diff --git a/mypy/typeanal.py b/mypy/typeanal.py
index 2f85e83bb3c3..bc340c194cdc 100644
--- a/mypy/typeanal.py
+++ b/mypy/typeanal.py
@@ -110,7 +110,7 @@
     get_proper_type,
     has_type_vars,
 )
-from mypy.types_utils import is_bad_type_type_item
+from mypy.types_utils import get_bad_type_type_item
 from mypy.typevars import fill_typevars
 
 T = TypeVar("T")
@@ -652,14 +652,15 @@ 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)
+            bad_item_name = get_bad_type_type_item(item)
+            if bad_item_name:
+                self.fail(f'{type_str} can\'t contain "{bad_item_name}"', 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 1cd56eae5835..aaa7d7fba37a 100644
--- a/mypy/types_utils.py
+++ b/mypy/types_utils.py
@@ -15,6 +15,7 @@
     AnyType,
     CallableType,
     Instance,
+    LiteralType,
     NoneType,
     Overloaded,
     ParamSpecType,
@@ -75,21 +76,33 @@ def is_invalid_recursive_alias(seen_nodes: set[TypeAlias], target: Type) -> bool
     return False
 
 
-def is_bad_type_type_item(item: Type) -> bool:
+def get_bad_type_type_item(item: Type) -> str | None:
     """Prohibit types like Type[Type[...]].
 
     Such types are explicitly prohibited by PEP 484. Also, they cause problems
     with recursive types like T = Type[T], because internal representation of
     TypeType item is normalized (i.e. always a proper type).
+
+    Also forbids `Type[Literal[...]]`, because typing spec does not allow it.
     """
+    # TODO: what else cannot be present in `type[...]`?
     item = get_proper_type(item)
     if isinstance(item, TypeType):
-        return True
+        return "Type[...]"
+    if isinstance(item, LiteralType):
+        return "Literal[...]"
     if isinstance(item, UnionType):
-        return any(
-            isinstance(get_proper_type(i), TypeType) for i in flatten_nested_unions(item.items)
-        )
-    return False
+        items = [
+            bad_item
+            for typ in flatten_nested_unions(item.items)
+            if (bad_item := get_bad_type_type_item(typ)) is not None
+        ]
+        if not items:
+            return None
+        if len(items) == 1:
+            return items[0]
+        return f"Union[{', '.join(items)}]"
+    return None
 
 
 def is_union_with_any(tp: Type) -> bool:
diff --git a/test-data/unit/check-literal.test b/test-data/unit/check-literal.test
index 2f94b5df0f83..b2d3024d3b44 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[...]"
+y: Type[Union[Literal[1], Literal[2]]]  # E: Type[...] can't contain "Union[Literal[...], Literal[...]]"
+z: Type[Literal[1, 2]]  # E: Type[...] can't contain "Union[Literal[...], Literal[...]]"
+[builtins fixtures/tuple.pyi]
diff --git a/test-data/unit/check-recursive-types.test b/test-data/unit/check-recursive-types.test
index 4d7af98204fb..a00a31863771 100644
--- a/test-data/unit/check-recursive-types.test
+++ b/test-data/unit/check-recursive-types.test
@@ -409,8 +409,9 @@ def local() -> None:
     x: L
     reveal_type(x)  # N: Revealed type is "builtins.list[Union[builtins.int, Any]]"
 
-S = Type[S]  # E: Type[...] can't contain another Type[...]
-U = Type[Union[int, U]]  # E: Type[...] can't contain another Type[...]
+S = Type[S]  # E: Type[...] can't contain "Type[...]"
+U = Type[Union[int, U]]  # E: Type[...] can't contain "Union[Type[...], Type[...]]" \
+                         # E: Type[...] can't contain "Type[...]"
 x: U
 reveal_type(x)  # N: Revealed type is "Type[Any]"