diff --git a/compiler/backend/src/org/jetbrains/kotlin/codegen/coroutines/CoroutineTransformerMethodVisitor.kt b/compiler/backend/src/org/jetbrains/kotlin/codegen/coroutines/CoroutineTransformerMethodVisitor.kt
index 50b76f52d21..5f739b05b87 100644
--- a/compiler/backend/src/org/jetbrains/kotlin/codegen/coroutines/CoroutineTransformerMethodVisitor.kt
+++ b/compiler/backend/src/org/jetbrains/kotlin/codegen/coroutines/CoroutineTransformerMethodVisitor.kt
@@ -783,13 +783,15 @@ class CoroutineTransformerMethodVisitor(
             // See 'splitTryCatchBlocksContainingSuspensionPoint'
             val possibleTryCatchBlockStart = suspension.tryCatchBlocksContinuationLabel
 
-            // Remove NOP as it's unnecessary anymore
+            // Move NOP, which is inserted in `splitTryCatchBlocksContainingSuspentionPoint`, inside the try catch block,
+            // so the inliner can transform suspend lambdas during inlining
             assert(possibleTryCatchBlockStart.previous.opcode == Opcodes.NOP) {
                 "NOP expected but ${possibleTryCatchBlockStart.previous.opcode} was found"
             }
             remove(possibleTryCatchBlockStart.previous)
 
             insert(possibleTryCatchBlockStart, withInstructionAdapter {
+                nop()
                 generateResumeWithExceptionCheck(languageVersionSettings.isReleaseCoroutines(), dataIndex, exceptionIndex)
 
                 // Load continuation argument just like suspending function returns it
diff --git a/compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt b/compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt
new file mode 100644
index 00000000000..fafeea1c713
--- /dev/null
+++ b/compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt
@@ -0,0 +1,50 @@
+// FILE: test.kt
+// WITH_RUNTIME
+// WITH_COROUTINES
+// CHECK_STATE_MACHINE
+// NO_CHECK_LAMBDA_INLINING
+
+import helpers.*
+import kotlin.coroutines.*
+
+const val DEBUG = false
+inline fun inlineFun(b: () -> Unit) {
+    if (DEBUG) {
+        inlineFunReal(b)
+    }
+}
+
+inline fun inlineFunReal(b: () -> Unit) {
+    try {
+        b()
+    } finally {
+    }
+}
+
+fun builder(c: suspend () -> Unit) {
+    c.startCoroutine(CheckStateMachineContinuation)
+}
+
+// FILE: box.kt
+import helpers.*
+
+class Sample {
+    fun test() {
+        inlineFun {
+            builder {
+                inlineFun {
+                    suspendFun()
+                    suspendFun()
+                }
+            }
+        }
+    }
+
+    suspend fun suspendFun() = StateMachineChecker.suspendHere()
+}
+
+fun box(): String {
+    Sample().test()
+    StateMachineChecker.check(0, checkFinished = false)
+    return "OK"
+}
\ No newline at end of file
diff --git a/compiler/tests-common/tests/org/jetbrains/kotlin/coroutineTestUtil.kt b/compiler/tests-common/tests/org/jetbrains/kotlin/coroutineTestUtil.kt
index 2b8ccbeef22..71dea34368b 100644
--- a/compiler/tests-common/tests/org/jetbrains/kotlin/coroutineTestUtil.kt
+++ b/compiler/tests-common/tests/org/jetbrains/kotlin/coroutineTestUtil.kt
@@ -94,7 +94,7 @@ fun createTextForHelpers(isReleaseCoroutines: Boolean, checkStateMachine: Boolea
             proceed = { c.resume(Unit) }
         }
 
-        fun check(numberOfSuspensions: Int) {
+        fun check(numberOfSuspensions: Int, checkFinished: Boolean = true) {
             for (i in 1..numberOfSuspensions) {
                 if (counter != i) error("Wrong state-machine generated: suspendHere should be called exactly once in one state. Expected " + i + ", got " + counter)
                 proceed()
@@ -103,7 +103,7 @@ fun createTextForHelpers(isReleaseCoroutines: Boolean, checkStateMachine: Boolea
                 error("Wrong state-machine generated: wrong number of overall suspensions. Expected " + numberOfSuspensions + ", got " + counter)
             if (finished) error("Wrong state-machine generated: it is finished early")
             proceed()
-            if (!finished) error("Wrong state-machine generated: it is not finished yet")
+            if (checkFinished && !finished) error("Wrong state-machine generated: it is not finished yet")
         }
     }
     val StateMachineChecker = StateMachineCheckerClass()
diff --git a/compiler/tests/org/jetbrains/kotlin/codegen/BlackBoxInlineCodegenTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/codegen/BlackBoxInlineCodegenTestGenerated.java
index d302c41b8f5..9415e7831f9 100644
--- a/compiler/tests/org/jetbrains/kotlin/codegen/BlackBoxInlineCodegenTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/codegen/BlackBoxInlineCodegenTestGenerated.java
@@ -4089,6 +4089,11 @@ public class BlackBoxInlineCodegenTestGenerated extends AbstractBlackBoxInlineCo
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/insideObject.kt", "kotlin.coroutines");
             }
 
