                             NEXT:[<SINK>]                                                            PREV:[jmp?(L2)]
+L2 [after local class]:
+L3 [after local declaration]:
+  1 <END>                                                             NEXT:[<SINK>]                                                            PREV:[jmp?(L2), jmp?(L3)]
 error:
     <ERROR>                                                           PREV:[]
 sink:
@@ -29,16 +31,16 @@ get() {
                 return b
             }
 ---------------------
-L3:
+L4:
   3 <START>
   4 mark({ val b: Int return b })
     v(val b: Int)
     r(b) -> <v0>
-    ret(*|<v0>) L4
-L4:
+    ret(*|<v0>) L5
+L5:
   3 <END>                            NEXT:[<SINK>]
 error:
     <ERROR>                          PREV:[]
 sink:
     <SINK>                           PREV:[<ERROR>, <END>]
-=====================
\ No newline at end of file
+=====================
diff --git a/compiler/testData/diagnostics/tests/controlFlowAnalysis/deadCode/deadCodeInLocalDeclarations.kt b/compiler/testData/diagnostics/tests/controlFlowAnalysis/deadCode/deadCodeInLocalDeclarations.kt
index 2ef3ce8afcd..81a3ac5df54 100644
--- a/compiler/testData/diagnostics/tests/controlFlowAnalysis/deadCode/deadCodeInLocalDeclarations.kt
+++ b/compiler/testData/diagnostics/tests/controlFlowAnalysis/deadCode/deadCodeInLocalDeclarations.kt
@@ -23,7 +23,7 @@ fun testObjectExpression1() {
 fun testClassDeclaration() {
     class C : <!UNREACHABLE_CODE!>Foo(<!>todo()<!UNREACHABLE_CODE!>)<!> {}
 
-    <!UNREACHABLE_CODE!>bar()<!>
+    bar()
 }
 
 fun testFunctionDefaultArgument() {
diff --git a/compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.kt b/compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.kt
new file mode 100644
index 00000000000..a6088c4dc74
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.kt
@@ -0,0 +1,21 @@
+fun foo() {
+    var x: String
+    class A {
+        init {
+            x = ""
+        }
+    }
+    // Error! See KT-10042
+    <!UNINITIALIZED_VARIABLE!>x<!>.length
+}
+
+fun bar() {
+    var x: String
+    object: Any() {
+        init {
+            x = ""
+        }
+    }
+    // Ok
+    x.length
+}
diff --git a/compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.txt b/compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.txt
new file mode 100644
index 00000000000..a34eb4a98fa
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.txt
@@ -0,0 +1,4 @@
+package
+
+public fun bar(): kotlin.Unit
+public fun foo(): kotlin.Unit
diff --git a/compiler/tests/org/jetbrains/kotlin/cfg/DataFlowTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/cfg/DataFlowTestGenerated.java
index 80820c9cb08..6aa25267655 100644
--- a/compiler/tests/org/jetbrains/kotlin/cfg/DataFlowTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/cfg/DataFlowTestGenerated.java
@@ -94,6 +94,12 @@ public class DataFlowTestGenerated extends AbstractDataFlowTest {
             KotlinTestUtils.assertAllTestsPresentByMetadata(this.getClass(), new File("compiler/testData/cfg-variables/bugs"), Pattern.compile("^(.+)\\.kt$"), true);
         }
 
+        @TestMetadata("initializationInLocalClass.kt")
+        public void testInitializationInLocalClass() throws Exception {
+            String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/cfg-variables/bugs/initializationInLocalClass.kt");
+            doTest(fileName);
+        }
+
         @TestMetadata("kt10243.kt")
         public void testKt10243() throws Exception {
             String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/cfg-variables/bugs/kt10243.kt");
diff --git a/compiler/tests/org/jetbrains/kotlin/cfg/PseudoValueTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/cfg/PseudoValueTestGenerated.java
index fa84fac429f..4ca34306ff2 100644
--- a/compiler/tests/org/jetbrains/kotlin/cfg/PseudoValueTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/cfg/PseudoValueTestGenerated.java
@@ -840,6 +840,12 @@ public class PseudoValueTestGenerated extends AbstractPseudoValueTest {
                 KotlinTestUtils.assertAllTestsPresentByMetadata(this.getClass(), new File("compiler/testData/cfg-variables/bugs"), Pattern.compile("^(.+)\\.kt$"), true);
             }
 
+            @TestMetadata("initializationInLocalClass.kt")
+            public void testInitializationInLocalClass() throws Exception {
+                String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/cfg-variables/bugs/initializationInLocalClass.kt");
+                doTest(fileName);
+            }
+
             @TestMetadata("kt10243.kt")
             public void testKt10243() throws Exception {
                 String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/cfg-variables/bugs/kt10243.kt");
diff --git a/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java
index edd95bc7455..7a7e8dd13f8 100644
--- a/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/checkers/DiagnosticsTestGenerated.java
@@ -2895,6 +2895,12 @@ public class DiagnosticsTestGenerated extends AbstractDiagnosticsTest {
                 doTest(fileName);
             }
 
+            @TestMetadata("initializationInLocalClass.kt")
+            public void testInitializationInLocalClass() throws Exception {
+                String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalClass.kt");
+                doTest(fileName);
+            }
+
             @TestMetadata("initializationInLocalFun.kt")
             public void testInitializationInLocalFun() throws Exception {
                 String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/diagnostics/tests/controlFlowAnalysis/initializationInLocalFun.kt");