diff --git a/Lib/test/test_compile.py b/Lib/test/test_compile.py
index 1a98d2ff9d4..0aba1c213d2 100644
--- a/Lib/test/test_compile.py
+++ b/Lib/test/test_compile.py
@@ -398,6 +398,10 @@ if 1:
         del d[..., ...]
         self.assertEqual((Ellipsis, Ellipsis) in d, False)
 
+    def test_nested_classes(self):
+        # Verify that it does not leak
+        compile("class A:\n    class B: pass", 'tmp', 'exec')
+
 def test_main():
     test_support.run_unittest(TestSpecifics)
 
diff --git a/Misc/NEWS b/Misc/NEWS
index 695e71b6f54..c914050134a 100644
--- a/Misc/NEWS
+++ b/Misc/NEWS
@@ -12,6 +12,9 @@ What's New in Python 2.5.3?
 Core and builtins
 -----------------
 
+- The compilation of a class nested in another class used to leak one
+  reference on the outer class name.
+
 - Issue #1477: With narrow Unicode builds, the unicode escape sequence
   \Uxxxxxxxx did not accept values outside the Basic Multilingual Plane.  This
   affected raw unicode literals and the 'raw-unicode-escape' codec.  Now
diff --git a/Python/compile.c b/Python/compile.c
index f40c325bbfe..d40357c4297 100644
--- a/Python/compile.c
+++ b/Python/compile.c
@@ -2061,6 +2061,7 @@ compiler_class(struct compiler *c, stmt_ty s)
 	if (!compiler_enter_scope(c, s->v.ClassDef.name, (void *)s,
 				  s->lineno))
 		return 0;
+	Py_XDECREF(c->u->u_private);
 	c->u->u_private = s->v.ClassDef.name;
 	Py_INCREF(c->u->u_private);
 	str = PyString_InternFromString("__name__");