diff --git a/crates/ty_python_semantic/resources/corpus/cyclic_lambdas.py b/crates/ty_python_semantic/resources/corpus/cyclic_lambdas.py
new file mode 100644
index 0000000000000..e7868d8dda2cf
--- /dev/null
+++ b/crates/ty_python_semantic/resources/corpus/cyclic_lambdas.py
@@ -0,0 +1,25 @@
+# This test would previously panic with: `infer_definition_types(Id(1406)): execute: too many cycle iterations`.
+
+lambda: name_4
+
+@lambda: name_5
+class name_1: ...
+
+name_2 = [lambda: name_4, name_1]
+
+if name_2:
+    @(*name_2,)
+    class name_3: ...
+    assert unique_name_19
+
+@lambda: name_3
+class name_4[*name_2](0, name_1=name_3): ...
+
+try:
+    [name_5, name_4] = *name_4, = name_4
+except* 0:
+    ...
+else:
+    async def name_4(): ...
+
+for name_3 in name_4: ...
diff --git a/crates/ty_python_semantic/resources/mdtest/bidirectional.md b/crates/ty_python_semantic/resources/mdtest/bidirectional.md
index d62af32105ef0..db8fe891d7305 100644
--- a/crates/ty_python_semantic/resources/mdtest/bidirectional.md
+++ b/crates/ty_python_semantic/resources/mdtest/bidirectional.md
@@ -397,6 +397,59 @@ def _(flag: bool):
     reveal_type(x2)  # revealed: list[int | None]
 ```
 
+## Lambda expressions
+
+If a lambda expression is annotated as a `Callable` type, the body of the lambda is inferred with
+the annotated return type as type context, and the annotated parameter types are respected:
+
+```py
+from typing import Callable, TypedDict
+
+class Bar(TypedDict):
+    bar: int
+
+f1 = lambda x: {"bar": 1}
+reveal_type(f1)  # revealed: (x) -> dict[str, int]
+
+f2: Callable[[int], Bar] = lambda x: {"bar": 1}
+reveal_type(f2)  # revealed: (x: int) -> Bar
+
+# error: [missing-typed-dict-key] "Missing required key 'bar' in TypedDict `Bar` constructor"
+# error: [invalid-assignment] "Object of type `(x: int) -> dict[Unknown, Unknown]` is not assignable to `(int, /) -> Bar`"
+f3: Callable[[int], Bar] = lambda x: {}
+reveal_type(f3)  # revealed: (int, /) -> Bar
+
+# TODO: This should reveal `str`.
+f4: Callable[[str], str] = lambda x: reveal_type(x)  # revealed: Unknown
+reveal_type(f4)  # revealed: (x: str) -> Unknown
+
+# TODO: This should not error once we support `Unpack`.
+# error: [invalid-assignment]
+f5: Callable[[*tuple[int, ...]], None] = lambda x, y, z: None
+reveal_type(f5)  # revealed: (tuple[int, ...], /) -> None
+
+f6: Callable[[int, str], None] = lambda *args: None
+reveal_type(f6)  # revealed: (*args) -> None
+
+# N.B. `Callable` annotations only support positional parameters.
+# error: [invalid-assignment]
+f7: Callable[[int], None] = lambda *, x=1: None
+reveal_type(f7)  # revealed: (int, /) -> None
+
+# TODO: This should reveal `(*args: int, *, x=1) -> None` once we support `Unpack`.
+f8: Callable[[*tuple[int, ...], int], None] = lambda *args, x=1: None
+reveal_type(f8)  # revealed: (*args, *, x=1) -> None
+```
+
+We do not currently account for type annotations present later in the scope:
+
+```py
+f9 = lambda: [1]
+# TODO: This should not error.
+_: list[int | str] = f9()  # error: [invalid-assignment]
+reveal_type(f9)  # revealed: () -> list[int]
+```
+
 ## Dunder Calls
 
 The key and value parameters types are used as type context for `__setitem__` dunder calls:
diff --git a/crates/ty_python_semantic/resources/mdtest/cycle.md b/crates/ty_python_semantic/resources/mdtest/cycle.md
index 4a7fc249c0345..c29d61747a283 100644
--- a/crates/ty_python_semantic/resources/mdtest/cycle.md
+++ b/crates/ty_python_semantic/resources/mdtest/cycle.md
@@ -128,16 +128,16 @@ class C:
         self.c = lambda positional_only=self.c, /: positional_only
         self.d = lambda *, kw_only=self.d: kw_only
 
-        # revealed: (positional=...) -> Unknown
+        # revealed: (positional=...) -> Unknown | ((positional=...) -> Divergent) | ((positional=...) -> Unknown) | ((positional=...) -> Divergent)
         reveal_type(self.a)
 
-        # revealed: (*, kw_only=...) -> Unknown
+        # revealed: (*, kw_only=...) -> Unknown | ((*, kw_only=...) -> Divergent) | ((*, kw_only=...) -> Unknown) | ((*, kw_only=...) -> Divergent)
         reveal_type(self.b)
 
-        # revealed: (positional_only=..., /) -> Unknown
+        # revealed: (positional_only=..., /) -> Unknown | ((positional_only=..., /) -> Divergent) | ((positional_only=..., /) -> Unknown) | ((positional_only=..., /) -> Divergent)
         reveal_type(self.c)
 
-        # revealed: (*, kw_only=...) -> Unknown
+        # revealed: (*, kw_only=...) -> Unknown | ((*, kw_only=...) -> Divergent) | ((*, kw_only=...) -> Unknown) | ((*, kw_only=...) -> Divergent)
         reveal_type(self.d)
 ```
 
