diff --git a/python/src/com/jetbrains/python/formatter/PyBlock.java b/python/src/com/jetbrains/python/formatter/PyBlock.java
index 2ca7cfb4ce47..d86e35c683e8 100644
--- a/python/src/com/jetbrains/python/formatter/PyBlock.java
+++ b/python/src/com/jetbrains/python/formatter/PyBlock.java
@@ -385,6 +385,9 @@ public class PyBlock implements ASTBlock {
       while (lastChild != null) {
         IElementType last_type = lastChild.getElementType();
         if ( last_type == PyElementTypes.STATEMENT_LIST && hasLineBreakBefore(lastChild)) {
+          if (dedentAfterLastStatement((PyStatementList)lastChild.getPsi())) {
+            break;
+          }
           statementListsBelow++;
         }
         else if (statementListsBelow > 0 && lastChild.getPsi() instanceof PsiErrorElement) {
diff --git a/python/testSrc/com/jetbrains/python/PyIndentTest.java b/python/testSrc/com/jetbrains/python/PyIndentTest.java
index bece34187c21..1a145d66cfa9 100644
--- a/python/testSrc/com/jetbrains/python/PyIndentTest.java
+++ b/python/testSrc/com/jetbrains/python/PyIndentTest.java
@@ -167,6 +167,19 @@ public class PyIndentTest extends PyLightFixtureTestCase {
            "    <caret>");
   }
 
+  public void testUnindentAfterReturnNotLast() {  // PY-289
+    doTest("def foo():\n" +
+           "    if True:\n" +
+           "        return<caret>\n" +
+           "def bar(): pass",
+           "def foo():\n" +
+           "    if True:\n" +
+           "        return\n" +
+           "    <caret>\n" +
+           "def bar(): pass"
+    );
+  }
+
   /*
   TODO: formatter core problem?
   public void testAlignListBeforeEquals() throws Exception {