diff --git a/src/Literate.jl b/src/Literate.jl
index fd724c4..9ce052e 100644
--- a/src/Literate.jl
+++ b/src/Literate.jl
@@ -851,8 +851,8 @@ function sandbox()
     # eval(expr) is available in the REPL (i.e. Main) so we emulate that for the sandbox
     Core.eval(m, :(eval(x) = Core.eval($m, x)))
     # modules created with Module() does not have include defined
-    # abspath is needed since this will call `include_relative`
-    Core.eval(m, :(include(x) = Base.include($m, abspath(x))))
+    # the source path for recursive include is set while executing the block
+    Core.eval(m, :(include(x) = Base.include($m, x)))
     return m
 end
 
@@ -894,10 +894,13 @@ function execute_block(sb::Module, block::String; inputfile::String, fake_source
     # `rethrow = Union{}` means that we try-catch all the exceptions thrown in the do-block
     # and return them via the return value (they get handled below).
     c = IOCapture.capture(rethrow = Union{}) do
-        if softscope
-            include_string(REPL.softscope, sb, block, fake_source)
-        else
-            include_string(sb, block, fake_source)
+        # TODO: Perhaps `include_string` should set :SOURCE_PATH?
+        task_local_storage(:SOURCE_PATH, fake_source) do
+            if softscope
+                include_string(REPL.softscope, sb, block, fake_source)
+            else
+                include_string(sb, block, fake_source)
+            end
         end
     end
     popdisplay(disp) # IOCapture.capture has a try-catch so should always end up here
diff --git a/test/runtests.jl b/test/runtests.jl
index ee1e221..529231d 100644
--- a/test/runtests.jl
+++ b/test/runtests.jl
@@ -1310,6 +1310,15 @@ end end
             notebook = read(joinpath(outdir, "inputfile.ipynb"), String)
             @test occursin("\"data\": {\n      \"text/plain\": \"31\"\n     }", notebook)
 
+            # issue #251 (recursive include)
+            write(inputfile, "include(\"issue251/A.jl\")")
+            mkdir(joinpath(outdir, "issue251"))
+            write(joinpath(outdir, "issue251", "A.jl"), "include(\"B.jl\")")
+            write(joinpath(outdir, "issue251", "B.jl"), "230 + 21")
+            Literate.notebook(inputfile, outdir)
+            notebook = read(joinpath(outdir, "inputfile.ipynb"), String)
+            @test occursin("\"data\": {\n      \"text/plain\": \"251\"\n     }", notebook)
+
             # test error when executing notebook
             write(inputfile, "for i in 1:10\n    println(i)")
             r = @test_logs((:error, r"error when executing notebook based on input file: "), match_mode=:any,