diff --git a/crates/ty_python_semantic/resources/mdtest/expression/lambda.md b/crates/ty_python_semantic/resources/mdtest/expression/lambda.md
index ad0a0afc5595b..0993896dc3d8e 100644
--- a/crates/ty_python_semantic/resources/mdtest/expression/lambda.md
+++ b/crates/ty_python_semantic/resources/mdtest/expression/lambda.md
@@ -5,7 +5,7 @@
 `lambda` expressions can be defined without any parameters.
 
 ```py
-reveal_type(lambda: 1)  # revealed: () -> Unknown
+reveal_type(lambda: 1)  # revealed: () -> Literal[1]
 
 # error: [unresolved-reference]
 reveal_type(lambda: a)  # revealed: () -> Unknown
@@ -24,7 +24,7 @@ reveal_type(lambda a, b: a + b)  # revealed: (a, b) -> Unknown
 But, it can have default values:
 
 ```py
-reveal_type(lambda a=1: a)  # revealed: (a=1) -> Unknown
+reveal_type(lambda a=1: a)  # revealed: (a=1) -> Unknown | Literal[1]
 reveal_type(lambda a, b=2: a)  # revealed: (a, b=2) -> Unknown
 ```
 
@@ -37,25 +37,25 @@ reveal_type(lambda a, b, /, c: c)  # revealed: (a, b, /, c) -> Unknown
 And, keyword-only parameters:
 
 ```py
-reveal_type(lambda a, *, b=2, c: b)  # revealed: (a, *, b=2, c) -> Unknown
+reveal_type(lambda a, *, b=2, c: b)  # revealed: (a, *, b=2, c) -> Unknown | Literal[2]
 ```
 
 And, variadic parameter:
 
 ```py
-reveal_type(lambda *args: args)  # revealed: (*args) -> Unknown
+reveal_type(lambda *args: args)  # revealed: (*args) -> tuple[Unknown, ...]
 ```
 
 And, keyword-varidic parameter:
 
 ```py
-reveal_type(lambda **kwargs: kwargs)  # revealed: (**kwargs) -> Unknown
+reveal_type(lambda **kwargs: kwargs)  # revealed: (**kwargs) -> dict[str, Unknown]
 ```
 
 Mixing all of them together:
 
 ```py
-# revealed: (a, b, /, c=True, *args, *, d="default", e=5, **kwargs) -> Unknown
+# revealed: (a, b, /, c=True, *args, *, d="default", e=5, **kwargs) -> None
 reveal_type(lambda a, b, /, c=True, *args, d="default", e=5, **kwargs: None)
 ```
 
@@ -94,7 +94,7 @@ Here, a `lambda` expression is used as the default value for a parameter in anot
 expression.
 
 ```py
-reveal_type(lambda a=lambda x, y: 0: 2)  # revealed: (a=...) -> Unknown
+reveal_type(lambda a=lambda x, y: 0: 2)  # revealed: (a=...) -> Literal[2]
 ```
 
 ## Assignment
@@ -114,6 +114,9 @@ a4: Callable[[int, int], None] = lambda *args: None
 a5: Callable[[], None] = lambda x: None
 # error: [invalid-assignment]
 a6: Callable[[int], None] = lambda: None
+
+# error: [invalid-assignment]
+a7: Callable[[], str] = lambda: 1
 ```
 
