diff --git a/compiler/src/dotty/tools/dotc/parsing/Scanners.scala b/compiler/src/dotty/tools/dotc/parsing/Scanners.scala
index 7b9f2e8565dd..45ca80004e05 100644
--- a/compiler/src/dotty/tools/dotc/parsing/Scanners.scala
+++ b/compiler/src/dotty/tools/dotc/parsing/Scanners.scala
@@ -555,9 +555,14 @@ object Scanners {
           token = INDENT
     end observeIndented
 
-    /** Insert an <outdent> token if next token closes an indentation region */
+    /** Insert an <outdent> token if next token closes an indentation region.
+     *  Exception: continue if indentation region belongs to a `match` and next token is `case`.
+     */
     def observeOutdented(): Unit = currentRegion match
-      case r: Indented if !r.isOutermost && closingRegionTokens.contains(token) =>
+      case r: Indented
+      if !r.isOutermost
+         && closingRegionTokens.contains(token)
+         && !(token == CASE && r.prefix == MATCH) =>
         currentRegion = r.enclosing
         insert(OUTDENT, offset)
       case _ =>
diff --git a/tests/pos/i7516.scala b/tests/pos/i7516.scala
new file mode 100644
index 000000000000..810474cd825b
--- /dev/null
+++ b/tests/pos/i7516.scala
@@ -0,0 +1,3 @@
+val foo: Int => Int = Some(7) match
+  case Some(y) => x => y
+  case None => identity[Int]