diff --git a/src/aeso_ast_infer_types.erl b/src/aeso_ast_infer_types.erl
index 7f6bc2b..c88349b 100644
--- a/src/aeso_ast_infer_types.erl
+++ b/src/aeso_ast_infer_types.erl
@@ -1133,9 +1133,11 @@ infer_case(Env, Attrs, Pattern, ExprType, Branch, SwitchType) ->
 %% NewStmts = infer_block(Env, Attrs, Stmts, BlockType)
 infer_block(_Env, Attrs, [], BlockType) ->
     error({impossible, empty_block, Attrs, BlockType});
-infer_block(Env, Attrs, [Def={letfun, _, _, _, _, _}|Rest], BlockType) ->
-    NewDef = infer_letfun(Env, Def),
-    [NewDef|infer_block(Env, Attrs, Rest, BlockType)];
+infer_block(Env, Attrs, [Def={letfun, Ann, _, _, _, _}|Rest], BlockType) ->
+    {{Name, TypeSig}, LetFun} = infer_letfun(Env, Def),
+    FunT = freshen_type(typesig_to_fun_t(TypeSig)),
+    NewE = bind_var({id, Ann, Name}, FunT, Env),
+    [LetFun|infer_block(NewE, Attrs, Rest, BlockType)];
 infer_block(Env, Attrs, [Def={letrec, _, _}|Rest], BlockType) ->
     NewDef = infer_letrec(Env, Def),
     [NewDef|infer_block(Env, Attrs, Rest, BlockType)];
diff --git a/src/aeso_ast_to_fcode.erl b/src/aeso_ast_to_fcode.erl
index 0e06cac..76f64ad 100644
--- a/src/aeso_ast_to_fcode.erl
+++ b/src/aeso_ast_to_fcode.erl
@@ -722,6 +722,9 @@ decision_tree_to_fcode({'if', A, Then, Else}) ->
 -spec stmts_to_fcode(env(), [aeso_syntax:stmt()]) -> fexpr().
 stmts_to_fcode(Env, [{letval, _, {typed, _, {id, _, X}, _}, _, Expr} | Stmts]) ->
     {'let', X, expr_to_fcode(Env, Expr), stmts_to_fcode(bind_var(Env, X), Stmts)};
+stmts_to_fcode(Env, [{letfun, Ann, {id, _, X}, Args, _Type, Expr} | Stmts]) ->
+    {'let', X, expr_to_fcode(Env, {lam, Ann, Args, Expr}),
+               stmts_to_fcode(bind_var(Env, X), Stmts)};
 stmts_to_fcode(Env, [Expr]) ->
     expr_to_fcode(Env, Expr);
 stmts_to_fcode(Env, [Expr | Stmts]) ->
diff --git a/src/aeso_ast_to_icode.erl b/src/aeso_ast_to_icode.erl
index 7ff8d6a..ca71d04 100644
--- a/src/aeso_ast_to_icode.erl
+++ b/src/aeso_ast_to_icode.erl
@@ -530,6 +530,8 @@ ast_body({switch,_,A,Cases}, Icode) ->
 ast_body({block,As,[{letval,_,Pat,_,E}|Rest]}, Icode) ->
     #switch{expr=ast_body(E, Icode),
             cases=[{ast_body(Pat, Icode),ast_body({block,As,Rest}, Icode)}]};
+ast_body({block, As, [{letfun, Ann, F, Args, _Type, Expr} | Rest]}, Icode) ->
+    ast_body({block, As, [{letval, Ann, F, unused, {lam, Ann, Args, Expr}} | Rest]}, Icode);
 ast_body({block,_,[]}, _Icode) ->
     #tuple{cpts=[]};
 ast_body({block,_,[E]}, Icode) ->
diff --git a/test/aeso_compiler_tests.erl b/test/aeso_compiler_tests.erl
index fb630b7..dffb324 100644
--- a/test/aeso_compiler_tests.erl
+++ b/test/aeso_compiler_tests.erl
@@ -86,6 +86,7 @@ compilable_contracts() ->
      "dutch_auction",
      "environment",
      "factorial",
+     "functions",
      "fundme",
      "identity",
      "maps",
diff --git a/test/contracts/functions.aes b/test/contracts/functions.aes
new file mode 100644
index 0000000..058950c
--- /dev/null
+++ b/test/contracts/functions.aes
@@ -0,0 +1,15 @@
+contract Functions =
+  private function curry(f : ('a, 'b) => 'c) =
+    (x) => (y) => f(x, y)
+  private function map(f : 'a => 'b, xs : list('a)) =
+    switch(xs)
+      [] => []
+      x :: xs => f(x) :: map(f, xs)
+  private function map'() = map
+  private function plus(x, y) = x + y
+  function test1(xs : list(int)) = map(curry(plus)(5), xs)
+  function test2(xs : list(int)) = map'()(((x) => (y) => ((x, y) => x + y)(x, y))(100), xs)
+  function test3(xs : list(int)) =
+    let m(f, xs) = map(f, xs)
+    m((x) => x + 1, xs)
+