diff --git a/src/compiler/checker.ts b/src/compiler/checker.ts
index a297646d887c3..5525ff30ddab7 100644
--- a/src/compiler/checker.ts
+++ b/src/compiler/checker.ts
@@ -10482,21 +10482,6 @@ namespace ts {
             return result;
         }
 
-        function isPossiblyReferencedInConditionalType(tp: TypeParameter, node: Node) {
-            if (isTypeParameterPossiblyReferenced(tp, node)) {
-                return true;
-            }
-            while (node) {
-                if (node.kind === SyntaxKind.ConditionalType) {
-                    if (isTypeParameterPossiblyReferenced(tp, (<ConditionalTypeNode>node).extendsType)) {
-                        return true;
-                    }
-                }
-                node = node.parent;
-            }
-            return false;
-        }
-
         function getTypeFromConditionalTypeNode(node: ConditionalTypeNode): Type {
             const links = getNodeLinks(node);
             if (!links.resolvedType) {
@@ -10504,7 +10489,7 @@ namespace ts {
                 const aliasSymbol = getAliasSymbolForTypeNode(node);
                 const aliasTypeArguments = getTypeArgumentsForAliasSymbol(aliasSymbol);
                 const allOuterTypeParameters = getOuterTypeParameters(node, /*includeThisTypes*/ true);
-                const outerTypeParameters = aliasTypeArguments ? allOuterTypeParameters : filter(allOuterTypeParameters, tp => isPossiblyReferencedInConditionalType(tp, node));
+                const outerTypeParameters = aliasTypeArguments ? allOuterTypeParameters : filter(allOuterTypeParameters, tp => isTypeParameterPossiblyReferenced(tp, node));
                 const root: ConditionalRoot = {
                     node,
                     checkType,
@@ -11198,9 +11183,12 @@ namespace ts {
             // type parameter, or if the node contains type queries, we consider the type parameter possibly referenced.
             if (tp.symbol && tp.symbol.declarations && tp.symbol.declarations.length === 1) {
                 const container = tp.symbol.declarations[0].parent;
-                if (findAncestor(node, n => n.kind === SyntaxKind.Block ? "quit" : n === container)) {
-                    return !!forEachChild(node, containsReference);
+                for (let n = node; n !== container; n = n.parent) {
+                    if (!n || n.kind === SyntaxKind.Block || n.kind === SyntaxKind.ConditionalType && forEachChild((<ConditionalTypeNode>n).extendsType, containsReference)) {
+                        return true;
+                    }
                 }
+                return !!forEachChild(node, containsReference);
             }
             return true;
             function containsReference(node: Node): boolean {
diff --git a/tests/baselines/reference/conditionalTypes2.errors.txt b/tests/baselines/reference/conditionalTypes2.errors.txt
index f17a55dd61c6f..4093bf46fb0ee 100644
--- a/tests/baselines/reference/conditionalTypes2.errors.txt
+++ b/tests/baselines/reference/conditionalTypes2.errors.txt
@@ -267,4 +267,10 @@ tests/cases/conformance/types/conditional/conditionalTypes2.ts(75,12): error TS2
     };
     type PCCA = ProductComplementComplement['a'];
     type PCCB = ProductComplementComplement['b'];
+    
+    // Repro from #31326
+    
+    type Hmm<T, U extends T> = U extends T ? { [K in keyof U]: number } : never;
+    type What = Hmm<{}, { a: string }>
+    const w: What = { a: 4 };
     
\ No newline at end of file
diff --git a/tests/baselines/reference/conditionalTypes2.js b/tests/baselines/reference/conditionalTypes2.js
index 4f4f35e821afb..cb35ac6cc2dfe 100644
--- a/tests/baselines/reference/conditionalTypes2.js
+++ b/tests/baselines/reference/conditionalTypes2.js
@@ -188,6 +188,12 @@ type ProductComplementComplement = {
 };
 type PCCA = ProductComplementComplement['a'];
 type PCCB = ProductComplementComplement['b'];
+
+// Repro from #31326
+
+type Hmm<T, U extends T> = U extends T ? { [K in keyof U]: number } : never;
+type What = Hmm<{}, { a: string }>
+const w: What = { a: 4 };
 
 
 //// [conditionalTypes2.js]
@@ -265,6 +271,7 @@ function foo(value) {
         toString2(value);
     }
 }
+var w = { a: 4 };
 
