diff --git a/cheetah/Compiler.py b/cheetah/Compiler.py
index f4c76680..ee558681 100644
--- a/cheetah/Compiler.py
+++ b/cheetah/Compiler.py
@@ -1556,7 +1556,7 @@ def __init__(self, source=None, file=None,
         
         else:
             unicodeMatch = unicodeDirectiveRE.search(source)
-            encodingMatch = encodingDirectiveRE.match(source)
+            encodingMatch = encodingDirectiveRE.search(source)
             if unicodeMatch:
                 if encodingMatch:
                     raise ParseError(
diff --git a/cheetah/Tests/SyntaxAndOutput.py b/cheetah/Tests/SyntaxAndOutput.py
index 4fc467c4..e052e6e4 100644
--- a/cheetah/Tests/SyntaxAndOutput.py
+++ b/cheetah/Tests/SyntaxAndOutput.py
@@ -742,6 +742,12 @@ def test5(self):
         self.verify("#encoding latin-1\nAndr\202",
                     u'Andr\202')
 
+    def test6(self):
+        '''Using #encoding on the second line'''
+        self.verify("""### Comments on the first line
+#encoding utf-8\n\xe1\x88\xb4""",
+                    u'\u1234', outputEncoding='utf8')
+
 class UnicodeDirective(OutputTest):
     def test1(self):
         """basic #unicode """