diff --git a/mypy/nodes.py b/mypy/nodes.py
index e52618fcdae6..dbde3ddf4f1b 100644
--- a/mypy/nodes.py
+++ b/mypy/nodes.py
@@ -1647,19 +1647,21 @@ def accept(self, visitor: StatementVisitor[T]) -> T:
 
 
 class TypeAliasStmt(Statement):
-    __slots__ = ("name", "type_args", "value")
+    __slots__ = ("name", "type_args", "value", "invalid_recursive_alias")
 
     __match_args__ = ("name", "type_args", "value")
 
     name: NameExpr
     type_args: list[TypeParam]
     value: Expression  # Will get translated into a type
+    invalid_recursive_alias: bool
 
     def __init__(self, name: NameExpr, type_args: list[TypeParam], value: Expression) -> None:
         super().__init__()
         self.name = name
         self.type_args = type_args
         self.value = value
+        self.invalid_recursive_alias = False
 
     def accept(self, visitor: StatementVisitor[T]) -> T:
         return visitor.visit_type_alias_stmt(self)
diff --git a/mypy/semanal.py b/mypy/semanal.py
index 320ae72d99f9..0689d5416efe 100644
--- a/mypy/semanal.py
+++ b/mypy/semanal.py
@@ -3961,7 +3961,7 @@ def check_and_set_up_type_alias(self, s: AssignmentStmt) -> bool:
             alias_node.normalized = rvalue.node.normalized
         current_node = existing.node if existing else alias_node
         assert isinstance(current_node, TypeAlias)
-        self.disable_invalid_recursive_aliases(s, current_node)
+        self.disable_invalid_recursive_aliases(s, current_node, s.rvalue)
         if self.is_class_scope():
             assert self.type is not None
             if self.type.is_protocol:
@@ -4057,7 +4057,7 @@ def analyze_type_alias_type_params(
         return declared_tvars, all_declared_tvar_names
 
     def disable_invalid_recursive_aliases(
-        self, s: AssignmentStmt, current_node: TypeAlias
+        self, s: AssignmentStmt | TypeAliasStmt, current_node: TypeAlias, ctx: Context
     ) -> None:
         """Prohibit and fix recursive type aliases that are invalid/unsupported."""
         messages = []
@@ -4074,7 +4074,7 @@ def disable_invalid_recursive_aliases(
             current_node.target = AnyType(TypeOfAny.from_error)
             s.invalid_recursive_alias = True
         for msg in messages:
-            self.fail(msg, s.rvalue)
+            self.fail(msg, ctx)
 
     def analyze_lvalue(
         self,
@@ -5304,6 +5304,8 @@ def visit_match_stmt(self, s: MatchStmt) -> None:
             self.visit_block(s.bodies[i])
 
     def visit_type_alias_stmt(self, s: TypeAliasStmt) -> None:
+        if s.invalid_recursive_alias:
+            return
         self.statement = s
         type_params = self.push_type_args(s.type_args, s)
         if type_params is None:
@@ -5369,10 +5371,32 @@ def visit_type_alias_stmt(self, s: TypeAliasStmt) -> None:
                 and isinstance(existing.node, (PlaceholderNode, TypeAlias))
                 and existing.node.line == s.line
             ):
-                existing.node = alias_node
+                updated = False
+                if isinstance(existing.node, TypeAlias):
+                    if existing.node.target != res:
+                        # Copy expansion to the existing alias, this matches how we update base classes
+                        # for a TypeInfo _in place_ if there are nested placeholders.
+                        existing.node.target = res
+                        existing.node.alias_tvars = alias_tvars
+                        updated = True
+                else:
+                    # Otherwise just replace existing placeholder with type alias.
+                    existing.node = alias_node
+                    updated = True
+
+                if updated:
+                    if self.final_iteration:
+                        self.cannot_resolve_name(s.name.name, "name", s)
+                        return
+                    else:
+                        # We need to defer so that this change can get propagated to base classes.
+                        self.defer(s, force_progress=True)
             else:
                 self.add_symbol(s.name.name, alias_node, s)
 
+            current_node = existing.node if existing else alias_node
+            assert isinstance(current_node, TypeAlias)
+            self.disable_invalid_recursive_aliases(s, current_node, s.value)
         finally:
             self.pop_type_args(s.type_args)
 
diff --git a/test-data/unit/check-python312.test b/test-data/unit/check-python312.test
index f5d9fd195f04..6dd61351d7a8 100644
--- a/test-data/unit/check-python312.test
+++ b/test-data/unit/check-python312.test
@@ -1162,6 +1162,49 @@ def decorator(x: str) -> Any: ...
 class C[T]:
     pass
 
+[case testPEP695RecursiceTypeAlias]
+# mypy: enable-incomplete-feature=NewGenericSyntax
+
+type A = str | list[A]
+a: A
+reveal_type(a)  # N: Revealed type is "Union[builtins.str, builtins.list[...]]"
+
+class C[T]: pass
+
+type B[T] = C[T] | list[B[T]]
+b: B[int]
+reveal_type(b)  # N: Revealed type is "Union[__main__.C[builtins.int], builtins.list[...]]"
+
+[case testPEP695BadRecursiveTypeAlias]
+# mypy: enable-incomplete-feature=NewGenericSyntax
+
+type A = A  # E: Cannot resolve name "A" (possible cyclic definition)
+type B = B | int  # E: Invalid recursive alias: a union item of itself
+a: A
+reveal_type(a)  # N: Revealed type is "Any"
+b: B
+reveal_type(b)  # N: Revealed type is "Any"
+
+[case testPEP695RecursiveTypeAliasForwardReference]
+# mypy: enable-incomplete-feature=NewGenericSyntax
+
+def f(a: A) -> None:
+    if isinstance(a, str):
+        reveal_type(a)  # N: Revealed type is "builtins.str"
+    else:
+        reveal_type(a)  # N: Revealed type is "__main__.C[Union[builtins.str, __main__.C[...]]]"
+
+type A = str | C[A]
+
+class C[T]: pass
+
+f('x')
+f(C[str]())
+f(C[C[str]]())
+f(1)  # E: Argument 1 to "f" has incompatible type "int"; expected "A"
+f(C[int]())  # E: Argument 1 to "f" has incompatible type "C[int]"; expected "A"
+[builtins fixtures/isinstance.pyi]
+
 [case testPEP695InvalidGenericOrProtocolBaseClass]
 # mypy: enable-incomplete-feature=NewGenericSyntax
 from typing import Generic, Protocol, TypeVar