diff --git a/idea/src/org/jetbrains/kotlin/idea/intentions/ReplaceExplicitFunctionLiteralParamWithItIntention.kt b/idea/src/org/jetbrains/kotlin/idea/intentions/ReplaceExplicitFunctionLiteralParamWithItIntention.kt
index c77218f0ba3..725f32695f7 100644
--- a/idea/src/org/jetbrains/kotlin/idea/intentions/ReplaceExplicitFunctionLiteralParamWithItIntention.kt
+++ b/idea/src/org/jetbrains/kotlin/idea/intentions/ReplaceExplicitFunctionLiteralParamWithItIntention.kt
@@ -47,17 +47,19 @@ class ReplaceExplicitFunctionLiteralParamWithItIntention() : PsiElementBaseInten
         if (parameter.typeReference != null) return false
 
         if (functionLiteral.anyDescendantOfType<KtFunctionLiteral>() { literal ->
-            literal !== functionLiteral &&
-            !literal.hasParameterSpecification() &&
-            literal.anyDescendantOfType<KtSimpleNameExpression> { nameExpr ->
-                nameExpr.getReferencedName() == element.text
-            }
+            literal.usesName(element.text) &&
+            (!literal.hasParameterSpecification() || literal.usesName("it"))
         } ) return false
 
         text = "Replace explicit parameter '${parameter.name}' with 'it'"
         return true
     }
 
+    private fun KtFunctionLiteral.usesName(name: String): Boolean =
+            anyDescendantOfType<KtSimpleNameExpression> {
+                nameExpr -> nameExpr.getReferencedName() == name
+            }
+
     override fun startInWriteAction(): Boolean = false
 
     override fun invoke(project: Project, editor: Editor, element: PsiElement) {
diff --git a/idea/testData/intentions/replaceExplicitFunctionLiteralParamWithIt/notApplicable_itFromOuterLambda.kt b/idea/testData/intentions/replaceExplicitFunctionLiteralParamWithIt/notApplicable_itFromOuterLambda.kt
new file mode 100644
index 00000000000..0447495a1f2
--- /dev/null
+++ b/idea/testData/intentions/replaceExplicitFunctionLiteralParamWithIt/notApplicable_itFromOuterLambda.kt
@@ -0,0 +1,9 @@
+// IS_APPLICABLE: false
+
+// See KT-12437: it from outer lambda
+fun acceptLambda(p: Int, f: (Int) -> Int): Int = f(p)
+fun use() {
+    acceptLambda(1) {
+        acceptLambda(2) { <caret>p2 -> it * 10 + p2 }
+    }.hashCode()
+}
\ No newline at end of file
diff --git a/idea/tests/org/jetbrains/kotlin/idea/intentions/IntentionTestGenerated.java b/idea/tests/org/jetbrains/kotlin/idea/intentions/IntentionTestGenerated.java
index bcb760eea47..dbfd90b8314 100644
--- a/idea/tests/org/jetbrains/kotlin/idea/intentions/IntentionTestGenerated.java
+++ b/idea/tests/org/jetbrains/kotlin/idea/intentions/IntentionTestGenerated.java
@@ -8293,6 +8293,12 @@ public class IntentionTestGenerated extends AbstractIntentionTest {
             doTest(fileName);
         }
 
+        @TestMetadata("notApplicable_itFromOuterLambda.kt")
+        public void testNotApplicable_itFromOuterLambda() throws Exception {
+            String fileName = KotlinTestUtils.navigationMetadata("idea/testData/intentions/replaceExplicitFunctionLiteralParamWithIt/notApplicable_itFromOuterLambda.kt");
+            doTest(fileName);
+        }
+
         @TestMetadata("notApplicable_nestedLiterals.kt")
         public void testNotApplicable_nestedLiterals() throws Exception {
             String fileName = KotlinTestUtils.navigationMetadata("idea/testData/intentions/replaceExplicitFunctionLiteralParamWithIt/notApplicable_nestedLiterals.kt");