diff --git a/lib/markdown.php b/lib/markdown.php
index ee3dddbf918..f548fc26c3f 100644
--- a/lib/markdown.php
+++ b/lib/markdown.php
@@ -3,7 +3,7 @@
 # Markdown Extra  -  A text-to-HTML conversion tool for web writers
 #
 # PHP Markdown & Extra
-# Copyright (c) 2004-2009 Michel Fortin  
+# Copyright (c) 2004-2012 Michel Fortin  
 # <http://michelf.com/projects/php-markdown/>
 #
 # Original Markdown
@@ -12,8 +12,8 @@
 #
 
 
-define( 'MARKDOWN_VERSION',  "1.0.1n" ); # Sat 10 Oct 2009
-define( 'MARKDOWNEXTRA_VERSION',  "1.2.4" ); # Sat 10 Oct 2009
+define( 'MARKDOWN_VERSION',  "1.0.1o" ); # Sun 8 Jan 2012
+define( 'MARKDOWNEXTRA_VERSION',  "1.2.5" ); # Sun 8 Jan 2012
 
 
 #
@@ -71,7 +71,7 @@ function Markdown($text) {
 Plugin Name: Markdown Extra
 Plugin URI: http://michelf.com/projects/php-markdown/
 Description: <a href="http://daringfireball.net/projects/markdown/syntax">Markdown syntax</a> allows you to write using an easy-to-read, easy-to-write plain text format. Based on the original Perl version by <a href="http://daringfireball.net/">John Gruber</a>. <a href="http://michelf.com/projects/php-markdown/">More...</a>
-Version: 1.2.4
+Version: 1.2.5
 Author: Michel Fortin
 Author URI: http://michelf.com/
 */
@@ -950,7 +950,7 @@ class Markdown_Parser {
 
 		# Re-usable patterns to match list item bullets and number markers:
 		$marker_ul_re  = '[*+-]';
-		$marker_ol_re  = '\d+[.]';
+		$marker_ol_re  = '\d+[\.]';
 		$marker_any_re = "(?:$marker_ul_re|$marker_ol_re)";
 
 		$markers_relist = array(
@@ -1011,7 +1011,7 @@ class Markdown_Parser {
 	function _doLists_callback($matches) {
 		# Re-usable patterns to match list item bullets and number markers:
 		$marker_ul_re  = '[*+-]';
-		$marker_ol_re  = '\d+[.]';
+		$marker_ol_re  = '\d+[\.]';
 		$marker_any_re = "(?:$marker_ul_re|$marker_ol_re)";
 		
