diff --git a/ocaml/lambda/value_rec_compiler.ml b/ocaml/lambda/value_rec_compiler.ml
index a010fb65029..721a568f97b 100644
--- a/ocaml/lambda/value_rec_compiler.ml
+++ b/ocaml/lambda/value_rec_compiler.ml
@@ -662,6 +662,15 @@ let rec split_static_function lfun block_var local_idents lam :
   | Levent (lam, lev) ->
     let+ lam = split_static_function lfun block_var local_idents lam in
     Levent (lam, lev)
+  | Lregion (lam, layout_fun) ->
+    (* The type-checker forbids recursive values from being allocated on the
+       stack, so this region is only here to collect temporary allocations.
+       In particular the function itself does not capture any stack-allocated
+       variables, so we can lift it out of the region. *)
+    let+ lam = split_static_function lfun block_var local_idents lam in
+    (* The new expression returns the closure block instead of the function *)
+    ignore layout_fun;
+    Lregion (lam, layout_block)
   | Lmutvar _
   | Lconst _
   | Lapply _
@@ -671,7 +680,6 @@ let rec split_static_function lfun block_var local_idents lam :
   | Lassign _
   | Lsend _
   | Lifused _
-  | Lregion _
   | Lexclave _ ->
     Misc.fatal_errorf
       "letrec binding is not a static function:@ lfun=%a@ lam=%a"
diff --git a/ocaml/testsuite/tests/letrec-compilation/region.ml b/ocaml/testsuite/tests/letrec-compilation/region.ml
new file mode 100644
index 00000000000..84104036d69
--- /dev/null
+++ b/ocaml/testsuite/tests/letrec-compilation/region.ml
@@ -0,0 +1,19 @@
+(* TEST *)
+
+(* Recursive values are not allowed to be stack-allocated, but their
+   defining expressions are allowed to make allocations on the stack.
+   This can introduce a region around the whole definition. *)
+
+let rec f =
+  let p = local_ (fun msg -> print_string msg) in
+  p "hello, ";
+  p "world!";
+  print_newline ();
+  fun x -> f x
+
+(* Original bug report: unused function *)
+let rec foo =
+  let _f x = x, foo in
+  function
+  | None -> foo None
+  | Some x -> x
diff --git a/ocaml/testsuite/tests/letrec-compilation/region.reference b/ocaml/testsuite/tests/letrec-compilation/region.reference
new file mode 100644
index 00000000000..270c611ee72
--- /dev/null
+++ b/ocaml/testsuite/tests/letrec-compilation/region.reference
@@ -0,0 +1 @@
+hello, world!