diff --git a/nova/compute/manager.py b/nova/compute/manager.py
index 7b403e9cc257..053357dd182b 100644
--- a/nova/compute/manager.py
+++ b/nova/compute/manager.py
@@ -5287,12 +5287,16 @@ class ComputeManager(manager.Manager):
                                        self._rollback_live_migration,
                                        block_migration, migrate_data)
         except Exception:
-            # Executing live migration
-            # live_migration might raises exceptions, but
-            # nothing must be recovered in this version.
             LOG.exception(_LE('Live migration failed.'), instance=instance)
             with excutils.save_and_reraise_exception():
+                # Put instance and migration into error state,
+                # as its almost certainly too late to rollback
                 self._set_migration_status(migration, 'error')
+                # first refresh instance as it may have got updated by
+                # post_live_migration_at_destination
+                instance.refresh()
+                self._set_instance_obj_error_state(context, instance,
+                                                   clean_task_state=True)
 
     @wrap_exception()
     @wrap_instance_event(prefix='compute')
diff --git a/nova/tests/unit/compute/test_compute.py b/nova/tests/unit/compute/test_compute.py
index 02d0598a9bda..847d5b8cbaa7 100644
--- a/nova/tests/unit/compute/test_compute.py
+++ b/nova/tests/unit/compute/test_compute.py
@@ -5801,6 +5801,51 @@ class ComputeTestCase(BaseTestCase):
         mock_post.assert_called_once_with(c, instance, False, dest)
         mock_clear.assert_called_once_with(mock.ANY)
 
+    @mock.patch.object(compute_rpcapi.ComputeAPI, 'pre_live_migration')
+    @mock.patch.object(network_api.API, 'migrate_instance_start')
+    @mock.patch.object(compute_rpcapi.ComputeAPI,
+                       'post_live_migration_at_destination')
+    @mock.patch.object(compute_manager.InstanceEvents,
+                       'clear_events_for_instance')
+    @mock.patch.object(compute_utils, 'EventReporter')
+    @mock.patch('nova.objects.Migration.save')
+    def test_live_migration_handles_errors_correctly(self,
+            mock_save, mock_event, mock_clear,
+            mock_post, mock_migrate, mock_pre):
+        # Confirm live_migration() works as expected correctly.
+        # creating instance testdata
+        c = context.get_admin_context()
+        instance = self._create_fake_instance_obj(context=c)
+        instance.host = self.compute.host
+        dest = 'desthost'
+
+        migrate_data = migrate_data_obj.LibvirtLiveMigrateData(
+            is_shared_instance_path=False,
+            is_shared_block_storage=False)
+        mock_pre.return_value = migrate_data
+
+        # start test
+        migration = objects.Migration()
+        with mock.patch.object(self.compute.driver,
+                               'cleanup') as mock_cleanup:
+            mock_cleanup.side_effect = test.TestingException
+
+            self.assertRaises(test.TestingException,
+                self.compute.live_migration,
+                c, dest, instance, False, migration, migrate_data)
+
+        # ensure we have updated the instance and migration objects
+        self.assertEqual(vm_states.ERROR, instance.vm_state)
+        self.assertIsNone(instance.task_state)
+        self.assertEqual("error", migration.status)
+
+        mock_pre.assert_called_once_with(c, instance, False, None,
+                                         dest, migrate_data)
+        self.assertEqual(0, mock_clear.call_count)
+
+        # cleanup
+        instance.destroy()
+
     @mock.patch.object(fake.FakeDriver, 'unfilter_instance')
     @mock.patch.object(network_api.API, 'migrate_instance_start')
     @mock.patch.object(compute_rpcapi.ComputeAPI,