diff --git a/java/idea-ui/src/com/intellij/ide/impl/NewProjectUtil.java b/java/idea-ui/src/com/intellij/ide/impl/NewProjectUtil.java
index 84c7058e61ec..f2738ff51dcf 100644
--- a/java/idea-ui/src/com/intellij/ide/impl/NewProjectUtil.java
+++ b/java/idea-ui/src/com/intellij/ide/impl/NewProjectUtil.java
@@ -223,10 +223,12 @@ public class NewProjectUtil {
 
     JavaSdkVersion version = JavaSdk.getInstance().getVersion(jdk);
     if (version != null) {
-      LanguageLevel level = version.getMaxLanguageLevel();
+      LanguageLevel maxLevel = version.getMaxLanguageLevel();
+      LanguageLevelProjectExtension extension = LanguageLevelProjectExtension.getInstance(ProjectManager.getInstance().getDefaultProject());
+      Boolean aDefault = extension.isDefault();
       LanguageLevelProjectExtension ext = LanguageLevelProjectExtension.getInstance(project);
-      if (level.compareTo(ext.getLanguageLevel()) < 0) {
-        ext.setLanguageLevel(level);
+      if (aDefault != null && aDefault || maxLevel.compareTo(ext.getLanguageLevel()) < 0) {
+        ext.setLanguageLevel(maxLevel);
       }
     }
   }
diff --git a/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/LanguageLevelCombo.java b/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/LanguageLevelCombo.java
index dce78205af30..9716dbee0f6d 100644
--- a/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/LanguageLevelCombo.java
+++ b/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/LanguageLevelCombo.java
@@ -15,12 +15,18 @@
  */
 package com.intellij.openapi.roots.ui.configuration;
 
+import com.intellij.core.JavaCoreBundle;
+import com.intellij.openapi.projectRoots.JavaSdk;
+import com.intellij.openapi.projectRoots.JavaSdkVersion;
+import com.intellij.openapi.projectRoots.Sdk;
+import com.intellij.openapi.roots.ex.ProjectRootManagerEx;
 import com.intellij.ui.ListCellRendererWrapper;
 import com.intellij.openapi.project.Project;
 import com.intellij.openapi.project.ProjectBundle;
 import com.intellij.openapi.roots.LanguageLevelProjectExtension;
 import com.intellij.openapi.ui.ComboBox;
 import com.intellij.pom.java.LanguageLevel;
+import org.jetbrains.annotations.Nullable;
 
 import javax.swing.*;
 
@@ -28,7 +34,10 @@ import javax.swing.*;
  * @author ven
  */
 public class LanguageLevelCombo extends ComboBox {
+
   public static final String USE_PROJECT_LANGUAGE_LEVEL = ProjectBundle.message("project.language.level.combo.item");
+  @Nullable
+  private LanguageLevel myDefaultLevel;
 
   public LanguageLevelCombo() {
     for (LanguageLevel level : LanguageLevel.values()) {
@@ -48,7 +57,47 @@ public class LanguageLevelCombo extends ComboBox {
   }
 
   public void reset(Project project) {
-    setSelectedItem(LanguageLevelProjectExtension.getInstance(project).getLanguageLevel());
+    removeAllItems();
+    for (LanguageLevel level : LanguageLevel.values()) {
+      addItem(level);
+    }
+    myDefaultLevel = null;
+    Sdk sdk = ProjectRootManagerEx.getInstanceEx(project).getProjectSdk();
+    if (sdk != null) {
+      JavaSdkVersion version = JavaSdk.getInstance().getVersion(sdk);
+      if (version != null) {
+        myDefaultLevel = version.getMaxLanguageLevel();
+      }
+    }
+    String item = null;
+    if (myDefaultLevel != null) {
+      item = JavaCoreBundle.message("default.jdk.level.description", myDefaultLevel.getPresentableText());
+      addItem(item);
+    }
+    else if (project.isDefault()) {
+      item = JavaCoreBundle.message("default.language.level.description");
+      addItem(item);
+      myDefaultLevel = LanguageLevelProjectExtension.getInstance(project).getLanguageLevel();
+    }
+
+    LanguageLevelProjectExtension extension = LanguageLevelProjectExtension.getInstance(project);
+    Boolean aDefault = extension.isDefault();
+    if (item != null && aDefault != null && aDefault) {
+      setSelectedItem(item);
+    }
+    else {
+      setSelectedItem(extension.getLanguageLevel());
+    }
+  }
+
+  @Nullable
+  public LanguageLevel getSelectedLevel() {
+    Object item = getSelectedItem();
+    return item instanceof LanguageLevel ? (LanguageLevel)item : myDefaultLevel;
+  }
+
+  public boolean isDefault() {
+    return !(getSelectedItem() instanceof LanguageLevel);
   }
 
