--- a/langtools/src/share/classes/com/sun/tools/javac/comp/LambdaToMethod.java	Wed Apr 30 18:19:23 2014 -0700
+++ b/langtools/src/share/classes/com/sun/tools/javac/comp/LambdaToMethod.java	Wed Apr 30 23:02:14 2014 -0700
@@ -36,6 +36,7 @@
 import com.sun.tools.javac.code.Symbol.ClassSymbol;
 import com.sun.tools.javac.code.Symbol.DynamicMethodSymbol;
 import com.sun.tools.javac.code.Symbol.MethodSymbol;
+import com.sun.tools.javac.code.Symbol.TypeSymbol;
 import com.sun.tools.javac.code.Symbol.VarSymbol;
 import com.sun.tools.javac.code.Symtab;
 import com.sun.tools.javac.code.Type;
@@ -50,8 +51,10 @@
 
 import java.util.EnumMap;
 import java.util.HashMap;
+import java.util.HashSet;
 import java.util.LinkedHashMap;
 import java.util.Map;
+import java.util.Set;
 
 import static com.sun.tools.javac.comp.LambdaToMethod.LambdaSymbolKind.*;
 import static com.sun.tools.javac.code.Flags.*;
@@ -1280,7 +1283,10 @@
 
         @Override
         public void visitNewClass(JCNewClass tree) {
-            if (lambdaNewClassFilter(context(), tree)) {
+            TypeSymbol def = tree.type.tsym;
+            boolean inReferencedClass = currentlyInClass(def);
+            boolean isLocal = def.isLocal();
+            if ((inReferencedClass && isLocal || lambdaNewClassFilter(context(), tree))) {
                 TranslationContext<?> localContext = context();
                 while (localContext != null) {
                     if (localContext.tree.getTag() == LAMBDA) {
@@ -1290,16 +1296,16 @@
                     localContext = localContext.prev;
                 }
             }
-            if (context() != null && tree.type.tsym.owner.kind == MTH) {
+            if (context() != null && !inReferencedClass && isLocal) {
                 LambdaTranslationContext lambdaContext = (LambdaTranslationContext)context();
-                captureLocalClassDefs(tree.type.tsym, lambdaContext);
+                captureLocalClassDefs(def, lambdaContext);
             }
             super.visitNewClass(tree);
         }
         //where
             void captureLocalClassDefs(Symbol csym, final LambdaTranslationContext lambdaContext) {
                 JCClassDecl localCDef = localClassDefs.get(csym);
-                if (localCDef != null && localCDef.pos < lambdaContext.tree.pos) {
+                if (localCDef != null && lambdaContext.freeVarProcessedLocalClasses.add(csym)) {
                     BasicFreeVarCollector fvc = lower.new BasicFreeVarCollector() {
                         @Override
                         void addFreeVars(ClassSymbol c) {
@@ -1325,6 +1331,18 @@
                     fvc.scan(localCDef);
                 }
         }
+        //where
+        boolean currentlyInClass(Symbol csym) {
+            for (Frame frame : frameStack) {
+                if (frame.tree.hasTag(JCTree.Tag.CLASSDEF)) {
+                    JCClassDecl cdef = (JCClassDecl) frame.tree;
+                    if (cdef.sym == csym) {
+                        return true;
+                    }
+                }
+            }
+            return false;
+        }
 
         /**
          * Method references to local class constructors, may, if the local
@@ -1750,6 +1768,11 @@
 
             List<JCVariableDecl> syntheticParams;
 
+            /**
+             * to prevent recursion, track local classes processed
+             */
+            final Set<Symbol> freeVarProcessedLocalClasses;
+
             LambdaTranslationContext(JCLambda tree) {
                 super(tree);
                 Frame frame = frameStack.head;
@@ -1779,6 +1802,8 @@
                 translatedSymbols.put(CAPTURED_VAR, new LinkedHashMap<Symbol, Symbol>());
                 translatedSymbols.put(CAPTURED_THIS, new LinkedHashMap<Symbol, Symbol>());
                 translatedSymbols.put(TYPE_VAR, new LinkedHashMap<Symbol, Symbol>());
+
+                freeVarProcessedLocalClasses = new HashSet<>();
             }
 
              /**