diff --git a/lisp/org-src.el b/lisp/org-src.el
index d1f6879..dd3f3c2 100644
--- a/lisp/org-src.el
+++ b/lisp/org-src.el
@@ -922,10 +922,19 @@ fontification of code blocks see `org-src-fontify-block' and
 	       (concat " org-src-fontification:" (symbol-name lang-mode)))
 	    (delete-region (point-min) (point-max))
 	    (insert string " ") ;; so there's a final property change
+	    (unless org-src-preserve-indentation (org-do-remove-indentation))
 	    (unless (eq major-mode lang-mode) (funcall lang-mode))
 	    (font-lock-fontify-buffer)
 	    (setq pos (point-min))
 	    (while (setq next (next-single-property-change pos 'face))
+	      (unless org-src-preserve-indentation
+		(let ((eol (save-excursion (goto-char pos)
+					   (line-end-position))))
+		  (with-current-buffer org-buffer
+		    (goto-char (+ start (1- pos)))
+		    (setq start (- (line-end-position) (1- eol))))
+		  (when (< eol next)
+		    (setq next (1+ eol)))))
 	      (put-text-property
 	       (+ start (1- pos)) (1- (+ start next)) 'face
 	       (get-text-property pos 'face) org-buffer)