   @Override
diff --git a/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ModulesConfigurator.form b/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ModulesConfigurator.form
index 576d5146ff89..af967430fbc2 100644
--- a/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ModulesConfigurator.form
+++ b/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ModulesConfigurator.form
@@ -1,6 +1,6 @@
 <?xml version="1.0" encoding="UTF-8"?>
 <form xmlns="http://www.intellij.com/uidesigner/form/" version="1" bind-to-class="com.intellij.openapi.roots.ui.configuration.ProjectConfigurable">
-  <grid id="27dc6" binding="myWholePanel" layout-manager="GridLayoutManager" row-count="5" column-count="1" same-size-horizontally="false" same-size-vertically="false" hgap="-1" vgap="10">
+  <grid id="27dc6" binding="myWholePanel" layout-manager="GridLayoutManager" row-count="5" column-count="1" same-size-horizontally="false" same-size-vertically="false" hgap="-1" vgap="5">
     <margin top="0" left="0" bottom="0" right="0"/>
     <constraints>
       <xy x="20" y="20" width="907" height="288"/>
@@ -34,7 +34,7 @@
           <component id="1f983" class="com.intellij.openapi.roots.ui.configuration.LanguageLevelCombo" binding="myLanguageLevelCombo" custom-create="true">
             <constraints>
               <grid row="0" column="0" row-span="1" col-span="1" vsize-policy="3" hsize-policy="7" anchor="8" fill="0" indent="0" use-parent-layout="false">
-                <minimum-size width="-1" height="26"/>
+                <minimum-size width="310" height="28"/>
               </grid>
             </constraints>
             <properties/>
@@ -59,9 +59,7 @@
         <children>
           <component id="60d6f" class="com.intellij.ui.FieldPanel" binding="myProjectCompilerOutput" custom-create="true">
             <constraints>
-              <grid row="0" column="0" row-span="1" col-span="1" vsize-policy="0" hsize-policy="6" anchor="0" fill="1" indent="0" use-parent-layout="false">
-                <minimum-size width="215" height="-1"/>
-              </grid>
+              <grid row="0" column="0" row-span="1" col-span="1" vsize-policy="0" hsize-policy="6" anchor="0" fill="1" indent="0" use-parent-layout="false"/>
             </constraints>
             <properties/>
           </component>
diff --git a/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ProjectConfigurable.java b/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ProjectConfigurable.java
index 6844b8c11a66..662d2813c61b 100644
--- a/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ProjectConfigurable.java
+++ b/java/idea-ui/src/com/intellij/openapi/roots/ui/configuration/ProjectConfigurable.java
@@ -42,7 +42,6 @@ import com.intellij.openapi.util.io.FileUtil;
 import com.intellij.openapi.util.registry.Registry;
 import com.intellij.openapi.util.text.StringUtil;
 import com.intellij.openapi.vfs.VfsUtil;
-import com.intellij.pom.java.LanguageLevel;
 import com.intellij.ui.DocumentAdapter;
 import com.intellij.ui.FieldPanel;
 import com.intellij.ui.InsertPathAction;
@@ -139,7 +138,7 @@ public class ProjectConfigurable extends ProjectStructureElementConfigurable<Pro
       nameFieldPanel.add(myProjectName);
 
       namePanel.add(nameFieldPanel, BorderLayout.CENTER);
-      final JPanel wrapper = new JPanel(new FlowLayout(FlowLayout.LEFT));
+      final JPanel wrapper = new JPanel(new FlowLayout(FlowLayout.LEFT, 0, 0));
       wrapper.add(namePanel);
       wrapper.setAlignmentX(0);
       myPanel.add(wrapper, new GridBagConstraints(0, GridBagConstraints.RELATIVE, 1, 1, 0.0, 0.0,
@@ -150,7 +149,7 @@ public class ProjectConfigurable extends ProjectStructureElementConfigurable<Pro
     myProjectJdkConfigurable = new ProjectJdkConfigurable(myProject, model);
     myPanel.add(myProjectJdkConfigurable.createComponent(), new GridBagConstraints(0, GridBagConstraints.RELATIVE, 1, 1, 0.0, 0.0,
                                                                                    GridBagConstraints.WEST, GridBagConstraints.HORIZONTAL,
-                                                                                   new Insets(4, 4, 0, 0), 0, 0));
+                                                                                   new Insets(4, 0, 0, 0), 0, 0));
 
     myPanel.add(myWholePanel, new GridBagConstraints(0, GridBagConstraints.RELATIVE, 1, 1, 1.0, 1.0, GridBagConstraints.NORTHWEST,
                                                      GridBagConstraints.NONE, new Insets(4, 0, 0, 0), 0, 0));
@@ -224,8 +223,9 @@ public class ProjectConfigurable extends ProjectStructureElementConfigurable<Pro
           compilerProjectExtension.setCompilerOutputPointer(null);
         }
 