 ## Function-like behavior of lambdas
diff --git a/crates/ty_python_semantic/src/semantic_index/scope.rs b/crates/ty_python_semantic/src/semantic_index/scope.rs
index df10f6e7dd660..d5ffb43f0a0e8 100644
--- a/crates/ty_python_semantic/src/semantic_index/scope.rs
+++ b/crates/ty_python_semantic/src/semantic_index/scope.rs
@@ -38,7 +38,8 @@ impl<'db> ScopeId<'db> {
     pub(crate) fn accepts_type_context(self, db: &dyn Db) -> bool {
         matches!(
             self.node(db),
-            NodeWithScopeKind::ListComprehension(_)
+            NodeWithScopeKind::Lambda(_)
+                | NodeWithScopeKind::ListComprehension(_)
                 | NodeWithScopeKind::SetComprehension(_)
                 | NodeWithScopeKind::DictComprehension(_)
         )
diff --git a/crates/ty_python_semantic/src/types/infer/builder.rs b/crates/ty_python_semantic/src/types/infer/builder.rs
index 520b2e8f7841e..a23e181e8fd8c 100644
--- a/crates/ty_python_semantic/src/types/infer/builder.rs
+++ b/crates/ty_python_semantic/src/types/infer/builder.rs
@@ -579,7 +579,9 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
             NodeWithScopeKind::Function(function) => {
                 self.infer_function_body(function.node(self.module()));
             }
-            NodeWithScopeKind::Lambda(lambda) => self.infer_lambda_body(lambda.node(self.module())),
+            NodeWithScopeKind::Lambda(lambda) => {
+                self.infer_lambda_body(lambda.node(self.module()), tcx);
+            }
             NodeWithScopeKind::Class(class) => self.infer_class_body(class.node(self.module())),
             NodeWithScopeKind::ClassTypeParameters(class) => {
                 self.infer_class_type_params(class.node(self.module()));
@@ -5468,7 +5470,9 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
             ast::Expr::Subscript(subscript) => self.infer_subscript_expression(subscript),
             ast::Expr::Slice(slice) => self.infer_slice_expression(slice),
             ast::Expr::If(if_expression) => self.infer_if_expression(if_expression, tcx),
-            ast::Expr::Lambda(lambda_expression) => self.infer_lambda_expression(lambda_expression),
+            ast::Expr::Lambda(lambda_expression) => {
+                self.infer_lambda_expression(lambda_expression, tcx)
+            }
             ast::Expr::Call(call_expression) => self.infer_call_expression(call_expression, tcx),
             ast::Expr::Starred(starred) => self.infer_starred_expression(starred, tcx),
             ast::Expr::Yield(yield_expression) => self.infer_yield_expression(yield_expression),
@@ -6724,11 +6728,15 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
         }
     }
 
-    fn infer_lambda_body(&mut self, lambda_expression: &ast::ExprLambda) {
-        self.infer_expression(&lambda_expression.body, TypeContext::default());
+    fn infer_lambda_body(&mut self, lambda_expression: &ast::ExprLambda, tcx: TypeContext<'db>) {
+        self.infer_expression(&lambda_expression.body, tcx);
     }
 
-    fn infer_lambda_expression(&mut self, lambda_expression: &ast::ExprLambda) -> Type<'db> {
+    fn infer_lambda_expression(
+        &mut self,
+        lambda_expression: &ast::ExprLambda,
+        tcx: TypeContext<'db>,
+    ) -> Type<'db> {
         let ast::ExprLambda {
             range: _,
             node_index: _,
@@ -6740,27 +6748,64 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
         let in_stub = self.in_stub();
         let previous_deferred_state = std::mem::replace(&mut self.deferred_state, in_stub.into());
 
