diff --git a/3.1.16_RELEASE_NOTES.txt b/3.1.16_RELEASE_NOTES.txt
new file mode 100644
index 00000000..4a351fa5
--- /dev/null
+++ b/3.1.16_RELEASE_NOTES.txt
@@ -0,0 +1,35 @@
+In Smarty 3.1 template inheritance is a compile time process. All the extending of {block} tags 
+is done at compile time and the parent and child templates are compiled in a single compiled template.
+{include} subtemplate could also {block} tags. Such subtemplate could not compiled by it's own because
+it could be used in other context where the {block} extended with a different result. For that reasion
+the compiled code of {include} subtemplates gets also merged in compiled inheritance template.
+
+Merging the code into a single compile template has some drawbacks.
+1. You could not use variable file names in {include} Smarty would use the {include} of compilation time.
+2. You could not use individual compile_id in {include}
+3. Seperate caching of subtemplate was not possible
+4. Any change of the template directory structure between calls was not necessarily seen.
+
+Starting with 3.1.15 some of the above conditions got checked and resulted in an exception. It turned out
+that a couple of users did use some of above and now got exceptions.
+
+To resolve this starting with 3.1.16 there is a new configuration parameter $inheritance_merge_compiled_includes.
+For most backward compatibility its default setting is true.
+With this setting all {include} subtemplate will be merge into the compiled inheritance template, but the above cases
+could be rejected by exception.
+
+
+If $smarty->inheritance_merge_compiled_includes = false; {include} subtemplate will not be merged. 
+You must now manually merge all {include} subtemplate which do contain {block} tags. This is done by setting the "inline" option.
+{include file='foo.bar' inline}
+
+1. In case of a variable file name like {include file=$foo inline} you must you the variable in a compile_id  $smarty->compile_id = $foo;
+2. If you use individual compile_id in {include file='foo.tpl' compile_id=$bar inline} it must be used in the 
+   global compile_id as well  $smarty->compile_id = $foo;
+3. If call templates with different template_dir configurations and a parent could same named child template from different folders
+   you must make the folder name part of the compile_id.
+
+
+In the upcomming major release Smarty 3.2 inheritance will no longer be a compile time process. 
+All restrictions will be then removed.
+
diff --git a/change_log.txt b/change_log.txt
index a2c2aa6f..2657bbb1 100644
--- a/change_log.txt
+++ b/change_log.txt
@@ -1,4 +1,8 @@
  ===== trunk =====
+ 15.12.2013
+ - bugfix {include} with {block} tag handling (forum topic 24599, 24594, 24682) (Issue 161)
+   Read 3.1.16_RELEASE_NOTES for more details
+   
  07.11.2013
  - bugfix too restrictive handling of {include} within {block} tags. 3.1.15 did throw errors where 3.1.14 did not (forum topic 24599)
  - bugfix compiler could fail if PHP mbstring.func_overload is enabled  (Issue 164)
diff --git a/libs/Smarty.class.php b/libs/Smarty.class.php
index 897b385a..893ffb2e 100644
--- a/libs/Smarty.class.php
+++ b/libs/Smarty.class.php
@@ -299,6 +299,11 @@ class Smarty extends Smarty_Internal_TemplateBase
      * @var boolean
      */
     public $merge_compiled_includes = false;
+    /**
+     * template inheritance merge compiled includes
+     * @var boolean
+     */    
+    public $inheritance_merge_compiled_includes = true;
     /**
      * cache lifetime in seconds
      * @var integer
diff --git a/libs/sysplugins/smarty_internal_compile_block.php b/libs/sysplugins/smarty_internal_compile_block.php
index 0699aa08..ba26ed0a 100644
--- a/libs/sysplugins/smarty_internal_compile_block.php
+++ b/libs/sysplugins/smarty_internal_compile_block.php
@@ -160,6 +160,7 @@ class Smarty_Internal_Compile_Block extends Smarty_Internal_CompileBase
         if ($compiler->smarty->debugging) {
             Smarty_Internal_Debug::ignore($_tpl);
         }
+        $_tpl->tpl_vars = $compiler->template->tpl_vars;
         $_tpl->variable_filters = $compiler->template->variable_filters;
         $_tpl->properties['nocache_hash'] = $compiler->template->properties['nocache_hash'];
         $_tpl->allow_relative_path = true;
diff --git a/libs/sysplugins/smarty_internal_compile_include.php b/libs/sysplugins/smarty_internal_compile_include.php
index 7a7f960c..1ea8b577 100644
--- a/libs/sysplugins/smarty_internal_compile_include.php
+++ b/libs/sysplugins/smarty_internal_compile_include.php
@@ -85,7 +85,7 @@ class Smarty_Internal_Compile_Include extends Smarty_Internal_CompileBase
         $_caching = Smarty::CACHING_OFF;
 