-        final LanguageLevel newLevel = (LanguageLevel)myLanguageLevelCombo.getSelectedItem();
-        LanguageLevelProjectExtension.getInstance(myProject).setLanguageLevel(newLevel);
+        LanguageLevelProjectExtension extension = LanguageLevelProjectExtension.getInstance(myProject);
+        extension.setLanguageLevel(myLanguageLevelCombo.getSelectedLevel());
+        extension.setDefault(myLanguageLevelCombo.isDefault());
         myProjectJdkConfigurable.apply();
 
         if (myProjectName != null) {
diff --git a/java/java-impl/src/com/intellij/openapi/roots/impl/LanguageLevelProjectExtensionImpl.java b/java/java-impl/src/com/intellij/openapi/roots/impl/LanguageLevelProjectExtensionImpl.java
index 836d6e005113..2335a0e23a86 100644
--- a/java/java-impl/src/com/intellij/openapi/roots/impl/LanguageLevelProjectExtensionImpl.java
+++ b/java/java-impl/src/com/intellij/openapi/roots/impl/LanguageLevelProjectExtensionImpl.java
@@ -31,28 +31,33 @@ import org.jdom.Element;
 import org.jetbrains.annotations.NonNls;
 import org.jetbrains.annotations.NotNull;
 
-public class LanguageLevelProjectExtensionImpl extends LanguageLevelProjectExtension {
+  public class LanguageLevelProjectExtensionImpl extends LanguageLevelProjectExtension {
   private static final Logger LOG = Logger.getInstance("#com.intellij.openapi.roots.impl.LanguageLevelProjectExtensionImpl");
   @Deprecated
   @NonNls private static final String ASSERT_KEYWORD_ATTR = "assert-keyword";
   @Deprecated
   @NonNls private static final String JDK_15_ATTR = "jdk-15";
+  private static final String LANGUAGE_LEVEL = "languageLevel";
+  private static final String DEFAULT_ATTRIBUTE = "default";
 
   private LanguageLevel myLanguageLevel = LanguageLevel.JDK_1_6;
   private final Project myProject;
 
   public LanguageLevelProjectExtensionImpl(final Project project) {
     myProject = project;
+    setDefault(project.isDefault() ? true : null);
   }
 
   private void readExternal(final Element element) {
-    String level = element.getAttributeValue("languageLevel");
+    String level = element.getAttributeValue(LANGUAGE_LEVEL);
     if (level == null) {
       myLanguageLevel = migrateFromIdea7(element);
     }
     else {
       myLanguageLevel = LanguageLevel.valueOf(level);
     }
+    String aDefault = element.getAttributeValue(DEFAULT_ATTRIBUTE);
+    setDefault(aDefault == null ? null : Boolean.parseBoolean(aDefault));
   }
 
   private static LanguageLevel migrateFromIdea7(Element element) {
@@ -70,7 +75,11 @@ public class LanguageLevelProjectExtensionImpl extends LanguageLevelProjectExten
   }
 
   private void writeExternal(final Element element) {
-    element.setAttribute("languageLevel", myLanguageLevel.name());
+    element.setAttribute(LANGUAGE_LEVEL, myLanguageLevel.name());
+    Boolean aBoolean = isDefault();
+    if (aBoolean != null) {
+      element.setAttribute(DEFAULT_ATTRIBUTE, Boolean.toString(aBoolean));
+    }
     writeAttributesForIdea7(element);
   }
 
diff --git a/java/java-psi-api/src/com/intellij/openapi/roots/LanguageLevelProjectExtension.java b/java/java-psi-api/src/com/intellij/openapi/roots/LanguageLevelProjectExtension.java
index e09f149927ac..dee5fb7de932 100644
--- a/java/java-psi-api/src/com/intellij/openapi/roots/LanguageLevelProjectExtension.java
+++ b/java/java-psi-api/src/com/intellij/openapi/roots/LanguageLevelProjectExtension.java
@@ -19,6 +19,7 @@ import com.intellij.openapi.components.ServiceManager;
 import com.intellij.openapi.project.Project;
 import com.intellij.pom.java.LanguageLevel;
 import org.jetbrains.annotations.NotNull;
+import org.jetbrains.annotations.Nullable;
 