+            @TestMetadata("lambdaTransformation.kt")
+            public void testLambdaTransformation() throws Exception {
+                runTest("compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt");
+            }
+
             @TestMetadata("normalInline.kt")
             public void testNormalInline_1_2() throws Exception {
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/normalInline.kt", "kotlin.coroutines.experimental");
diff --git a/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstInlineKotlinTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstInlineKotlinTestGenerated.java
index 64fd496b5c4..33985182dac 100644
--- a/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstInlineKotlinTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/codegen/CompileKotlinAgainstInlineKotlinTestGenerated.java
@@ -4089,6 +4089,11 @@ public class CompileKotlinAgainstInlineKotlinTestGenerated extends AbstractCompi
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/insideObject.kt", "kotlin.coroutines");
             }
 
+            @TestMetadata("lambdaTransformation.kt")
+            public void testLambdaTransformation() throws Exception {
+                runTest("compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt");
+            }
+
             @TestMetadata("normalInline.kt")
             public void testNormalInline_1_2() throws Exception {
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/normalInline.kt", "kotlin.coroutines.experimental");
diff --git a/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrBlackBoxInlineCodegenTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrBlackBoxInlineCodegenTestGenerated.java
index 59da71a0256..a5f339617d3 100644
--- a/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrBlackBoxInlineCodegenTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrBlackBoxInlineCodegenTestGenerated.java
@@ -3879,6 +3879,11 @@ public class IrBlackBoxInlineCodegenTestGenerated extends AbstractIrBlackBoxInli
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/insideObject.kt", "kotlin.coroutines");
             }
 
+            @TestMetadata("lambdaTransformation.kt")
+            public void testLambdaTransformation() throws Exception {
+                runTest("compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt");
+            }
+
             @TestMetadata("normalInline.kt")
             public void testNormalInline_1_3() throws Exception {
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/normalInline.kt", "kotlin.coroutines");
diff --git a/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrCompileKotlinAgainstInlineKotlinTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrCompileKotlinAgainstInlineKotlinTestGenerated.java
index 9423f89a1e4..d3e5024f815 100644
--- a/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrCompileKotlinAgainstInlineKotlinTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrCompileKotlinAgainstInlineKotlinTestGenerated.java
@@ -3879,6 +3879,11 @@ public class IrCompileKotlinAgainstInlineKotlinTestGenerated extends AbstractIrC
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/insideObject.kt", "kotlin.coroutines");
             }
 
+            @TestMetadata("lambdaTransformation.kt")
+            public void testLambdaTransformation() throws Exception {
+                runTest("compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt");
+            }
+
             @TestMetadata("normalInline.kt")
             public void testNormalInline_1_3() throws Exception {
                 runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/normalInline.kt", "kotlin.coroutines");
diff --git a/js/js.tests/test/org/jetbrains/kotlin/js/test/ir/semantics/IrInlineSuspendTestsGenerated.java b/js/js.tests/test/org/jetbrains/kotlin/js/test/ir/semantics/IrInlineSuspendTestsGenerated.java
index 527d88209b6..b38eed6c39d 100644
--- a/js/js.tests/test/org/jetbrains/kotlin/js/test/ir/semantics/IrInlineSuspendTestsGenerated.java
+++ b/js/js.tests/test/org/jetbrains/kotlin/js/test/ir/semantics/IrInlineSuspendTestsGenerated.java
@@ -329,6 +329,11 @@ public class IrInlineSuspendTestsGenerated extends AbstractIrInlineSuspendTests
             runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/insideObject.kt", "kotlin.coroutines");
         }
 
+        @TestMetadata("lambdaTransformation.kt")
+        public void testLambdaTransformation() throws Exception {
+            runTest("compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt");
+        }
+
         @TestMetadata("normalInline.kt")
         public void testNormalInline_1_3() throws Exception {
             runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/normalInline.kt", "kotlin.coroutines");
diff --git a/js/js.tests/test/org/jetbrains/kotlin/js/test/semantics/InlineSuspendTestsGenerated.java b/js/js.tests/test/org/jetbrains/kotlin/js/test/semantics/InlineSuspendTestsGenerated.java
index c036b30bfbe..bccff50baf5 100644
--- a/js/js.tests/test/org/jetbrains/kotlin/js/test/semantics/InlineSuspendTestsGenerated.java
+++ b/js/js.tests/test/org/jetbrains/kotlin/js/test/semantics/InlineSuspendTestsGenerated.java
@@ -529,6 +529,11 @@ public class InlineSuspendTestsGenerated extends AbstractInlineSuspendTests {
             runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/insideObject.kt", "kotlin.coroutines");
         }
 
+        @TestMetadata("lambdaTransformation.kt")
+        public void testLambdaTransformation() throws Exception {
+            runTest("compiler/testData/codegen/boxInline/suspend/stateMachine/lambdaTransformation.kt");
+        }
+
         @TestMetadata("normalInline.kt")
         public void testNormalInline_1_2() throws Exception {
             runTestWithPackageReplacement("compiler/testData/codegen/boxInline/suspend/stateMachine/normalInline.kt", "kotlin.coroutines.experimental");