diff --git a/lib/ansible/utils/template.py b/lib/ansible/utils/template.py
index 7e7b984fe4c..6e8893e2c84 100644
--- a/lib/ansible/utils/template.py
+++ b/lib/ansible/utils/template.py
@@ -157,6 +157,8 @@ def _varFind(basedir, text, vars, depth=0):
         if lookup_plugin_name == 'LOOKUP':
             lookup_plugin_name, args = args.split(",", 1)
             args = args.strip()
+        # args have to be templated
+        args = varReplace(basedir, args, vars, depth=depth+1, expand_lists=True)
         instance = utils.plugins.lookup_loader.get(lookup_plugin_name.lower(), basedir=basedir)
         if instance is not None:
             replacement = instance.run(args, inject=vars)
diff --git a/test/TestUtils.py b/test/TestUtils.py
index 1cf6e61bf26..7b748919edd 100644
--- a/test/TestUtils.py
+++ b/test/TestUtils.py
@@ -272,9 +272,9 @@ class TestUtils(unittest.TestCase):
         assert res == u'hello oh great one'
 
     def test_varReplace_include(self):
-        template = 'hello $FILE(world) $LOOKUP(file, world)'
+        template = 'hello $FILE(world) $LOOKUP(file, $filename)'
 
-        res = ansible.utils.template("test", template, {}, expand_lists=True)
+        res = ansible.utils.template("test", template, {'filename': 'world'}, expand_lists=True)
 
         assert res == u'hello world world'