diff --git a/src/compiler/diagnosticInformationMap.generated.ts b/src/compiler/diagnosticInformationMap.generated.ts
index 17dbae83bf2..4520aaffc02 100644
--- a/src/compiler/diagnosticInformationMap.generated.ts
+++ b/src/compiler/diagnosticInformationMap.generated.ts
@@ -144,6 +144,7 @@ module ts {
         Array_element_destructuring_pattern_expected: { code: 1181, category: DiagnosticCategory.Error, key: "Array element destructuring pattern expected." },
         A_destructuring_declaration_must_have_an_initializer: { code: 1182, category: DiagnosticCategory.Error, key: "A destructuring declaration must have an initializer." },
         Destructuring_declarations_are_not_allowed_in_ambient_contexts: { code: 1183, category: DiagnosticCategory.Error, key: "Destructuring declarations are not allowed in ambient contexts." },
+        Modifiers_cannot_appear_here: { code: 1184, category: DiagnosticCategory.Error, key: "Modifiers cannot appear here." },
         Duplicate_identifier_0: { code: 2300, category: DiagnosticCategory.Error, key: "Duplicate identifier '{0}'." },
         Initializer_of_instance_member_variable_0_cannot_reference_identifier_1_declared_in_the_constructor: { code: 2301, category: DiagnosticCategory.Error, key: "Initializer of instance member variable '{0}' cannot reference identifier '{1}' declared in the constructor." },
         Static_members_cannot_reference_class_type_parameters: { code: 2302, category: DiagnosticCategory.Error, key: "Static members cannot reference class type parameters." },
diff --git a/src/compiler/diagnosticMessages.json b/src/compiler/diagnosticMessages.json
index a06b71d460e..7aacd21cea4 100644
--- a/src/compiler/diagnosticMessages.json
+++ b/src/compiler/diagnosticMessages.json
@@ -568,6 +568,10 @@
         "category": "Error",
         "code": 1183
     },
+    "Modifiers cannot appear here.": {
+        "category": "Error",
+        "code": 1184
+    },
 
     "Duplicate identifier '{0}'.": {
         "category": "Error",
diff --git a/src/compiler/parser.ts b/src/compiler/parser.ts
index 3e8301ef7f7..9552e0f9cc9 100644
--- a/src/compiler/parser.ts
+++ b/src/compiler/parser.ts
@@ -3866,12 +3866,45 @@ module ts {
                     }
                     // Else parse it like identifier - fall through
                 default:
+                    if (isModifier(token)) {
+                        var result = tryParse(parseVariableStatementOrFunctionDeclarationWithModifiers);
+                        if (result) {
+                            return result;
+                        }
+                    }
+
                     return isLabel()
                         ? parseLabeledStatement()
                         : parseExpressionStatement();
             }
         }
 
+        function parseVariableStatementOrFunctionDeclarationWithModifiers(): FunctionDeclaration | VariableStatement {
+            var start = scanner.getStartPos();
+            var modifiers = parseModifiers();
+            switch (token) {
+                case SyntaxKind.ConstKeyword:
+                    var nextTokenIsEnum = lookAhead(nextTokenIsEnumKeyword)
+                    if (nextTokenIsEnum) {
+                        return undefined;
+                    }
+                    return parseVariableStatement(start, modifiers);
+
+                case SyntaxKind.LetKeyword:
+                    if (!isLetDeclaration()) {
+                        return undefined;
+                    }
+                    return parseVariableStatement(start, modifiers);
+
+                case SyntaxKind.VarKeyword:
+                    return parseVariableStatement(start, modifiers);
+                case SyntaxKind.FunctionKeyword:
+                    return parseFunctionDeclaration(start, modifiers);
+            }
+
+            return undefined;
+        }
+
         function parseFunctionBlockOrSemicolon(isGenerator: boolean): Block {
             if (token === SyntaxKind.OpenBraceToken) {
                 return parseFunctionBlock(isGenerator, /*ignoreMissingOpenBrace:*/ false);
@@ -4600,6 +4633,7 @@ module ts {
         // We're automatically in an ambient context if this is a .d.ts file.
         var inAmbientContext = fileExtensionIs(file.filename, ".d.ts");
         var inFunctionBlock = false;
+        var inBlock = false;
         var parent: Node;
         visitNode(file);
 
