diff --git a/src/Paragraph.cpp b/src/Paragraph.cpp
index 8ba663939b..8716982b02 100644
--- a/src/Paragraph.cpp
+++ b/src/Paragraph.cpp
@@ -2307,6 +2307,10 @@ void Paragraph::latex(BufferParams const & bparams,
 	if (body_pos > 0) {
 		// the optional argument is kept in curly brackets in
 		// case it contains a ']'
+		// This is not strictly needed, but if this is changed it
+		// would be a file format change, and tex2lyx would need
+		// to be adjusted, since it unconditionally removes the
+		// braces when it parses \item.
 		os << "[{";
 		column += 2;
 		basefont = getLabelFont(bparams, outerfont);
diff --git a/src/tex2lyx/test/test-structure.tex b/src/tex2lyx/test/test-structure.tex
index d773dee15c..cc13a6e311 100644
--- a/src/tex2lyx/test/test-structure.tex
+++ b/src/tex2lyx/test/test-structure.tex
@@ -269,6 +269,10 @@ What else? Well, we have descriptions:
 \begin{description}
 \item[ABC] first item
 \item[BCD] second one
+\item[{x y z}] with space
+\item  % hi there
+[{x y % bla
+z}] and with comments
 \end{description}
 labelings:
 \begin{lyxlist}{00.00.0000}
diff --git a/src/tex2lyx/text.cpp b/src/tex2lyx/text.cpp
index 6247fce81d..7c3dcc2da7 100644
--- a/src/tex2lyx/text.cpp
+++ b/src/tex2lyx/text.cpp
@@ -2158,16 +2158,15 @@ void parse_text(Parser & p, ostream & os, unsigned flags, bool outer,
 		}
 
 		else if (t.cs() == "item") {
-			p.skip_spaces();
 			string s;
-			bool optarg = false;
-			if (p.next_token().cat() != catEscape &&
-			    p.next_token().character() == '[') {
-				p.get_token(); // eat '['
-				s = parse_text_snippet(p, FLAG_BRACK_LAST,
-						       outer, context);
-				optarg = true;
-			}
+			bool const optarg = p.hasOpt();
+			if (optarg) {
+				// FIXME: This swallows comments, but we cannot use
+				//        eat_whitespace() since we must not output
+				//        anything before the item.
+				s = p.getArg('[', ']');
+			} else
+				p.skip_spaces(false);
 			context.set_item();
 			context.check_layout(os);
 			if (context.has_item) {
@@ -2183,13 +2182,30 @@ void parse_text(Parser & p, ostream & os, unsigned flags, bool outer,
 				if (context.layout->labeltype != LABEL_MANUAL) {
 					// LyX does not support \item[\mybullet]
 					// in itemize environments
-					handle_ert(os, "[", context);
-					os << s;
-					handle_ert(os, "]", context);
+					Parser p2(s + ']');
+					os << parse_text_snippet(p2,
+						FLAG_BRACK_LAST, outer, context);
 				} else if (!s.empty()) {
+					// LyX adds braces around the argument,
+					// so we need to remove them here.
+					if (s.size() > 2 && s[0] == '{' &&
+					    s[s.size()-1] == '}')
+						s = s.substr(1, s.size()-2);
+					// If the argument contains a space we
+					// must put it into ERT: Otherwise LyX
+					// would misinterpret the space as
+					// item delimiter (bug 7663)
+					if (contains(s, ' ')) {
+						handle_ert(os, s, context);
+					} else {
+						Parser p2(s + ']');
+						os << parse_text_snippet(p2,
+							FLAG_BRACK_LAST,
+							outer, context);
+					}
 					// The space is needed to separate the
 					// item from the rest of the sentence.
-					os << s << ' ';
+					os << ' ';
 					eat_whitespace(p, os, context, false);
 				}
 			}
diff --git a/status.20x b/status.20x
index ebd51b749d..a4c0927c86 100644
--- a/status.20x
+++ b/status.20x
@@ -168,6 +168,8 @@ What's new
 
 - Fix tex2lyx handling of framed boxes without inner box.
 
+- Fix tex2lyx handling of description \item with spaces (bug 7663).
+
 - Store the autosave files of unnamed buffers in the correct directory
   and make sure they are not left behind after saving (bug 7793).