@@ -177,8 +177,9 @@ def infer_constraints(template: Type, actual: Type, direction: int) -> list[Cons
         for (t, a) in reversed(TypeState.inferring)
     ):
         return []
-    if has_recursive_types(template):
+    if has_recursive_types(template) or isinstance(get_proper_type(template), Instance):
         # This case requires special care because it may cause infinite recursion.
+        # Note that we include Instances because the may be recursive as str(Sequence[str]).
         if not has_type_vars(template):
             # Return early on an empty branch.
             return []
 
@@ -3240,6 +3240,12 @@ def __init__(self) -> None:
     def visit_type_var(self, t: TypeVarType) -> bool:
         return True
 
+    def visit_type_var_tuple(self, t: TypeVarTupleType) -> bool:
+        return True
+
+    def visit_param_spec(self, t: ParamSpecType) -> bool:
+        return True
+
 
 def has_type_vars(typ: Type) -> bool:
     """Check if a type contains any type variables (recursively)."""
 
@@ -826,3 +826,14 @@ z = z
 x = y  # E: Incompatible types in assignment (expression has type "L", variable has type "K")
 z = x  # OK
 [builtins fixtures/tuple.pyi]
+
+[case testRecursiveInstanceInferenceNoCrash]
+from typing import Sequence, TypeVar, Union
+
+class C(Sequence[C]): ...
+
+T = TypeVar("T")
+def foo(x: T) -> C: ...
+
+Nested = Union[C, Sequence[Nested]]
+x: Nested = foo(42)