 		$list = $matches[1];
@@ -1141,17 +1141,17 @@ class Markdown_Parser {
 
 
 	var $em_relist = array(
-		''  => '(?:(?<!\*)\*(?!\*)|(?<!_)_(?!_))(?=\S|$)(?![.,:;]\s)',
+		''  => '(?:(?<!\*)\*(?!\*)|(?<!_)_(?!_))(?=\S|$)(?![\.,:;]\s)',
 		'*' => '(?<=\S|^)(?<!\*)\*(?!\*)',
 		'_' => '(?<=\S|^)(?<!_)_(?!_)',
 		);
 	var $strong_relist = array(
-		''   => '(?:(?<!\*)\*\*(?!\*)|(?<!_)__(?!_))(?=\S|$)(?![.,:;]\s)',
+		''   => '(?:(?<!\*)\*\*(?!\*)|(?<!_)__(?!_))(?=\S|$)(?![\.,:;]\s)',
 		'**' => '(?<=\S|^)(?<!\*)\*\*(?!\*)',
 		'__' => '(?<=\S|^)(?<!_)__(?!_)',
 		);
 	var $em_strong_relist = array(
-		''    => '(?:(?<!\*)\*\*\*(?!\*)|(?<!_)___(?!_))(?=\S|$)(?![.,:;]\s)',
+		''    => '(?:(?<!\*)\*\*\*(?!\*)|(?<!_)___(?!_))(?=\S|$)(?![\.,:;]\s)',
 		'***' => '(?<=\S|^)(?<!\*)\*\*\*(?!\*)',
 		'___' => '(?<=\S|^)(?<!_)___(?!_)',
 		);
@@ -1885,7 +1885,7 @@ class MarkdownExtra_Parser extends Markdown_Parser {
 				|
 					# Fenced code block marker
 					(?> ^ | \n )
-					[ ]{'.($indent).'}~~~+[ ]*\n
+					[ ]{0,'.($indent).'}~~~+[ ]*\n
 				' : '' ). ' # End (if not is span).
 				)
 			}xs';
@@ -1947,20 +1947,12 @@ class MarkdownExtra_Parser extends Markdown_Parser {
 				}
 			}
 			#
-			# Check for: Indented code block.
-			#
-			else if ($tag{0} == "\n" || $tag{0} == " ") {
-				# Indented code block: pass it unchanged, will be handled 
-				# later.
-				$parsed .= $tag;
-			}
-			#
 			# Check for: Fenced code block marker.
 			#
-			else if ($tag{0} == "~") {
+			else if (preg_match('{^\n?[ ]{0,'.($indent+3).'}~}', $tag)) {
 				# Fenced code block marker: find matching end marker.
 				$tag_re = preg_quote(trim($tag));
-				if (preg_match('{^(?>.*\n)+?'.$tag_re.' *\n}', $text, 
+				if (preg_match('{^(?>.*\n)+?[ ]{0,'.($indent).'}'.$tag_re.'[ ]*\n}', $text, 
 					$matches)) 
 				{
 					# End marker found: pass text unchanged until marker.
@@ -1973,6 +1965,14 @@ class MarkdownExtra_Parser extends Markdown_Parser {
 				}
 			}
 			#
+			# Check for: Indented code block.
+			#
+			else if ($tag{0} == "\n" || $tag{0} == " ") {
+				# Indented code block: pass it unchanged, will be handled 
+				# later.
+				$parsed .= $tag;
+			}
+			#
 			# Check for: Opening Block level tag or
 			#            Opening Context Block tag (like ins and del) 
 			#               used as a block tag (tag is alone on it's line).
@@ -2588,17 +2588,17 @@ class MarkdownExtra_Parser extends Markdown_Parser {
 	# work in the middle of a word.
 	#
 	var $em_relist = array(
-		''  => '(?:(?<!\*)\*(?!\*)|(?<![a-zA-Z0-9_])_(?!_))(?=\S|$)(?![.,:;]\s)',
+		''  => '(?:(?<!\*)\*(?!\*)|(?<![a-zA-Z0-9_])_(?!_))(?=\S|$)(?![\.,:;]\s)',
 		'*' => '(?<=\S|^)(?<!\*)\*(?!\*)',
 		'_' => '(?<=\S|^)(?<!_)_(?![a-zA-Z0-9_])',
 		);
 	var $strong_relist = array(
-		''   => '(?:(?<!\*)\*\*(?!\*)|(?<![a-zA-Z0-9_])__(?!_))(?=\S|$)(?![.,:;]\s)',
+		''   => '(?:(?<!\*)\*\*(?!\*)|(?<![a-zA-Z0-9_])__(?!_))(?=\S|$)(?![\.,:;]\s)',
 		'**' => '(?<=\S|^)(?<!\*)\*\*(?!\*)',
 		'__' => '(?<=\S|^)(?<!_)__(?![a-zA-Z0-9_])',
 		);
 	var $em_strong_relist = array(
-		''    => '(?:(?<!\*)\*\*\*(?!\*)|(?<![a-zA-Z0-9_])___(?!_))(?=\S|$)(?![.,:;]\s)',
+		''    => '(?:(?<!\*)\*\*\*(?!\*)|(?<![a-zA-Z0-9_])___(?!_))(?=\S|$)(?![\.,:;]\s)',
 		'***' => '(?<=\S|^)(?<!\*)\*\*\*(?!\*)',
 		'___' => '(?<=\S|^)(?<!_)___(?![a-zA-Z0-9_])',
 		);
diff --git a/lib/markdown_license.txt b/lib/markdown_license.txt
new file mode 100644
index 00000000000..4d6bf8b6359
--- /dev/null
+++ b/lib/markdown_license.txt
@@ -0,0 +1,36 @@
+PHP Markdown & Extra  
+Copyright (c) 2004-2009 Michel Fortin  
+<http://michelf.com/>  
+All rights reserved.
+
+Based on Markdown  
+Copyright (c) 2003-2006 John Gruber   
+<http://daringfireball.net/>   
+All rights reserved.
+
+Redistribution and use in source and binary forms, with or without
+modification, are permitted provided that the following conditions are
+met:
+
+* Redistributions of source code must retain the above copyright notice,
+  this list of conditions and the following disclaimer.
+
+* Redistributions in binary form must reproduce the above copyright
