diff --git a/features/create_sites.feature b/features/create_sites.feature
index 16e733b1..a25a0d32 100644
--- a/features/create_sites.feature
+++ b/features/create_sites.feature
@@ -44,6 +44,17 @@ Feature: Create sites
     Then the _site directory should exist
     And I should see "Post Layout: <p>The only winning move is not to play.</p>" in "_site/2009/03/27/wargames.html"
 
+  Scenario: Basic site with layout inside a subfolder and a post
+    Given I have a _layouts directory
+    And I have a _posts directory
+    And I have the following posts:
+      | title    | date      | layout  | content                               |
+      | Wargames | 2009-03-27 | post/simple | The only winning move is not to play. |
+    And I have a post/simple layout that contains "Post Layout: {{ content }}"
+    When I run jekyll
+    Then the _site directory should exist
+    And I should see "Post Layout: <p>The only winning move is not to play.</p>" in "_site/2009/03/27/wargames.html"
+
   Scenario: Basic site with layouts, pages, posts and files
     Given I have a _layouts directory
     And I have a page layout that contains "Page {{ page.title }}: {{ content }}"
diff --git a/features/step_definitions/jekyll_steps.rb b/features/step_definitions/jekyll_steps.rb
index 3604f523..4e11aad9 100644
--- a/features/step_definitions/jekyll_steps.rb
+++ b/features/step_definitions/jekyll_steps.rb
@@ -38,7 +38,12 @@ Given /^I have an? (.*) (layout|theme) that contains "(.*)"$/ do |name, type, te
   else
     '_theme'
   end
-  File.open(File.join(folder, name + '.html'), 'w') do |f|
+  destination_file = File.join(folder, name + '.html')
+  destination_path = File.dirname(destination_file)
+  unless File.exist?(destination_path)
+    FileUtils.mkdir_p(destination_path)
+  end
+  File.open(destination_file, 'w') do |f|
     f.write(text)
   end
 end
diff --git a/lib/jekyll/site.rb b/lib/jekyll/site.rb
index 5cad11c8..04fc77e1 100644
--- a/lib/jekyll/site.rb
+++ b/lib/jekyll/site.rb
@@ -122,7 +122,7 @@ module Jekyll
       base = File.join(self.source, self.config['layouts'])
       return unless File.exists?(base)
       entries = []
-      Dir.chdir(base) { entries = filter_entries(Dir['*.*']) }
+      Dir.chdir(base) { entries = filter_entries(Dir['**/*.*']) }
 
       entries.each do |f|
         name = f.split(".")[0..-2].join(".")
diff --git a/test/source/_layouts/post/simple.html b/test/source/_layouts/post/simple.html
new file mode 100644
index 00000000..cd4f5999
--- /dev/null
+++ b/test/source/_layouts/post/simple.html
@@ -0,0 +1 @@
+<<< {{ content }} >>>
diff --git a/test/test_site.rb b/test/test_site.rb
index 0ff9185f..4deb5645 100644
--- a/test/test_site.rb
+++ b/test/test_site.rb
@@ -156,7 +156,7 @@ class TestSite < Test::Unit::TestCase
 
     should "read layouts" do
       @site.read_layouts
-      assert_equal ["default", "simple"].sort, @site.layouts.keys.sort
+      assert_equal ["default", "simple", "post/simple"].sort, @site.layouts.keys.sort
     end
 
     should "read posts" do