@@ -4614,6 +4648,10 @@ module ts {
                 if (isFunctionBlock(node)) {
                     inFunctionBlock = true;
                 }
+                var savedInBlock = inBlock;
+                if (node.kind === SyntaxKind.Block || node.kind === SyntaxKind.TryBlock || node.kind === SyntaxKind.FinallyBlock) {
+                    inBlock = true;
+                }
 
                 var savedInAmbientContext = inAmbientContext
                 if (node.flags & NodeFlags.Ambient) {
@@ -4624,6 +4662,7 @@ module ts {
 
                 inAmbientContext = savedInAmbientContext;
                 inFunctionBlock = savedInFunctionBlock;
+                inBlock = savedInBlock;
             }
 
             parent = savedParent;
@@ -5085,7 +5124,8 @@ module ts {
         }
 
         function checkFunctionDeclaration(node: FunctionLikeDeclaration) {
-            return checkAnySignatureDeclaration(node) ||
+            return checkForDisallowedModifiersInBlock(node) ||
+                checkAnySignatureDeclaration(node) ||
                 checkFunctionName(node.name) ||
                 checkForBodyInAmbientContext(node.body, /*isConstructor:*/ false) ||
                 checkForGenerator(node);
@@ -5820,10 +5860,17 @@ module ts {
         }
 
         function checkVariableStatement(node: VariableStatement) {
-            return checkVariableDeclarations(node.declarations) ||
+            return checkForDisallowedModifiersInBlock(node) ||
+                checkVariableDeclarations(node.declarations) ||
                 checkForDisallowedLetOrConstStatement(node);
         }
 
+        function checkForDisallowedModifiersInBlock(node: Node) {
+            if (inBlock && node.modifiers) {
+                return grammarErrorOnFirstToken(node, Diagnostics.Modifiers_cannot_appear_here);
+            }
+        }
+
         function checkForDisallowedLetOrConstStatement(node: VariableStatement) {
             if (!allowLetAndConstDeclarations(node.parent)) {
                 if (isLet(node)) {
diff --git a/tests/baselines/reference/parserModifierOnStatementInBlock2.errors.txt b/tests/baselines/reference/parserModifierOnStatementInBlock2.errors.txt
index 7155d5cfe42..b07d7d9aad1 100644
--- a/tests/baselines/reference/parserModifierOnStatementInBlock2.errors.txt
+++ b/tests/baselines/reference/parserModifierOnStatementInBlock2.errors.txt
@@ -1,13 +1,10 @@
-tests/cases/conformance/parser/ecmascript5/ErrorRecovery/parserModifierOnStatementInBlock2.ts(2,12): error TS1005: ';' expected.
-tests/cases/conformance/parser/ecmascript5/ErrorRecovery/parserModifierOnStatementInBlock2.ts(2,4): error TS2304: Cannot find name 'declare'.
+tests/cases/conformance/parser/ecmascript5/ErrorRecovery/parserModifierOnStatementInBlock2.ts(2,4): error TS1184: Modifiers cannot appear here.
 
 
-==== tests/cases/conformance/parser/ecmascript5/ErrorRecovery/parserModifierOnStatementInBlock2.ts (2 errors) ====
+==== tests/cases/conformance/parser/ecmascript5/ErrorRecovery/parserModifierOnStatementInBlock2.ts (1 errors) ====
     {
        declare var x = this;
-               ~~~
-!!! error TS1005: ';' expected.
        ~~~~~~~
-!!! error TS2304: Cannot find name 'declare'.
+!!! error TS1184: Modifiers cannot appear here.
     }
     
\ No newline at end of file