diff --git a/src/Selenium2Library/keywords/keywordgroup.py b/src/Selenium2Library/keywords/keywordgroup.py
index ff4f319ca..672603afd 100644
--- a/src/Selenium2Library/keywords/keywordgroup.py
+++ b/src/Selenium2Library/keywords/keywordgroup.py
@@ -8,13 +8,22 @@
     decorator = None # decorator module doesn't work with IronPython 2.6
 
 def _run_on_failure_decorator(method, *args, **kwargs):
+    self = args[0]
+    already_in_keyword = getattr(self, "_already_in_keyword", False) # If False, we are in the outermost keyword (or in `run_keyword`, if it's a dynamic library)
+    self._already_in_keyword = True # Set a flag on the instance so that as we call keywords inside this call and this gets run again, we know we're at least one level in.
     try:
         return method(*args, **kwargs)
     except Exception, err:
-        self = args[0]
-        if hasattr(self, '_run_on_failure'):
+        if hasattr(self, '_run_on_failure') and not self._has_run_on_failure:
+            # If we're in an inner keyword, track the fact that we've already run on failure once
+            self._has_run_on_failure = True
             self._run_on_failure()
         raise
+    finally:
+        if not already_in_keyword:
+            # If we are in the outer call, reset the flags.
+            self._already_in_keyword = False
+            self._has_run_on_failure = False
 
 class KeywordGroupMetaClass(type):
     def __new__(cls, clsname, bases, dict):
diff --git a/test/acceptance/keywords/run_on_failure.txt b/test/acceptance/keywords/run_on_failure.txt
old mode 100644
new mode 100755
index d5a482cab..6d9e45927
--- a/test/acceptance/keywords/run_on_failure.txt
+++ b/test/acceptance/keywords/run_on_failure.txt
@@ -1,14 +1,37 @@
 *** Settings ***
 Suite Setup     Run Keywords  Go To Front Page  Set Info Loglevel
 Suite Teardown  Set Debug Loglevel
-Test Teardown   Register Keyword to Run on Failure  Nothing
 Resource        ../resource.txt
 
 *** Variables ***
 ${PAGE TITLE}  (root)/index.html
 ${FAILURE MESSAGE}  Page should not have contained text 'needle'
+${old order}
+
+*** Keywords ***
+On Fail
+    ${count}=    Evaluate    ${ON FAIL COUNT} + 1
+    Set Test Variable    ${ON FAIL COUNT}    ${count}
+
+Prefer Custom Keywords
+    Import Library  CustomSeleniumKeywords
+    ${old order}=  Set Library Search Order  CustomSeleniumKeywords
+
+Restore Old Search Order
+    Set Library Search Order  ${old order}
+
+Open Browser To Front Page
+    Open Browser  ${FRONT PAGE}
 
 *** Test Cases ***
+Run On Failure Keyword Only Called Once
+    [Setup]  Prefer Custom Keywords
+    Set Test Variable    ${ON FAIL COUNT}    ${0}
+    Register Keyword To Run On Failure    On Fail
+    Run Keyword And Ignore Error    Custom Selenium Keyword
+    Should Be Equal    ${ON FAIL COUNT}    ${1}    On Failure Keyword called ${ON FAIL COUNT} times.
+    [Teardown]  Register Keyword to Run On Failure  Nothing
+
 Log Title On Failure
     [Documentation]  LOG 1 Log Title will be run on failure. LOG 2:2 NONE LOG 3.1.1:1 ${PAGE TITLE} LOG 3.1:3 NONE
     Register Keyword to Run on Failure  Log Title
diff --git a/test/acceptance/resource.txt b/test/acceptance/resource.txt
old mode 100644
new mode 100755
diff --git a/test/env.py b/test/env.py
old mode 100644
new mode 100755
index ed636cde9..efc6c4148
--- a/test/env.py
+++ b/test/env.py
@@ -6,6 +6,7 @@
 ACCEPTANCE_TEST_DIR = os.path.join(ROOT_DIR, "acceptance")
 LIB_DIR = os.path.join(ROOT_DIR, "lib")
 RESOURCES_DIR = os.path.join(ROOT_DIR, "resources")
+TEST_LIBS_DIR = os.path.join(RESOURCES_DIR, "testlibs")
 RESULTS_DIR = os.path.join(ROOT_DIR, "results")
 HTTP_SERVER_FILE = os.path.join(RESOURCES_DIR, 'testserver', 'testserver.py')
 SRC_DIR = os.path.join(ROOT_DIR, "..", "src")
diff --git a/test/resources/testlibs/CustomSeleniumKeywords.py b/test/resources/testlibs/CustomSeleniumKeywords.py
new file mode 100755
index 000000000..8c6a79c6f
--- /dev/null
+++ b/test/resources/testlibs/CustomSeleniumKeywords.py
@@ -0,0 +1,18 @@
+from Selenium2Library import Selenium2Library
+from robot.utils import asserts
+from robot.libraries.BuiltIn import BuiltIn
+
+class CustomSeleniumKeywords(Selenium2Library):
+
+    def __init__(self, *args, **kwargs):
+        """Share `Selenium2Library`'s cache of browsers, so that
+        we don't have to open a separate browser instance for the
+        `Run On Failure Keyword Only Called Once` test."""
+        ret = super(CustomSeleniumKeywords, self).__init__(*args, **kwargs)
+        self._cache = BuiltIn().get_library_instance("Selenium2Library")._cache
+
+    def custom_selenium_keyword(self):
+        self.custom_selenium_keyword_inner()
+
+    def custom_selenium_keyword_inner(self):
+        asserts.assert_false(True)
\ No newline at end of file
diff --git a/test/run_tests.py b/test/run_tests.py
index e8e009744..ed0d4bdd4 100755
--- a/test/run_tests.py
+++ b/test/run_tests.py
@@ -26,7 +26,7 @@
     '--critical', 'regression',
     '--noncritical', 'inprogress',
 ]
-ARG_VALUES = {'outdir': env.RESULTS_DIR, 'pythonpath': env.SRC_DIR}
+ARG_VALUES = {'outdir': env.RESULTS_DIR, 'pythonpath': ':'.join((env.SRC_DIR, env.TEST_LIBS_DIR))}
 
 def acceptance_tests(interpreter, browser, args):
     ARG_VALUES['browser'] = browser.replace('*', '')