 /**
  * @author Dmitry Avdeev
@@ -34,6 +35,21 @@ public abstract class LanguageLevelProjectExtension {
 
   public abstract void setLanguageLevel(@NotNull LanguageLevel languageLevel);
 
+  private Boolean myDefault;
+
+  /**
+   * Auto-detect language level from project JDK maximum possible level.
+   * @return null if the property is not set yet (e.g. after migration).
+   */
+  @Nullable
+  public Boolean isDefault() {
+    return myDefault;
+  }
+
+  public void setDefault(@Nullable Boolean value) {
+    myDefault = value;
+  }
+
   public abstract void languageLevelsChanged();
 
   /**
diff --git a/java/java-psi-api/src/com/intellij/pom/java/LanguageLevel.java b/java/java-psi-api/src/com/intellij/pom/java/LanguageLevel.java
index 258893910878..176474cbc4d3 100644
--- a/java/java-psi-api/src/com/intellij/pom/java/LanguageLevel.java
+++ b/java/java-psi-api/src/com/intellij/pom/java/LanguageLevel.java
@@ -16,6 +16,8 @@
 package com.intellij.pom.java;
 
 import com.intellij.core.JavaCoreBundle;
+import com.intellij.openapi.roots.LanguageLevelModuleExtension;
+import com.intellij.openapi.roots.LanguageLevelProjectExtension;
 import com.intellij.openapi.util.Key;
 import org.jetbrains.annotations.Nls;
 import org.jetbrains.annotations.NonNls;
@@ -24,6 +26,8 @@ import org.jetbrains.annotations.Nullable;
 
 /**
  * @author dsl
+ * @see LanguageLevelProjectExtension
+ * @see LanguageLevelModuleExtension
  */
 public enum LanguageLevel {
   JDK_1_3("Java 1.3", JavaCoreBundle.message("jdk.1.3.language.level.description")),
diff --git a/java/java-psi-api/src/messages/JavaCoreBundle.properties b/java/java-psi-api/src/messages/JavaCoreBundle.properties
index ddf3b03b0a72..c9646f45f3b0 100644
--- a/java/java-psi-api/src/messages/JavaCoreBundle.properties
+++ b/java/java-psi-api/src/messages/JavaCoreBundle.properties
@@ -1,5 +1,7 @@
 psi.error.attempt.to.edit.class.file=Cannot modify compiled element
 
+default.language.level.description=JDK default
+default.jdk.level.description=JDK default ({0})
 jdk.1.3.language.level.description=1.3 - Plain old Java
 jdk.1.4.language.level.description=1.4 - 'assert' keyword
 jdk.1.5.language.level.description=5.0 - 'enum' keyword, generics, autoboxing etc.
diff --git a/java/openapi/src/com/intellij/ide/util/projectWizard/JavaModuleBuilder.java b/java/openapi/src/com/intellij/ide/util/projectWizard/JavaModuleBuilder.java
index 02773d89f1c8..8a48d8389014 100644
--- a/java/openapi/src/com/intellij/ide/util/projectWizard/JavaModuleBuilder.java
+++ b/java/openapi/src/com/intellij/ide/util/projectWizard/JavaModuleBuilder.java
@@ -35,7 +35,6 @@ import com.intellij.openapi.vfs.LocalFileSystem;
 import com.intellij.openapi.vfs.VfsUtil;
 import com.intellij.openapi.vfs.VfsUtilCore;
 import com.intellij.openapi.vfs.VirtualFile;
-import com.intellij.pom.java.LanguageLevel;
 import org.jetbrains.annotations.NonNls;
 import org.jetbrains.annotations.NotNull;
 import org.jetbrains.annotations.Nullable;
@@ -155,8 +154,16 @@ public class JavaModuleBuilder extends ModuleBuilder implements SourcePathsBuild
   @Nullable
   @Override
   public List<Module> commit(@NotNull Project project, ModifiableModuleModel model, ModulesProvider modulesProvider) {
-    LanguageLevel defaultLevel = LanguageLevelProjectExtension.getInstance(ProjectManager.getInstance().getDefaultProject()).getLanguageLevel();
-    LanguageLevelProjectExtension.getInstance(project).setLanguageLevel(defaultLevel);
+    LanguageLevelProjectExtension extension = LanguageLevelProjectExtension.getInstance(ProjectManager.getInstance().getDefaultProject());
+    Boolean aDefault = extension.isDefault();
+    LanguageLevelProjectExtension instance = LanguageLevelProjectExtension.getInstance(project);
+    if (aDefault != null && !aDefault) {
+      instance.setLanguageLevel(extension.getLanguageLevel());
+      instance.setDefault(false);
+    }
+    else {
+      instance.setDefault(true);
+    }
     return super.commit(project, model, modulesProvider);
   }