diff --git a/NEWS b/NEWS
index b48e932c..9e27a445 100644
--- a/NEWS
+++ b/NEWS
@@ -54,8 +54,6 @@ Other changes:
 - `~connection.isolation_level` doesn't read from the database but will return
   `~psycopg2.extensions.ISOLATION_LEVEL_DEFAULT` if no value was set on the
   connection.
-- `~connection.set_isolation_level()` will throw an exception if executed
-  inside a transaction; previously it would have silently rolled it back.
 - Empty arrays no more converted into lists if they don't have a type attached
   (:ticket:`#506`)
 
diff --git a/doc/src/connection.rst b/doc/src/connection.rst
index c2a0c5ce..d554ce6d 100644
--- a/doc/src/connection.rst
+++ b/doc/src/connection.rst
@@ -480,8 +480,9 @@ The ``connection`` class
 
         .. note::
 
-            From version 2.4.2, `set_session()` and `autocommit` offer
-            finer control on the transaction characteristics.
+            This is a legacy method mixing `~conn.isolation_level` and
+            `~conn.autocommit`. Using the respective properties is a better
+            option.
 
         Set the `transaction isolation level`_ for the current session.
         The level defines the different phenomena that can happen in the
@@ -501,12 +502,6 @@ The ``connection`` class
 
         See also :ref:`transactions-control`.
 
-        .. versionchanged:: 2.7
-
-            the function must be called outside a transaction; previously it
-            would have executed an implicit :sql:`ROLLBACK`; it will now raise
-            an exception.
-
 
     .. index::
         pair: Client; Encoding
diff --git a/psycopg/connection_type.c b/psycopg/connection_type.c
index b09fdde7..df67c802 100644
--- a/psycopg/connection_type.c
+++ b/psycopg/connection_type.c
@@ -698,7 +698,9 @@ psyco_conn_set_isolation_level(connectionObject *self, PyObject *args)
     int level = 1;
     PyObject *pyval = NULL;
 
-    _set_session_checks(self, set_isolation_level);
+    EXC_IF_CONN_CLOSED(self);
+    EXC_IF_CONN_ASYNC(self, "isolation_level");
+    EXC_IF_TPC_PREPARED(self, "isolation_level");
 
     if (!PyArg_ParseTuple(args, "O", &pyval)) return NULL;
 
@@ -717,6 +719,10 @@ psyco_conn_set_isolation_level(connectionObject *self, PyObject *args)
         }
     }
 
+    if (0 > conn_rollback(self)) {
+        return NULL;
+    }
+
     if (level == 0) {
         if (0 > conn_set_session(self, 1,
                 ISOLATION_LEVEL_DEFAULT, self->readonly, self->deferrable)) {
diff --git a/tests/test_connection.py b/tests/test_connection.py
index da0a588c..1d11ff16 100755
--- a/tests/test_connection.py
+++ b/tests/test_connection.py
@@ -560,14 +560,34 @@ class IsolationLevelsTestCase(ConnectingTestCase):
         self.assertEqual(ext.TRANSACTION_STATUS_INTRANS,
             conn.get_transaction_status())
 
-        # changed in psycopg 2.7
-        self.assertRaises(psycopg2.ProgrammingError,
-            conn.set_isolation_level,
-            ext.ISOLATION_LEVEL_SERIALIZABLE)
-        self.assertEqual(ext.TRANSACTION_STATUS_INTRANS,
+        conn.set_isolation_level(
+            psycopg2.extensions.ISOLATION_LEVEL_SERIALIZABLE)
+        self.assertEqual(psycopg2.extensions.TRANSACTION_STATUS_IDLE,
             conn.get_transaction_status())
+        cur.execute("select count(*) from isolevel;")
+        self.assertEqual(0, cur.fetchone()[0])
+
+        cur.execute("insert into isolevel values (10);")
+        self.assertEqual(psycopg2.extensions.TRANSACTION_STATUS_INTRANS,
+            conn.get_transaction_status())
+        conn.set_isolation_level(
+            psycopg2.extensions.ISOLATION_LEVEL_AUTOCOMMIT)
+        self.assertEqual(psycopg2.extensions.TRANSACTION_STATUS_IDLE,
+            conn.get_transaction_status())
+        cur.execute("select count(*) from isolevel;")
+        self.assertEqual(0, cur.fetchone()[0])
+
+        cur.execute("insert into isolevel values (10);")
+        self.assertEqual(psycopg2.extensions.TRANSACTION_STATUS_IDLE,
+            conn.get_transaction_status())
+        conn.set_isolation_level(
+            psycopg2.extensions.ISOLATION_LEVEL_READ_COMMITTED)
+        self.assertEqual(psycopg2.extensions.TRANSACTION_STATUS_IDLE,
+            conn.get_transaction_status())
+        cur.execute("select count(*) from isolevel;")
+        self.assertEqual(1, cur.fetchone()[0])
         self.assertEqual(conn.isolation_level,
-            ext.ISOLATION_LEVEL_DEFAULT)
+            psycopg2.extensions.ISOLATION_LEVEL_READ_COMMITTED)
 
     def test_isolation_level_autocommit(self):
         cnn1 = self.connect()