         // flag if included template code should be merged into caller
-        $merge_compiled_includes = ($compiler->smarty->merge_compiled_includes || $compiler->inheritance || $_attr['inline'] === true) && !$compiler->template->source->recompiled;
+        $merge_compiled_includes = ($compiler->smarty->merge_compiled_includes ||($compiler->inheritance && $compiler->smarty->inheritance_merge_compiled_includes)|| $_attr['inline'] === true) && !$compiler->template->source->recompiled;
 
         // set default when in nocache mode
 //       if ($compiler->template->caching && ($compiler->nocache || $compiler->tag_nocache || $compiler->forceNocache == 2)) {
@@ -129,12 +129,15 @@ class Smarty_Internal_Compile_Include extends Smarty_Internal_CompileBase
         }
 
         $has_compiled_template = false;
-        if ($merge_compiled_includes) {
+        if ($merge_compiled_includes && $_attr['inline'] !== true) {
             // variable template name ?
             if ($compiler->has_variable_string || !((substr_count($include_file, '"') == 2 || substr_count($include_file, "'") == 2))
                 || substr_count($include_file, '(') != 0 || substr_count($include_file, '$_smarty_tpl->') != 0
             ) {
                 $merge_compiled_includes = false;
+                if ($compiler->inheritance && $compiler->smarty->inheritance_merge_compiled_includes) {
+                    $compiler->trigger_template_error(' variable template file names not allow within {block} tags');
+                }
             }
             // variable compile_id?
             if (isset($_attr['compile_id'])) {
@@ -142,10 +145,18 @@ class Smarty_Internal_Compile_Include extends Smarty_Internal_CompileBase
                     || substr_count($_attr['compile_id'], '(') != 0 || substr_count($_attr['compile_id'], '$_smarty_tpl->') != 0
                 ) {
                     $merge_compiled_includes = false;
+                    if ($compiler->inheritance && $compiler->smarty->inheritance_merge_compiled_includes) {
+                        $compiler->trigger_template_error(' variable compile_id not allow within {block} tags');
+                    }
                 }
             }
+        }
+        if ($merge_compiled_includes) {
             if ($compiler->template->caching && ($compiler->tag_nocache || $compiler->nocache) && $_caching != self::CACHING_NOCACHE_CODE) {
                 $merge_compiled_includes = false;
+                if ($compiler->inheritance && $compiler->smarty->inheritance_merge_compiled_includes) {
+                    $compiler->trigger_template_error(' invalid caching mode of subtemplate within {block} tags');
+                }
             }
         }
         if ($merge_compiled_includes) {
@@ -153,6 +164,7 @@ class Smarty_Internal_Compile_Include extends Smarty_Internal_CompileBase
             $uid = sha1($_compile_id);
             $tpl_name = null;
             $nocache = false;
+            $_smarty_tpl = $compiler->template;
             eval("\$tpl_name = $include_file;");
             if (!isset($compiler->smarty->merged_templates_func[$tpl_name][$uid]) || $compiler->inheritance) {
                 $tpl = new $compiler->smarty->template_class ($tpl_name, $compiler->smarty, $compiler->template, $compiler->template->cache_id, $compiler->template->compile_id);