diff --git a/Misc/NEWS b/Misc/NEWS
index cabee7f6de2..c6c401f5e46 100644
--- a/Misc/NEWS
+++ b/Misc/NEWS
@@ -12,6 +12,9 @@ What's New in Python 2.6 beta 3?
 Core and Builtins
 -----------------
 
+- Issue #3205: When iterating over a BZ2File fails allocating memory, raise
+  a MemoryError rather than silently stop the iteration.
+
 - Issue #1481296: Make long(float('nan')) and int(float('nan')) raise
   ValueError consistently across platforms.
 
diff --git a/Modules/bz2module.c b/Modules/bz2module.c
index 16201bd6486..39292197d8e 100644
--- a/Modules/bz2module.c
+++ b/Modules/bz2module.c
@@ -416,6 +416,7 @@ Util_ReadAhead(BZ2FileObject *f, int bufsize)
 		return 0;
 	}
 	if ((f->f_buf = PyMem_Malloc(bufsize)) == NULL) {
+		PyErr_NoMemory();
 		return -1;
 	}
 	Py_BEGIN_ALLOW_THREADS