diff --git a/Lib/compiler/pycodegen.py b/Lib/compiler/pycodegen.py
index d5d68aa29ef0..e3667b594d3b 100644
--- a/Lib/compiler/pycodegen.py
+++ b/Lib/compiler/pycodegen.py
@@ -382,16 +382,7 @@ def _visitFuncOrLambda(self, node, isLambda=0):
         self.set_lineno(node)
         for default in node.defaults:
             self.visit(default)
-        frees = gen.scope.get_free_vars()
-        if frees:
-            for name in frees:
-                self.emit('LOAD_CLOSURE', name)
-            self.emit('LOAD_CONST', gen)
-            self.emit('MAKE_CLOSURE', len(node.defaults))
-        else:
-            self.emit('LOAD_CONST', gen)
-            self.emit('MAKE_FUNCTION', len(node.defaults))
-
+        self._makeClosure(gen, len(node.defaults))
         for i in range(ndecorators):
             self.emit('CALL_FUNCTION', 1)
 
@@ -405,14 +396,7 @@ def visitClass(self, node):
         for base in node.bases:
             self.visit(base)
         self.emit('BUILD_TUPLE', len(node.bases))
-        frees = gen.scope.get_free_vars()
-        for name in frees:
-            self.emit('LOAD_CLOSURE', name)
-        self.emit('LOAD_CONST', gen)
-        if frees:
-            self.emit('MAKE_CLOSURE', 0)
-        else:
-            self.emit('MAKE_FUNCTION', 0)
+        self._makeClosure(gen, 0)
         self.emit('CALL_FUNCTION', 0)
         self.emit('BUILD_CLASS')
         self.storeName(node.name)
@@ -644,22 +628,25 @@ def visitListCompIf(self, node, branch):
         self.newBlock()
         self.emit('POP_TOP')
 
+    def _makeClosure(self, gen, args):
+        frees = gen.scope.get_free_vars()
+        if frees:
+            for name in frees:
+                self.emit('LOAD_CLOSURE', name)
+            self.emit('BUILD_TUPLE', len(frees))
+            self.emit('LOAD_CONST', gen)
+            self.emit('MAKE_CLOSURE', args)
+        else:
+            self.emit('LOAD_CONST', gen)
+            self.emit('MAKE_FUNCTION', args)
+
     def visitGenExpr(self, node):
         gen = GenExprCodeGenerator(node, self.scopes, self.class_name,
                                    self.get_module())
         walk(node.code, gen)
         gen.finish()
         self.set_lineno(node)
-        frees = gen.scope.get_free_vars()
-        if frees:
-            for name in frees:
-                self.emit('LOAD_CLOSURE', name)
-            self.emit('LOAD_CONST', gen)
-            self.emit('MAKE_CLOSURE', 0)
-        else:
-            self.emit('LOAD_CONST', gen)
-            self.emit('MAKE_FUNCTION', 0)
-
+        self._makeClosure(gen, 0)
         # precomputation of outmost iterable
         self.visit(node.code.quals[0].iter)
         self.emit('GET_ITER')
diff --git a/Lib/test/test_compiler.py b/Lib/test/test_compiler.py
index 929a12bb6f29..9dff71e299c0 100644
--- a/Lib/test/test_compiler.py
+++ b/Lib/test/test_compiler.py
@@ -104,6 +104,19 @@ def testFlatten(self):
         self.assertEquals(flatten([1, [2]]), [1, 2])
         self.assertEquals(flatten((1, (2,))), [1, 2])
 
+    def testNestedScope(self):
+        c = compiler.compile('def g():\n'
+                             '    a = 1\n'
+                             '    def f(): return a + 2\n'
+                             '    return f()\n'
+                             'result = g()',
+                             '<string>',
+                             'exec')
+        dct = {}
+        exec c in dct
+        self.assertEquals(dct.get('result'), 3)
+
+        
 NOLINENO = (compiler.ast.Module, compiler.ast.Stmt, compiler.ast.Discard)
 
 ###############################################################################
diff --git a/Misc/NEWS b/Misc/NEWS
index c4904da76409..3c1ba7f1de1a 100644
--- a/Misc/NEWS
+++ b/Misc/NEWS
@@ -28,6 +28,9 @@ Library
 - Bug #1531405, format_exception no longer raises an exception if
   str(exception) raised an exception.
 
+- Fix a bug in the ``compiler`` package that caused invalid code to be
+  generated for nested functions.
+
 
 Extension Modules
 -----------------