 
 //// [conditionalTypes2.d.ts]
@@ -392,3 +399,10 @@ declare type ProductComplementComplement = {
 };
 declare type PCCA = ProductComplementComplement['a'];
 declare type PCCB = ProductComplementComplement['b'];
+declare type Hmm<T, U extends T> = U extends T ? {
+    [K in keyof U]: number;
+} : never;
+declare type What = Hmm<{}, {
+    a: string;
+}>;
+declare const w: What;
diff --git a/tests/baselines/reference/conditionalTypes2.symbols b/tests/baselines/reference/conditionalTypes2.symbols
index b164d26e45089..f665cbc3c71d9 100644
--- a/tests/baselines/reference/conditionalTypes2.symbols
+++ b/tests/baselines/reference/conditionalTypes2.symbols
@@ -685,3 +685,25 @@ type PCCB = ProductComplementComplement['b'];
 >PCCB : Symbol(PCCB, Decl(conditionalTypes2.ts, 187, 45))
 >ProductComplementComplement : Symbol(ProductComplementComplement, Decl(conditionalTypes2.ts, 181, 34))
 
+// Repro from #31326
+
+type Hmm<T, U extends T> = U extends T ? { [K in keyof U]: number } : never;
+>Hmm : Symbol(Hmm, Decl(conditionalTypes2.ts, 188, 45))
+>T : Symbol(T, Decl(conditionalTypes2.ts, 192, 9))
+>U : Symbol(U, Decl(conditionalTypes2.ts, 192, 11))
+>T : Symbol(T, Decl(conditionalTypes2.ts, 192, 9))
+>U : Symbol(U, Decl(conditionalTypes2.ts, 192, 11))
+>T : Symbol(T, Decl(conditionalTypes2.ts, 192, 9))
+>K : Symbol(K, Decl(conditionalTypes2.ts, 192, 44))
+>U : Symbol(U, Decl(conditionalTypes2.ts, 192, 11))
+
+type What = Hmm<{}, { a: string }>
+>What : Symbol(What, Decl(conditionalTypes2.ts, 192, 76))
+>Hmm : Symbol(Hmm, Decl(conditionalTypes2.ts, 188, 45))
+>a : Symbol(a, Decl(conditionalTypes2.ts, 193, 21))
+
+const w: What = { a: 4 };
+>w : Symbol(w, Decl(conditionalTypes2.ts, 194, 5))
+>What : Symbol(What, Decl(conditionalTypes2.ts, 192, 76))
+>a : Symbol(a, Decl(conditionalTypes2.ts, 194, 17))
+
diff --git a/tests/baselines/reference/conditionalTypes2.types b/tests/baselines/reference/conditionalTypes2.types
index aac6ba47475c6..e3d949f268e90 100644
--- a/tests/baselines/reference/conditionalTypes2.types
+++ b/tests/baselines/reference/conditionalTypes2.types
@@ -431,3 +431,18 @@ type PCCA = ProductComplementComplement['a'];
 type PCCB = ProductComplementComplement['b'];
 >PCCB : Product<"b", 1>
 
+// Repro from #31326
+
+type Hmm<T, U extends T> = U extends T ? { [K in keyof U]: number } : never;
+>Hmm : Hmm<T, U>
+
+type What = Hmm<{}, { a: string }>
+>What : { a: number; }
+>a : string
+
+const w: What = { a: 4 };
+>w : { a: number; }
+>{ a: 4 } : { a: number; }
+>a : number
+>4 : 4
+
diff --git a/tests/cases/conformance/types/conditional/conditionalTypes2.ts b/tests/cases/conformance/types/conditional/conditionalTypes2.ts
index 4b65b5ddeb202..bb70093f23319 100644
--- a/tests/cases/conformance/types/conditional/conditionalTypes2.ts
+++ b/tests/cases/conformance/types/conditional/conditionalTypes2.ts
@@ -190,3 +190,9 @@ type ProductComplementComplement = {
 };
 type PCCA = ProductComplementComplement['a'];
 type PCCB = ProductComplementComplement['b'];
+
+// Repro from #31326
+
+type Hmm<T, U extends T> = U extends T ? { [K in keyof U]: number } : never;
+type What = Hmm<{}, { a: string }>
+const w: What = { a: 4 };