+  notice, this list of conditions and the following disclaimer in the
+  documentation and/or other materials provided with the distribution.
+
+* Neither the name "Markdown" nor the names of its contributors may
+  be used to endorse or promote products derived from this software
+  without specific prior written permission.
+
+This software is provided by the copyright holders and contributors "as
+is" and any express or implied warranties, including, but not limited
+to, the implied warranties of merchantability and fitness for a
+particular purpose are disclaimed. In no event shall the copyright owner
+or contributors be liable for any direct, indirect, incidental, special,
+exemplary, or consequential damages (including, but not limited to,
+procurement of substitute goods or services; loss of use, data, or
+profits; or business interruption) however caused and on any theory of
+liability, whether in contract, strict liability, or tort (including
+negligence or otherwise) arising in any way out of the use of this
+software, even if advised of the possibility of such damage.
diff --git a/lib/tests/markdown_test.php b/lib/tests/markdown_test.php
new file mode 100644
index 00000000000..b564e8408e5
--- /dev/null
+++ b/lib/tests/markdown_test.php
@@ -0,0 +1,66 @@
+<?php
+// This file is part of Moodle - http://moodle.org/
+//
+// Moodle is free software: you can redistribute it and/or modify
+// it under the terms of the GNU General Public License as published by
+// the Free Software Foundation, either version 3 of the License, or
+// (at your option) any later version.
+//
+// Moodle is distributed in the hope that it will be useful,
+// but WITHOUT ANY WARRANTY; without even the implied warranty of
+// MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE.  See the
+// GNU General Public License for more details.
+//
+// You should have received a copy of the GNU General Public License
+// along with Moodle.  If not, see <http://www.gnu.org/licenses/>.
+
+/**
+ * Test markdown text format
+ *
+ * @package    core
+ * @category   phpunit
+ * @copyright  2012 Petr Skoda {@link http://skodak.org}
+ * @license    http://www.gnu.org/copyleft/gpl.html GNU GPL v3 or later
+ */
+
+defined('MOODLE_INTERNAL') || die();
+
+
+/**
+ * This is not a complete markdown test, it just validates
+ * Moodle integration works.
+ *
+ * See http://daringfireball.net/projects/markdown/basics
+ * for more format information.
+ *
+ * @package    core
+ * @category   phpunit
+ * @copyright  2012 Petr Skoda {@link http://skodak.org}
+ * @license    http://www.gnu.org/copyleft/gpl.html GNU GPL v3 or later
+ */
+class core_markdown_testcase extends basic_testcase {
+
+    public function test_paragraphs() {
+        $text = "one\n\ntwo";
+        $result = "<p>one</p>\n\n<p>two</p>\n";
+        $this->assertEquals($result, markdown_to_html($text));
+    }
+
+    public function test_headings() {
+        $text = "Header 1\n====================\n\n## Header 2";
+        $result = "<h1>Header 1</h1>\n\n<h2>Header 2</h2>\n";
+        $this->assertEquals($result, markdown_to_html($text));
+    }
+
+    public function test_lists() {
+        $text = "* one\n* two\n* three\n";
+        $result = "<ul>\n<li>one</li>\n<li>two</li>\n<li>three</li>\n</ul>\n";
+        $this->assertEquals($result, markdown_to_html($text));
+    }
+
+    public function test_links() {
+        $text = "some [example link](http://example.com/)";
+        $result = "<p>some <a href=\"http://example.com/\">example link</a></p>\n";
+        $this->assertEquals($result, markdown_to_html($text));
+    }
+}
diff --git a/lib/thirdpartylibs.xml b/lib/thirdpartylibs.xml
index 149c148b067..c1ac4286677 100644
--- a/lib/thirdpartylibs.xml
+++ b/lib/thirdpartylibs.xml
@@ -242,7 +242,7 @@
     <location>markdown.php</location>
     <name>Markdown original+extra</name>
     <license>BSD</license>
-    <version>1.2.4</version>
+    <version>1.2.5</version>
     <licenseversion></licenseversion>
   </library>
   <library>