diff --git a/compile/interface/src/main/scala/xsbt/API.scala b/compile/interface/src/main/scala/xsbt/API.scala
index b64770cb5..b20219823 100644
--- a/compile/interface/src/main/scala/xsbt/API.scala
+++ b/compile/interface/src/main/scala/xsbt/API.scala
@@ -72,9 +72,9 @@ final class API(val global: CallbackGlobal) extends Compat
 
 	// call back to the xsbti.SafeLazy class in main sbt code to construct a SafeLazy instance
 	//   we pass a thunk, whose class is loaded by the interface class loader (this class's loader)
-	//   SafeLazy ensures that once the value is forced, the thunk is nulled out and so 
+	//   SafeLazy ensures that once the value is forced, the thunk is nulled out and so
 	//   references to the thunk's classes are not retained.  Specifically, it allows the interface classes
-	//   (those in this subproject) to be garbage collected after compilation. 
+	//   (those in this subproject) to be garbage collected after compilation.
 	private[this] val safeLazy = Class.forName("xsbti.SafeLazy").getMethod("apply", classOf[xsbti.F0[_]])
 	private def lzy[S <: AnyRef](s: => S): xsbti.api.Lazy[S] =
 	{
@@ -196,7 +196,7 @@ final class API(val global: CallbackGlobal) extends Compat
 		case Nullary(un) => un
 		case _ => t
 	}
-		
+
 	private def typeDef(in: Symbol, s: Symbol): xsbti.api.TypeMember =
 	{
 		val (typeParams, tpe) =
@@ -312,9 +312,13 @@ final class API(val global: CallbackGlobal) extends Compat
 	private def processType(in: Symbol, t: Type): xsbti.api.Type = typeCache.getOrElseUpdate((in, t), makeType(in, t))
 	private def makeType(in: Symbol, t: Type): xsbti.api.Type =
 	{
-		def dealias(t: Type) = t match { case TypeRef(_, sym, _) if sym.isAliasType => t.normalize; case _ => t }
 
-		dealias(t) match
+		val dealiased = t match {
+			case TypeRef(_, sym, _) if sym.isAliasType => t.dealias
+			case _ => t
+		}
+
+		dealiased match
 		{
 			case NoPrefix => Constants.emptyType
 			case ThisType(sym) => new xsbti.api.Singleton(thisPath(sym))
diff --git a/sbt/src/sbt-test/source-dependencies/abstract-type-override/build.sbt b/sbt/src/sbt-test/source-dependencies/abstract-type-override/build.sbt
new file mode 100644
index 000000000..92d209377
--- /dev/null
+++ b/sbt/src/sbt-test/source-dependencies/abstract-type-override/build.sbt
@@ -0,0 +1,7 @@
+InputKey[Unit]("check-number-of-compiler-iterations") <<= inputTask { (argTask: TaskKey[Seq[String]]) =>
+  (argTask, compile in Compile) map { (args: Seq[String], a: sbt.inc.Analysis) =>
+    assert(args.size == 1)
+    val expectedIterationsNumber = args(0).toInt
+    assert(a.compilations.allCompilations.size == expectedIterationsNumber, "a.compilations.allCompilations.size = %d (expected %d)".format(a.compilations.allCompilations.size, expectedIterationsNumber))
+  }
+}
diff --git a/sbt/src/sbt-test/source-dependencies/abstract-type-override/changes/Bar1.scala b/sbt/src/sbt-test/source-dependencies/abstract-type-override/changes/Bar1.scala
new file mode 100644
index 000000000..fb8320f6e
--- /dev/null
+++ b/sbt/src/sbt-test/source-dependencies/abstract-type-override/changes/Bar1.scala
@@ -0,0 +1,4 @@
+object Bar {
+  def bar: Outer.TypeInner = null
+  // comment to trigger recompilation
+}
diff --git a/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Bar.scala b/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Bar.scala
new file mode 100644
index 000000000..93e2de3bc
--- /dev/null
+++ b/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Bar.scala
@@ -0,0 +1,3 @@
+object Bar {
+  def bar: Outer.TypeInner = null
+}
diff --git a/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Foo.scala b/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Foo.scala
new file mode 100644
index 000000000..44e7145e1
--- /dev/null
+++ b/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Foo.scala
@@ -0,0 +1,5 @@
+object Outer {
+  class Inner { type Xyz }
+
+  type TypeInner = Inner { type Xyz = Int }
+}
diff --git a/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Impl.scala b/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Impl.scala
new file mode 100644
index 000000000..b691898dd
--- /dev/null
+++ b/sbt/src/sbt-test/source-dependencies/abstract-type-override/src/main/scala/Impl.scala
@@ -0,0 +1,3 @@
+class Impl {
+  def bleep = Bar.bar
+}
diff --git a/sbt/src/sbt-test/source-dependencies/abstract-type-override/test b/sbt/src/sbt-test/source-dependencies/abstract-type-override/test
new file mode 100644
index 000000000..b0bec415e
--- /dev/null
+++ b/sbt/src/sbt-test/source-dependencies/abstract-type-override/test
@@ -0,0 +1,14 @@
+# Test for separate compilation and proper value of
+# the OVERRIDE flag when abstract types, type alias
+# and structural type are involved
+# See https://github.com/sbt/sbt/issues/726 for details
+
+# introduces first compile iteration
+> compile
+# this change adds a comment and does not change api so introduces
+# only one additional compile iteration
+$ copy-file changes/Bar1.scala src/main/scala/Bar.scala
+# second iteration
+#> compile
+# check if there are only two compile iterations performed
+> check-number-of-compiler-iterations 2