diff --git a/jps/model-serialization/src/org/jetbrains/jps/model/serialization/JpsProjectLoader.java b/jps/model-serialization/src/org/jetbrains/jps/model/serialization/JpsProjectLoader.java
index 28863f900152..23fb427f9660 100644
--- a/jps/model-serialization/src/org/jetbrains/jps/model/serialization/JpsProjectLoader.java
+++ b/jps/model-serialization/src/org/jetbrains/jps/model/serialization/JpsProjectLoader.java
@@ -83,15 +83,16 @@ public class JpsProjectLoader extends JpsLoaderBase {
       new JpsProjectLoader(project, pathVariables, file.getParentFile()).loadFromIpr(file);
     }
     else {
+      File dotIdea = new File(file, PathMacroUtil.DIRECTORY_STORE_NAME);
       File directory;
-      if (file.isDirectory() && file.getName().equals(PathMacroUtil.DIRECTORY_STORE_NAME)) {
+      if (dotIdea.isDirectory()) {
+        directory = dotIdea;
+      }
+      else if (file.isDirectory() && file.getName().equals(PathMacroUtil.DIRECTORY_STORE_NAME)) {
         directory = file;
       }
       else {
-        directory = new File(file, PathMacroUtil.DIRECTORY_STORE_NAME);
-        if (!directory.isDirectory()) {
-          throw new IOException("Cannot find IntelliJ IDEA project files at " + projectPath);
-        }
+        throw new IOException("Cannot find IntelliJ IDEA project files at " + projectPath);
       }
       new JpsProjectLoader(project, pathVariables, directory.getParentFile()).loadFromDirectory(directory);
     }
diff --git a/jps/model-serialization/testData/matryoshka/.idea/.idea/misc.xml b/jps/model-serialization/testData/matryoshka/.idea/.idea/misc.xml
new file mode 100644
index 000000000000..dc7535439d30
--- /dev/null
+++ b/jps/model-serialization/testData/matryoshka/.idea/.idea/misc.xml
@@ -0,0 +1,7 @@
+<?xml version="1.0" encoding="UTF-8"?>
+<project version="4">
+  <component name="ProjectRootManager" version="2" languageLevel="JDK_1_6" assert-keyword="true" jdk-15="true" project-jdk-name="1.6" project-jdk-type="JavaSDK">
+    <output url="file://$PROJECT_DIR$/out" />
+  </component>
+</project>
+
diff --git a/jps/model-serialization/testData/matryoshka/.idea/.idea/modules.xml b/jps/model-serialization/testData/matryoshka/.idea/.idea/modules.xml
new file mode 100644
index 000000000000..e1042fc80c7a
--- /dev/null
+++ b/jps/model-serialization/testData/matryoshka/.idea/.idea/modules.xml
@@ -0,0 +1,8 @@
+<?xml version="1.0" encoding="UTF-8"?>
+<project version="4">
+  <component name="ProjectModuleManager">
+    <modules>
+    </modules>
+  </component>
+</project>
+
diff --git a/jps/model-serialization/testSrc/org/jetbrains/jps/model/serialization/JpsProjectSerializationTest.java b/jps/model-serialization/testSrc/org/jetbrains/jps/model/serialization/JpsProjectSerializationTest.java
index 3ed4336709c4..2567927c87e9 100644
--- a/jps/model-serialization/testSrc/org/jetbrains/jps/model/serialization/JpsProjectSerializationTest.java
+++ b/jps/model-serialization/testSrc/org/jetbrains/jps/model/serialization/JpsProjectSerializationTest.java
@@ -23,10 +23,7 @@ import org.jetbrains.jps.model.JpsDummyElement;
 import org.jetbrains.jps.model.JpsEncodingConfigurationService;
 import org.jetbrains.jps.model.JpsEncodingProjectConfiguration;
 import org.jetbrains.jps.model.artifact.JpsArtifactService;
-import org.jetbrains.jps.model.java.JpsJavaDependencyExtension;
-import org.jetbrains.jps.model.java.JpsJavaDependencyScope;
-import org.jetbrains.jps.model.java.JpsJavaExtensionService;
-import org.jetbrains.jps.model.java.JpsJavaSdkType;
+import org.jetbrains.jps.model.java.*;
 import org.jetbrains.jps.model.library.JpsLibrary;
 import org.jetbrains.jps.model.library.JpsOrderRootType;
 import org.jetbrains.jps.model.library.sdk.JpsSdkReference;
@@ -135,6 +132,13 @@ public class JpsProjectSerializationTest extends JpsSerializationTestCase {
     assertSameElements(lib2.getRootUrls(JpsOrderRootType.COMPILED), getUrl("data/lib2"));
   }
 
+  public void testDotIdeaUnderDotIdea() {
+    loadProject("/jps/model-serialization/testData/matryoshka/.idea");
+    JpsJavaProjectExtension extension = JpsJavaExtensionService.getInstance().getProjectExtension(myProject);
+    assertNotNull(extension);
+    assertEquals(getUrl("out"), extension.getOutputUrl());
+  }
+
   public void testLoadEncoding() {
     loadProject(SAMPLE_PROJECT_PATH);
     JpsEncodingConfigurationService service = JpsEncodingConfigurationService.getInstance();