diff --git a/mypy/typeanal.py b/mypy/typeanal.py
index 2f85e83bb3c34..22da40a1548af 100644
--- a/mypy/typeanal.py
+++ b/mypy/typeanal.py
@@ -652,14 +652,14 @@ def try_analyze_special_unbound_type(self, t: UnboundType, fullname: str) -> Typ
                     # To prevent assignment of 'builtins.type' inferred as 'builtins.object'
                     # See https://github.com/python/mypy/issues/9476 for more information
                     return None
+            type_str = "Type[...]" if fullname == "typing.Type" else "type[...]"
             if len(t.args) != 1:
-                type_str = "Type[...]" if fullname == "typing.Type" else "type[...]"
                 self.fail(
-                    type_str + " must have exactly one type argument", t, code=codes.VALID_TYPE
+                    f"{type_str} must have exactly one type argument", t, code=codes.VALID_TYPE
                 )
             item = self.anal_type(t.args[0])
             if is_bad_type_type_item(item):
-                self.fail("Type[...] can't contain another Type[...]", t, code=codes.VALID_TYPE)
+                self.fail(f'{type_str} can\'t contain "{item}"', t, code=codes.VALID_TYPE)
                 item = AnyType(TypeOfAny.from_error)
             return TypeType.make_normalized(item, line=t.line, column=t.column)
         elif fullname == "typing.ClassVar":
diff --git a/mypy/types_utils.py b/mypy/types_utils.py
index 1cd56eae5835c..1f3483193a757 100644
--- a/mypy/types_utils.py
+++ b/mypy/types_utils.py
@@ -26,6 +26,7 @@
     TypeVarType,
     UnionType,
     UnpackType,
+    LiteralType,
     flatten_nested_unions,
     get_proper_type,
     get_proper_types,
@@ -83,11 +84,11 @@ def is_bad_type_type_item(item: Type) -> bool:
     TypeType item is normalized (i.e. always a proper type).
     """
     item = get_proper_type(item)
-    if isinstance(item, TypeType):
+    if isinstance(item, (TypeType, LiteralType)):
         return True
     if isinstance(item, UnionType):
         return any(
-            isinstance(get_proper_type(i), TypeType) for i in flatten_nested_unions(item.items)
+            is_bad_type_type_item(typ) for typ in flatten_nested_unions(item.items)
         )
     return False
 
diff --git a/test-data/unit/check-literal.test b/test-data/unit/check-literal.test
index 2f94b5df0f83c..cc9abf91da5e7 100644
--- a/test-data/unit/check-literal.test
+++ b/test-data/unit/check-literal.test
@@ -2984,3 +2984,12 @@ class C(Base):
             reveal_type(sep)  # N: Revealed type is "Union[Literal['a'], Literal['b']]"
         return super().feed_data(sep)
 [builtins fixtures/tuple.pyi]
+
+[case testLiteralInsideAType]
+from typing_extensions import Literal
+from typing import Type, Union
+
+x: Type[Literal[1]]  # E: Type[...] can't contain "Literal[1]"
+y: Type[Union[Literal[1], Literal[2]]]  # E: Type[...] can't contain "Union[Literal[1], Literal[2]]"
+z: Type[Literal[1, 2]]  # E: Type[...] can't contain "Union[Literal[1], Literal[2]]"
+[builtins fixtures/tuple.pyi]