diff --git a/patchlevel.h b/patchlevel.h
--- a/patchlevel.h
+++ b/patchlevel.h
@@ -25,6 +25,6 @@
    regexp `^#define[ 	]*PATCHLEVEL', since that's what support/mkversion.sh
    looks for to find the patch level (for the sccs version string). */
 
-#define PATCHLEVEL 3
+#define PATCHLEVEL 4
 
 #endif /* _PATCHLEVEL_H_ */
diff --git a/subst.c b/subst.c
--- a/subst.c
+++ b/subst.c
@@ -1798,6 +1798,9 @@ extract_heredoc_dolbrace_string (string, sindex, quoted, flags)
   return (result);
 }
 
+#define PARAMEXPNEST_MAX	32	// for now
+static int dbstate[PARAMEXPNEST_MAX];
+
 /* Extract a parameter expansion expression within ${ and } from STRING.
    Obey the Posix.2 rules for finding the ending `}': count braces while
    skipping over enclosed quoted strings and command substitutions.
@@ -1828,6 +1831,8 @@ extract_dollar_brace_string (string, sindex, quoted, flags)
   if (quoted == Q_HERE_DOCUMENT && dolbrace_state == DOLBRACE_QUOTE && (flags & SX_NOALLOC) == 0)
     return (extract_heredoc_dolbrace_string (string, sindex, quoted, flags));
 
+  dbstate[0] = dolbrace_state;
+
   pass_character = 0;
   nesting_level = 1;
   slen = strlen (string + *sindex) + *sindex;
@@ -1852,6 +1857,8 @@ extract_dollar_brace_string (string, sindex, quoted, flags)
 
       if (string[i] == '$' && string[i+1] == LBRACE)
 	{
+	  if (nesting_level < PARAMEXPNEST_MAX)
+	    dbstate[nesting_level] = dolbrace_state;
 	  nesting_level++;
 	  i += 2;
 	  if (dolbrace_state == DOLBRACE_QUOTE || dolbrace_state == DOLBRACE_WORD)
@@ -1864,6 +1871,7 @@ extract_dollar_brace_string (string, sindex, quoted, flags)
 	  nesting_level--;
 	  if (nesting_level == 0)
 	    break;
+	  dolbrace_state = (nesting_level < PARAMEXPNEST_MAX) ? dbstate[nesting_level] : dbstate[0];	/* Guess using initial state */
 	  i++;
 	  continue;
 	}