diff --git a/src/Mustache/Compiler.php b/src/Mustache/Compiler.php
index e25bd8c..334fd55 100644
--- a/src/Mustache/Compiler.php
+++ b/src/Mustache/Compiler.php
@@ -19,6 +19,7 @@ class Mustache_Compiler
     private $pragmas;
     private $defaultPragmas = array();
     private $sections;
+    private $blocks;
     private $source;
     private $indentNextLine;
     private $customEscape;
@@ -43,6 +44,7 @@ class Mustache_Compiler
     {
         $this->pragmas         = $this->defaultPragmas;
         $this->sections        = array();
+        $this->blocks          = array();
         $this->source          = $source;
         $this->indentNextLine  = true;
         $this->customEscape    = $customEscape;
@@ -195,6 +197,7 @@ class Mustache_Compiler
                 return $buffer;
             }
         %s
+        %s
         }';
 
     const KLASS_NO_LAMBDAS = '<?php
@@ -225,17 +228,18 @@ class Mustache_Compiler
     {
         $code     = $this->walk($tree);
         $sections = implode("\n", $this->sections);
-        $klass    = empty($this->sections) ? self::KLASS_NO_LAMBDAS : self::KLASS;
+        $blocks   = implode("\n", $this->blocks);
+        $klass    = empty($this->sections) && empty($this->blocks) ? self::KLASS_NO_LAMBDAS : self::KLASS;
 
         $callable = $this->strictCallables ? $this->prepare(self::STRICT_CALLABLE) : '';
 
-        return sprintf($this->prepare($klass, 0, false, true), $name, $callable, $code, $sections);
+        return sprintf($this->prepare($klass, 0, false, true), $name, $callable, $code, $sections, $blocks);
     }
 
     const BLOCK_VAR = '
-        $value = $this->resolveValue($context->findInBlock(%s), $context, $indent);
-        if ($value && !is_array($value) && !is_object($value)) {
-            $buffer .= $value;
+        $blockFunction = $context->findInBlock(%s);
+        if (is_callable($blockFunction)) {
+            $buffer .= call_user_func($blockFunction, $context);
         } else {
             %s
         }
@@ -258,13 +262,12 @@ class Mustache_Compiler
     {
         $id = var_export($id, true);
 
-        return sprintf($this->prepare(self::BLOCK_VAR, $level), $id, $this->walk($nodes, 2));
+        return sprintf($this->prepare(self::BLOCK_VAR, $level), $id, $this->walk($nodes, $level));
     }
 
     const BLOCK_ARG = '
         // %s block_arg
-        $value = $this->section%s($context, \'\', true);
-        $newContext[%s] = %s$value;
+        $newContext[%s] = array($this, \'block%s\');
     ';
 
     /**
@@ -282,10 +285,38 @@ class Mustache_Compiler
      */
     private function blockArg($nodes, $id, $start, $end, $otag, $ctag, $level)
     {
-        $key = $this->section($nodes, $id, array(), $start, $end, $otag, $ctag, $level, true);
-        $id  = var_export($id, true);
+        $key = $this->block($nodes);
+        $keystr = var_export($key, true);
+        $id = var_export($id, true);
 
-        return sprintf($this->prepare(self::BLOCK_ARG, $level), $id, $key, $id, $this->flushIndent());
+        return sprintf($this->prepare(self::BLOCK_ARG, 1), $keystr, $id, $key);
+    }
+
+    const BLOCK_FUNCTION = 'public function block%s($context) {
+            $indent = $buffer = \'\';
+
+            %s
+
+            return $buffer;
+        }';
+
+    /**
+     * Generate Mustache Template inheritance block function PHP source.
+     *
+     * @param array  $nodes Array of child tokens
+     *
+     * @return string key of new block function
+     */
+    private function block($nodes)
+    {
+        $code = $this->walk($nodes, 1);
+
+        $key = ucfirst(md5($code));
+
+        if (!isset($this->blocks[$key])) {
+            $this->blocks[$key] = sprintf($this->prepare(self::BLOCK_FUNCTION, 1), $key, $code);
+        }
+        return $key;
     }
 
     const SECTION_CALL = '
diff --git a/test/Mustache/Test/Functional/InheritanceTest.php b/test/Mustache/Test/Functional/InheritanceTest.php
index 122ed31..598e798 100644
--- a/test/Mustache/Test/Functional/InheritanceTest.php
+++ b/test/Mustache/Test/Functional/InheritanceTest.php
@@ -433,6 +433,57 @@ class Mustache_Test_Functional_InheritanceTest extends PHPUnit_Framework_TestCas
         $this->assertEquals('default content', $tpl->render($data));
     }
 
+    public function testInheritanceWithLazyEvaluation()
+    {
+        $partials = array(
+            'parent' => '{{#items}}{{$value}}ignored{{/value}}{{/items}}',
+        );
+
+        $this->mustache->setPartials($partials);
+
+        $tpl = $this->mustache->loadTemplate(
+            '{{<parent}}{{$value}}<{{ . }}>{{/value}}{{/parent}}'
+        );
+
+        $data = array('items' => array(1, 2, 3));
+
+        $this->assertEquals('<1><2><3>', $tpl->render($data));
+    }
+
+    public function testInheritanceWithLazyEvaluationWhitespaceIgnored()
+    {
+        $partials = array(
+            'parent' => '{{#items}}{{$value}}\n\nignored\n\n{{/value}}{{/items}}',
+        );
+
+        $this->mustache->setPartials($partials);
+
+        $tpl = $this->mustache->loadTemplate(
+            '{{<parent}}\n\n\n{{$value}}<{{ . }}>{{/value}}\n\n{{/parent}}'
+        );
+
+        $data = array('items' => array(1, 2, 3));
+
+        $this->assertEquals('<1><2><3>', $tpl->render($data));
+    }
+
+    public function testInheritanceWithLazyEvaluationAndSections()
+    {
+        $partials = array(
+            'parent' => '{{#items}}{{$value}}\n\nignored {{.}} {{#more}} there is more {{/more}}\n\n{{/value}}{{/items}}',
+        );
+
+        $this->mustache->setPartials($partials);
+
+        $tpl = $this->mustache->loadTemplate(
+            '{{<parent}}\n\n\n{{$value}}<{{ . }}>{{#more}} there is less {{/more}}{{/value}}\n\n{{/parent}}'
+        );
+
+        $data = array('items' => array(1, 2, 3), 'more' => 'stuff');
+
+        $this->assertEquals('<1> there is less <2> there is less <3> there is less ', $tpl->render($data));
+    }
+
     /**
      * @dataProvider getIllegalInheritanceExamples
      * @expectedException Mustache_Exception_SyntaxException