diff --git a/python/src/com/jetbrains/python/PyTokenTypes.java b/python/src/com/jetbrains/python/PyTokenTypes.java
index 7df4b49c4807..063b0d23a43b 100644
--- a/python/src/com/jetbrains/python/PyTokenTypes.java
+++ b/python/src/com/jetbrains/python/PyTokenTypes.java
@@ -16,7 +16,7 @@ public class PyTokenTypes {
   public static final PyElementType TAB = new PyElementType("TAB");
   public static final PyElementType FORMFEED = new PyElementType("FORMFEED");
   public static final IElementType BAD_CHARACTER = TokenType.BAD_CHARACTER;
-  public static final IElementType INCONSISTENT_DEDENT = TokenType.BAD_CHARACTER;
+  public static final PyElementType INCONSISTENT_DEDENT = new PyElementType("INCONSISTENT_DEDENT");
 
   public static final PyElementType END_OF_LINE_COMMENT = new PyElementType("END_OF_LINE_COMMENT");
 
diff --git a/python/src/com/jetbrains/python/parsing/StatementParsing.java b/python/src/com/jetbrains/python/parsing/StatementParsing.java
index 743c739a9c3c..8c466b741a59 100644
--- a/python/src/com/jetbrains/python/parsing/StatementParsing.java
+++ b/python/src/com/jetbrains/python/parsing/StatementParsing.java
@@ -205,7 +205,12 @@ public class StatementParsing extends Parsing implements ITokenTypeRemapper {
     }
 
     builder.advanceLexer();
-    builder.error("statement expected, found " + firstToken.toString());
+    if (firstToken == PyTokenTypes.INCONSISTENT_DEDENT) {
+      builder.error("unindent does not match any outer indentation level");
+    }
+    else {
+      builder.error("statement expected, found " + firstToken.toString());
+    }
   }
 
   private boolean hasPrintStatement() {
diff --git a/python/testData/psi/InconsistentDedent.py b/python/testData/psi/InconsistentDedent.py
new file mode 100644
index 000000000000..b87400a420b3
--- /dev/null
+++ b/python/testData/psi/InconsistentDedent.py
@@ -0,0 +1,3 @@
+def foo():
+    pass
+  print 1
\ No newline at end of file
diff --git a/python/testData/psi/InconsistentDedent.txt b/python/testData/psi/InconsistentDedent.txt
new file mode 100644
index 000000000000..1ee44c60498d
--- /dev/null
+++ b/python/testData/psi/InconsistentDedent.txt
@@ -0,0 +1,21 @@
+PyFile:InconsistentDedent.py
+  PyFunction('foo')
+    PsiElement(Py:DEF_KEYWORD)('def')
+    PsiWhiteSpace(' ')
+    PsiElement(Py:IDENTIFIER)('foo')
+    PyParameterList
+      PsiElement(Py:LPAR)('(')
+      PsiElement(Py:RPAR)(')')
+    PsiElement(Py:COLON)(':')
+    PsiWhiteSpace('\n    ')
+    PyStatementList
+      PyPassStatement
+        PsiElement(Py:PASS_KEYWORD)('pass')
+      PsiErrorElement:unindent does not match any outer indentation level
+        <empty list>
+  PsiWhiteSpace('\n  ')
+  PyPrintStatement
+    PsiElement(Py:PRINT_KEYWORD)('print')
+    PsiWhiteSpace(' ')
+    PyNumericLiteralExpression
+      PsiElement(Py:INTEGER_LITERAL)('1')
\ No newline at end of file
diff --git a/python/testSrc/com/jetbrains/python/PythonParsingTest.java b/python/testSrc/com/jetbrains/python/PythonParsingTest.java
index 4ccbb77e3e60..8dc18ba4f804 100644
--- a/python/testSrc/com/jetbrains/python/PythonParsingTest.java
+++ b/python/testSrc/com/jetbrains/python/PythonParsingTest.java
@@ -206,6 +206,10 @@ public class PythonParsingTest extends ParsingTestCase {
     doTest();
   }
 
+  public void testInconsistentDedent() throws Exception { // PY-1131
+    doTest();
+  }
+
   public void doTest() throws Exception {
     doTest(LanguageLevel.PYTHON25);
   }