diff --git a/src/ng/compile.js b/src/ng/compile.js
index 9285b253d0b3..e3fe900701cc 100644
--- a/src/ng/compile.js
+++ b/src/ng/compile.js
@@ -1234,14 +1234,22 @@ function $CompileProvider($provide, $$sanitizeUriProvider) {
           directiveValue = (isFunction(directive.template))
               ? directive.template($compileNode, templateAttrs)
               : directive.template;
+          var elementTemplate = isElement(directiveValue);
 
-          directiveValue = denormalizeTemplate(directiveValue);
+          if (!elementTemplate) {
+            directiveValue = denormalizeTemplate(directiveValue);
+          }
 
           if (directive.replace) {
             replaceDirective = directive;
-            $template = jqLite('<div>' +
-                                 trim(directiveValue) +
-                               '</div>').contents();
+            if (elementTemplate) {
+              $template = jqLite(directiveValue).clone();
+            } else {
+              $template = jqLite('<div>' +
+                                   trim(directiveValue) +
+                                 '</div>').contents();
+            }
+
             compileNode = $template[0];
 
             if ($template.length != 1 || compileNode.nodeType !== 1) {
@@ -1270,7 +1278,11 @@ function $CompileProvider($provide, $$sanitizeUriProvider) {
 
             ii = directives.length;
           } else {
-            $compileNode.html(directiveValue);
+            if (elementTemplate) {
+              $compileNode.html('').append(jqLite(directiveValue).clone());
+            } else {
+              $compileNode.html(directiveValue);
+            }
           }
         }
 
diff --git a/test/ng/compileSpec.js b/test/ng/compileSpec.js
index 39e236959635..a69c6f5f3488 100755
--- a/test/ng/compileSpec.js
+++ b/test/ng/compileSpec.js
@@ -512,6 +512,14 @@ describe('$compile', function() {
               expect(element).toBe(attr.$$element);
             }
           }));
+
+          directive('svgCircle', valueFn({
+            replace: true,
+            template: jqLite('<svg><circle></circle></svg>').children()
+          }));
+          directive('domNodeTemplate', valueFn({
+            template: jqLite('<p>Hello!</p><p>world!</p>')
+          }));
         }));
 
 
@@ -675,6 +683,17 @@ describe('$compile', function() {
             }).not.toThrow();
           });
         });
+
+
+        it('should accept DOM nodes as a template', inject(function($compile, $rootScope) {
+          if (!(msie < 9)) {
+            element = $compile('<svg><g svg-circle></g></svg>')($rootScope);
+            expect(element.find('g').length).toBe(0);
+            expect(element.find('circle').length).toBe(1);
+          }
+          element = $compile('<div dom-node-template></div>')($rootScope);
+          expect(element.find('p').length).toBe(2);
+        }));
       });
 
 
@@ -693,6 +712,17 @@ describe('$compile', function() {
               expect($attrs.id).toBe('templateContent');
             }
           }));
+          directive('svgCircle', valueFn({
+            replace: true,
+            template: function() {
+              return jqLite('<svg><circle></circle></svg>').children();
+            }
+          }));
+          directive('domNodeTemplate', valueFn({
+            template: function() {
+              return jqLite('<p>Hello!</p><p>world!</p>');
+            }
+          }));
         }));
 
 
@@ -701,6 +731,17 @@ describe('$compile', function() {
           element = $compile('<div my-directive="some value">original content<div>')($rootScope);
           expect(element.text()).toEqual('template content');
         }));
+
+
+        it('should accept DOM nodes as a template', inject(function($compile, $rootScope) {
+          if (!(msie < 9)) {
+            element = $compile('<svg><g svg-circle></g></svg>')($rootScope);
+            expect(element.find('g').length).toBe(0);
+            expect(element.find('circle').length).toBe(1);
+          }
+          element = $compile('<div dom-node-template></div>')($rootScope);
+          expect(element.find('p').length).toBe(2);
+        }));
       });