diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetModifiableBlockHelper.java b/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetModifiableBlockHelper.java
index a5e3ddf140c..8133034391d 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetModifiableBlockHelper.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetModifiableBlockHelper.java
@@ -65,7 +65,7 @@ public final class JetModifiableBlockHelper {
         if (declaration != null) {
             if (declaration instanceof JetNamedFunction) {
                 JetNamedFunction function = (JetNamedFunction) declaration;
-                if (!function.hasDeclaredReturnType()) {
+                if (!function.hasDeclaredReturnType() && !function.hasBlockBody()) {
                     return true;
                 }
             }
diff --git a/idea/testData/codeInsight/outOfBlock/InFunInFunWithBody.kt b/idea/testData/codeInsight/outOfBlock/InFunInFunWithBody.kt
new file mode 100644
index 00000000000..d936f0e3748
--- /dev/null
+++ b/idea/testData/codeInsight/outOfBlock/InFunInFunWithBody.kt
@@ -0,0 +1,6 @@
+// FALSE
+fun test() {
+  fun hello() {
+    <caret>
+  }
+}
\ No newline at end of file
diff --git a/idea/tests/org/jetbrains/jet/plugin/codeInsight/OutOfBlockModificationTest.java b/idea/tests/org/jetbrains/jet/plugin/codeInsight/OutOfBlockModificationTest.java
index 91fdb68703a..dbe4cb306c5 100644
--- a/idea/tests/org/jetbrains/jet/plugin/codeInsight/OutOfBlockModificationTest.java
+++ b/idea/tests/org/jetbrains/jet/plugin/codeInsight/OutOfBlockModificationTest.java
@@ -46,6 +46,10 @@ public class OutOfBlockModificationTest extends LightCodeInsightFixtureTestCase
         doTest();
     }
 
+    public void testInFunInFunWithBody() {
+        doTest();
+    }
+
     public void testInFunWithInference() {
         doTest();
     }