diff --git a/gcc/cp/ChangeLog b/gcc/cp/ChangeLog
index b348c0d1349..09b2e08f0a5 100644
--- a/gcc/cp/ChangeLog
+++ b/gcc/cp/ChangeLog
@@ -1,3 +1,9 @@
+2008-04-21  Jason Merrill  <jason@redhat.com>
+
+	PR c++/35678
+	* pt.c (template_template_parm_bindings_ok_p): Set 
+	processing_template_decl while in this function.
+
 2008-04-18  Kris Van Hees <kris.van.hees@oracle.com>
 
 	* cvt.c (type_promotes_to): Support char16_t and char32_t.
diff --git a/gcc/cp/pt.c b/gcc/cp/pt.c
index 40662d91668..e55ce97b6a7 100644
--- a/gcc/cp/pt.c
+++ b/gcc/cp/pt.c
@@ -4814,6 +4814,10 @@ bool
 template_template_parm_bindings_ok_p (tree tparms, tree targs)
 {
   int i, ntparms = TREE_VEC_LENGTH (tparms);
+  bool ret = true;
+
+  /* We're dealing with template parms in this process.  */
+  ++processing_template_decl;
 
   targs = INNERMOST_TEMPLATE_ARGS (targs);
 
@@ -4864,13 +4868,18 @@ template_template_parm_bindings_ok_p (tree tparms, tree targs)
 			tf_none,
 			tparm,
 			targs))
-		return false;
+		{
+		  ret = false;
+		  goto out;
+		}
 	    }
 	}
     }
 
-  /* Everything is okay.  */
-  return true;
+ out:
+
+  --processing_template_decl;
+  return ret;
 }
 
 /* Convert the indicated template ARG as necessary to match the
diff --git a/gcc/testsuite/ChangeLog b/gcc/testsuite/ChangeLog
index 02e190f23b0..dca56d962bb 100644
--- a/gcc/testsuite/ChangeLog
+++ b/gcc/testsuite/ChangeLog
@@ -1,3 +1,8 @@
+2008-04-21  Jason Merrill  <jason@redhat.com>
+
+	PR c++/35678
+	* g++.dg/template/ttp27.C: New.
+
 2008-04-21  Tom Tromey  <tromey@redhat.com>
 
 	PR libcpp/33415:
diff --git a/gcc/testsuite/g++.dg/template/ttp27.C b/gcc/testsuite/g++.dg/template/ttp27.C
new file mode 100644
index 00000000000..f693690852b
--- /dev/null
+++ b/gcc/testsuite/g++.dg/template/ttp27.C
@@ -0,0 +1,6 @@
+// PR c++/35678
+
+template<typename T, T> struct A;
+template<typename> struct B; 
+template<template<typename T, T> class U> struct B<U<char, 'h'> > {};
+B<A<char,'h'> > x;