diff --git a/NEWS b/NEWS
index 3062c8ed..639759ee 100644
--- a/NEWS
+++ b/NEWS
@@ -1,6 +1,13 @@
 Current release
 ---------------
 
+What's new in psycopg 2.5.5
+^^^^^^^^^^^^^^^^^^^^^^^^^^^
+
+- Named cursors used as context manager don't swallow the exception on exit
+  (:ticket:`#262`).
+
+
 What's new in psycopg 2.5.4
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^
 
diff --git a/psycopg/cursor_type.c b/psycopg/cursor_type.c
index a7591ee9..67c51723 100644
--- a/psycopg/cursor_type.c
+++ b/psycopg/cursor_type.c
@@ -57,10 +57,24 @@ psyco_curs_close(cursorObject *self)
 
     if (self->name != NULL) {
         char buffer[128];
+        PGTransactionStatusType status;
 
-        EXC_IF_NO_MARK(self);
-        PyOS_snprintf(buffer, 127, "CLOSE \"%s\"", self->name);
-        if (pq_execute(self, buffer, 0, 0, 1) == -1) return NULL;
+        if (self->conn) {
+            status = PQtransactionStatus(self->conn->pgconn);
+        }
+        else {
+            status = PQTRANS_UNKNOWN;
+        }
+
+        if (!(status == PQTRANS_UNKNOWN || status == PQTRANS_INERROR)) {
+            EXC_IF_NO_MARK(self);
+            PyOS_snprintf(buffer, 127, "CLOSE \"%s\"", self->name);
+            if (pq_execute(self, buffer, 0, 0, 1) == -1) return NULL;
+        }
+        else {
+            Dprintf("skipping named curs close because tx status %d",
+                (int)status);
+        }
     }
 
     self->closed = 1;
diff --git a/tests/test_with.py b/tests/test_with.py
index d39016c6..13e4d7ef 100755
--- a/tests/test_with.py
+++ b/tests/test_with.py
@@ -200,6 +200,18 @@ class WithCursorTestCase(WithTestCase):
         self.assert_(curs.closed)
         self.assert_(closes)
 
+    def test_exception_swallow(self):
+        # bug #262: __exit__ calls cur.close() that hides the exception
+        # with another error.
+        try:
+            with self.conn as conn:
+                with conn.cursor('named') as cur:
+                    cur.execute("select 1/0")
+        except psycopg2.DataError, e:
+            self.assertEqual(e.pgcode, '22012')
+        else:
+            self.fail("where is my exception?")
+
 
 def test_suite():
     return unittest.TestLoader().loadTestsFromName(__name__)