+        let callable_tcx = if let Some(tcx) = tcx.annotation
+            // TODO: We could perform multi-inference here if there are multiple `Callable` annotations
+            // in the union.
+            && let Some(callable) = tcx
+                .filter_union(self.db(), Type::is_callable_type)
+                .as_callable()
+        {
+            let [signature] = callable.signatures(self.db()).overloads.as_slice() else {
+                panic!("`Callable` type annotations cannot be overloaded");
+            };
+
+            Some(signature)
+        } else {
+            None
+        };
+
+        // Extract the annotated parameter types.
+        //
+        // Note that `Callable` annotations are only valid for positional parameters.
+        let mut parameter_types = match callable_tcx {
+            None => [].iter(),
+            Some(signature) => signature.parameters().into_iter(),
+        }
+        .map(Parameter::annotated_type);
+
         let parameters = if let Some(parameters) = parameters {
             let positional_only = parameters
                 .posonlyargs
                 .iter()
                 .map(|param| {
-                    Parameter::positional_only(Some(param.name().id.clone()))
+                    let parameter = Parameter::positional_only(Some(param.name().id.clone()))
                         .with_optional_default_type(param.default().map(|default_expr| {
                             self.infer_expression(default_expr, TypeContext::default())
                                 .replace_parameter_defaults(self.db())
-                        }))
+                        }));
+
+                    if let Some(annotated_type) = parameter_types.next() {
+                        parameter.with_annotated_type(annotated_type)
+                    } else {
+                        parameter
+                    }
                 })
                 .collect::<Vec<_>>();
             let positional_or_keyword = parameters
                 .args
                 .iter()
                 .map(|param| {
-                    Parameter::positional_or_keyword(param.name().id.clone())
+                    let parameter = Parameter::positional_or_keyword(param.name().id.clone())
                         .with_optional_default_type(param.default().map(|default_expr| {
                             self.infer_expression(default_expr, TypeContext::default())
                                 .replace_parameter_defaults(self.db())
-                        }))
+                        }));
+
+                    if let Some(annotated_type) = parameter_types.next() {
+                        parameter.with_annotated_type(annotated_type)
+                    } else {
+                        parameter
+                    }
                 })
                 .collect::<Vec<_>>();
             let variadic = parameters
@@ -6784,25 +6829,48 @@ impl<'db, 'ast> TypeInferenceBuilder<'db, 'ast> {
                 .as_ref()
                 .map(|param| Parameter::keyword_variadic(param.name().id.clone()));
 
-            Parameters::new(
-                self.db(),
-                positional_only
-                    .into_iter()
-                    .chain(positional_or_keyword)
-                    .chain(variadic)
-                    .chain(keyword_only)
-                    .chain(keyword_variadic),
-            )
+            let parameters = positional_only
+                .into_iter()
+                .chain(positional_or_keyword)
+                .chain(variadic)
+                .chain(keyword_only)
+                .chain(keyword_variadic);
+
+            Parameters::new(self.db(), parameters)
         } else {
             Parameters::empty()
         };
 
         self.deferred_state = previous_deferred_state;
 
-        // TODO: Useful inference of a lambda's return type will require a different approach,
-        // which does the inference of the body expression based on arguments at each call site,
-        // rather than eagerly computing a return type without knowing the argument types.
-        Type::function_like_callable(self.db(), Signature::new(parameters, Type::unknown()))
+        let Some(scope_id) = self
+            .index
+            .try_node_scope(NodeWithScopeRef::Lambda(lambda_expression))
+        else {
+            return Type::unknown();
+        };
+
+        let scope = scope_id.to_scope_id(self.db(), self.file());
+
+        // If we have a direct `Callable` type context, we can infer the body with the annotated
+        // return type as type context.
+        let return_tcx = if let Some(signature) = callable_tcx {
+            match signature.return_ty {
+                Type::Dynamic(DynamicType::Unknown) => TypeContext::new(None),
+                _ => TypeContext::new(Some(signature.return_ty)),
+            }
+        } else {
+            // TODO: Useful inference of a lambda's return type will require a different approach,
+            // which does the inference of the body expression based on arguments at each call site,
+            // rather than eagerly computing a return type without knowing the argument types.
+            TypeContext::new(None)
+        };
+
+        let inference = infer_scope_types(self.db(), scope, return_tcx);
+        self.extend_scope(inference);
+
+        let return_ty = inference.expression_type(lambda_expression.body.as_ref());
+        Type::function_like_callable(self.db(), Signature::new(parameters, return_ty))
     }
 
     /// Attempt to narrow a splatted dictionary argument based on the narrowed types of individual
diff --git a/crates/ty_python_semantic/src/types/infer/builder/type_expression.rs b/crates/ty_python_semantic/src/types/infer/builder/type_expression.rs
index 92a8f5b4ce495..7691b685b5ca8 100644
--- a/crates/ty_python_semantic/src/types/infer/builder/type_expression.rs
+++ b/crates/ty_python_semantic/src/types/infer/builder/type_expression.rs
@@ -461,7 +461,7 @@ impl<'db> TypeInferenceBuilder<'db, '_> {
 
             ast::Expr::Lambda(lambda_expression) => {
                 if !self.deferred_state.in_string_annotation() {
-                    self.infer_lambda_expression(lambda_expression);
+                    self.infer_lambda_expression(lambda_expression, TypeContext::default());
                 }
                 self.report_invalid_type_expression(
                     expression,