diff --git a/lib/index.js b/lib/index.js
index 25883cb..ea7c0ba 100644
--- a/lib/index.js
+++ b/lib/index.js
@@ -25,7 +25,15 @@ module.exports = function reshapeLayouts (options = {}) {
 function handleExtendsNodes (tree, options, ctx) {
   return tree.reduce((m, node) => {
     // if it's not an "extends" tag, move on
-    if (node.name !== 'extends') { m.push(node); return m }
+    if (node.name !== 'extends') {
+      if (Array.isArray(node.content)) {
+        node.content = handleExtendsNodes(node.content, options, ctx)
+        m.push(node)
+      } else {
+        m.push(node)
+      }
+      return m
+    }
 
     // if the extends tag has no "src", throw an error
     if (!node.attrs || !node.attrs.src) {
@@ -51,7 +59,7 @@ function handleExtendsNodes (tree, options, ctx) {
     }
 
     // merge the contents of the current node into the layout
-    m = m.concat(mergeExtendsAndLayout(layoutTree, node.content, ctx))
+    m = m.concat(mergeExtendsAndLayout(layoutTree, handleExtendsNodes(node.content, options, ctx), ctx))
     return m
   }, [])
 }
diff --git a/test/index.js b/test/index.js
index 9ca97df..70bf302 100644
--- a/test/index.js
+++ b/test/index.js
@@ -194,6 +194,27 @@ test('uses the correct source location for layouts and templates', (t) => {
   }
 })
 
+test('recursive layout extension', (t) => {
+  mfs.writeFileSync('./layout.html', '<div class="container"><block name="content"><p>default</p></block></div>')
+  mfs.writeFileSync('./component.html', '<div><p>this is a very interesting component</p><block name="content">this is default content</block></div>')
+
+  return init(`<extends src="layout.html">
+    <block name="content">
+        <p>blah</p>
+        <extends src="component.html">
+          <block name="content">
+            Hello!
+          </block>
+        </extends>
+    </block>
+  </extends>
+  `).then((html) => {
+    t.truthy((html) === cleanHtml(`<div class="container"><p>blah</p><div><p>this is a very interesting component</p>
+            Hello!
+          </div></div>`))
+  })
+})
+
 function assertError (t, promise, expectedErrorMessage) {
   return promise
     .catch((error) => error.message)