diff --git a/rxjava-core/src/main/java/rx/Observable.java b/rxjava-core/src/main/java/rx/Observable.java
index 6bcd3e9f775..3dcff7fb697 100644
--- a/rxjava-core/src/main/java/rx/Observable.java
+++ b/rxjava-core/src/main/java/rx/Observable.java
@@ -3520,11 +3520,18 @@ public Observable<T> onErrorReturn(Func1<Throwable, ? extends T> resumeFunction)
      *            Observable, whose result will be used in the next accumulator call
      * @return an Observable that emits a single item that is the result of accumulating the
      *         output from the source Observable
+     * @throws IllegalArgumentException
+     *             if Observable sequence is empty.
      * @see <a href="http://msdn.microsoft.com/en-us/library/hh229154(v%3Dvs.103).aspx">MSDN: Observable.Aggregate</a>
      * @see <a href="http://en.wikipedia.org/wiki/Fold_(higher-order_function)">Wikipedia: Fold (higher-order function)</a>
      */
     public Observable<T> reduce(Func2<T, T, T> accumulator) {
-        return create(OperationScan.scan(this, accumulator)).takeLast(1);
+        /*
+         * Discussion and confirmation of implementation at https://github.com/Netflix/RxJava/issues/423#issuecomment-27642532
+         * 
+         * It should use last() not takeLast(1) since it needs to emit an error if the sequence is empty.
+         */
+        return create(OperationScan.scan(this, accumulator)).last();
     }
 
     /**
diff --git a/rxjava-core/src/test/java/rx/ObservableTests.java b/rxjava-core/src/test/java/rx/ObservableTests.java
index 496f520a116..d2ff7d5d88c 100644
--- a/rxjava-core/src/test/java/rx/ObservableTests.java
+++ b/rxjava-core/src/test/java/rx/ObservableTests.java
@@ -36,6 +36,7 @@
 import rx.observables.ConnectableObservable;
 import rx.subscriptions.BooleanSubscription;
 import rx.subscriptions.Subscriptions;
+import rx.util.functions.Action0;
 import rx.util.functions.Action1;
 import rx.util.functions.Func1;
 import rx.util.functions.Func2;
@@ -210,6 +211,31 @@ public Integer call(Integer t1, Integer t2) {
         verify(w).onNext(10);
     }
 
+    
+    /**
+     * A reduce should fail with an IllegalArgumentException if done on an empty Observable.
+     */
+    @Test(expected = IllegalArgumentException.class)
+    public void testReduceWithEmptyObservable() {
+        Observable<Integer> observable = Observable.range(1, 0);
+        observable.reduce(new Func2<Integer, Integer, Integer>() {
+
+            @Override
+            public Integer call(Integer t1, Integer t2) {
+                return t1 + t2;
+            }
+
+        }).toBlockingObservable().forEach(new Action1<Integer>() {
+
+            @Override
+            public void call(Integer t1) {
+                // do nothing ... we expect an exception instead
+            }
+        });
+
+        fail("Expected an exception to be thrown");
+    }
+    
     @Test
     public void testReduceWithInitialValue() {
         Observable<Integer> observable = Observable.from(1, 2, 3, 4);