diff --git a/core/src/core/transaction.rs b/core/src/core/transaction.rs
index e8246dddf..c536d1167 100644
--- a/core/src/core/transaction.rs
+++ b/core/src/core/transaction.rs
@@ -14,7 +14,6 @@
 
 //! Transactions
 
-use crate::consensus;
 use crate::core::hash::Hashed;
 use crate::core::verifier_cache::VerifierCache;
 use crate::core::{committed, Committed};
@@ -28,9 +27,10 @@ use crate::util::secp;
 use crate::util::secp::pedersen::{Commitment, RangeProof};
 use crate::util::static_secp_instance;
 use crate::util::RwLock;
+use crate::{consensus, global};
 use enum_primitive::FromPrimitive;
-use std::cmp::max;
 use std::cmp::Ordering;
+use std::cmp::{max, min};
 use std::collections::HashSet;
 use std::sync::Arc;
 use std::{error, fmt};
@@ -375,6 +375,12 @@ impl FixedLength for TxKernelEntry {
 pub enum Weighting {
 	/// Tx represents a tx (max block weight, accounting for additional coinbase reward).
 	AsTransaction,
+	/// Tx representing a tx with artificially limited max_weight.
+	/// This is used when selecting mineable txs from the pool.
+	AsLimitedTransaction {
+		/// The maximum (block) weight that we will allow.
+		max_weight: usize,
+	},
 	/// Tx represents a block (max block weight).
 	AsBlock,
 	/// No max weight limit (skip the weight check).
@@ -433,7 +439,7 @@ impl Readable for TransactionBody {
 			kernel_len as usize,
 		);
 
-		if tx_block_weight > consensus::MAX_BLOCK_WEIGHT {
+		if tx_block_weight > global::max_block_weight() {
 			return Err(ser::Error::TooLargeReadErr);
 		}
 
@@ -606,40 +612,31 @@ impl TransactionBody {
 	/// Verify the body is not too big in terms of number of inputs|outputs|kernels.
 	/// Weight rules vary depending on the "weight type" (block or tx or pool).
 	fn verify_weight(&self, weighting: Weighting) -> Result<(), Error> {
-		// If "tx" body then remember to reduce the max_block_weight for block requirements.
+		// A coinbase reward is a single output and a single kernel (for now).
+		// We need to account for this when verifying max tx weights.
+		let coinbase_weight = consensus::BLOCK_OUTPUT_WEIGHT + consensus::BLOCK_KERNEL_WEIGHT;
+
+		// If "tx" body then remember to reduce the max_block_weight by the weight of a kernel.
+		// If "limited tx" then compare against the provided max_weight.
 		// If "block" body then verify weight based on full set of inputs|outputs|kernels.
 		// If "pool" body then skip weight verification (pool can be larger than single block).
 		//
 		// Note: Taking a max tx and building a block from it we need to allow room
-		// for the additional coinbase reward (output + kernel).
+		// for the additional coinbase reward (1 output + 1 kernel).
 		//
-		let reserve = match weighting {
-			Weighting::AsTransaction => 1,
-			Weighting::AsBlock => 0,
+		let max_weight = match weighting {
+			Weighting::AsTransaction => global::max_block_weight().saturating_sub(coinbase_weight),
+			Weighting::AsLimitedTransaction { max_weight } => {
+				min(global::max_block_weight(), max_weight).saturating_sub(coinbase_weight)
+			}
+			Weighting::AsBlock => global::max_block_weight(),
 			Weighting::NoLimit => {
 				// We do not verify "tx as pool" weight so we are done here.
 				return Ok(());
 			}
 		};
 
-		// Note: If we add a reserve then we are reducing the number of outputs and kernels
-		// allowed in the body itself.
-		// A block is allowed to be slightly weightier than a tx to account for
-		// the additional coinbase reward output and kernel.
-		// i.e. We need to reserve space for coinbase reward when verifying tx weight.
-		//
-		// In effect we are verifying the tx _can_ be included in a block without exceeding
-		// MAX_BLOCK_WEIGHT.
-		//
-		// max_block = max_tx + coinbase
-		//
-		let tx_block_weight = TransactionBody::weight_as_block(
-			self.inputs.len(),
-			self.outputs.len() + reserve,
-			self.kernels.len() + reserve,
-		);
-
-		if tx_block_weight > consensus::MAX_BLOCK_WEIGHT {
+		if self.body_weight_as_block() > max_weight {
 			return Err(Error::TooHeavy);
 		}
 		Ok(())
diff --git a/core/src/global.rs b/core/src/global.rs
index 7cdfb5869..b85adca68 100644
--- a/core/src/global.rs
+++ b/core/src/global.rs
@@ -19,8 +19,8 @@
 use crate::consensus::HeaderInfo;
 use crate::consensus::{
 	graph_weight, BASE_EDGE_BITS, BLOCK_TIME_SEC, COINBASE_MATURITY, CUT_THROUGH_HORIZON,
-	DAY_HEIGHT, DEFAULT_MIN_EDGE_BITS, DIFFICULTY_ADJUST_WINDOW, INITIAL_DIFFICULTY, PROOFSIZE,
-	SECOND_POW_EDGE_BITS, STATE_SYNC_THRESHOLD,
+	DAY_HEIGHT, DEFAULT_MIN_EDGE_BITS, DIFFICULTY_ADJUST_WINDOW, INITIAL_DIFFICULTY,
+	MAX_BLOCK_WEIGHT, PROOFSIZE, SECOND_POW_EDGE_BITS, STATE_SYNC_THRESHOLD,
 };
 use crate::pow::{self, new_cuckaroo_ctx, new_cuckatoo_ctx, EdgeType, PoWContext};
 /// An enum collecting sets of parameters used throughout the
@@ -62,6 +62,9 @@ pub const TESTING_INITIAL_GRAPH_WEIGHT: u32 = 1;
 /// Testing initial block difficulty
 pub const TESTING_INITIAL_DIFFICULTY: u64 = 1;
 
+/// Testing max_block_weight (artifically low, just enough to support a few txs).
+pub const TESTING_MAX_BLOCK_WEIGHT: usize = 150;
+
 /// If a peer's last updated difficulty is 2 hours ago and its difficulty's lower than ours,
 /// we're sure this peer is a stuck node, and we will kick out such kind of stuck peers.
 pub const STUCK_PEER_KICK_TIME: i64 = 2 * 3600 * 1000;
@@ -227,6 +230,17 @@ pub fn initial_graph_weight() -> u32 {
 	}
 }
 
+/// Maximum allowed block weight.
+pub fn max_block_weight() -> usize {
+	let param_ref = CHAIN_TYPE.read();
+	match *param_ref {
+		ChainTypes::AutomatedTesting => TESTING_MAX_BLOCK_WEIGHT,
+		ChainTypes::UserTesting => TESTING_MAX_BLOCK_WEIGHT,
+		ChainTypes::Floonet => MAX_BLOCK_WEIGHT,
+		ChainTypes::Mainnet => MAX_BLOCK_WEIGHT,
+	}
+}
+
 /// Horizon at which we can cut-through and do full local pruning
 pub fn cut_through_horizon() -> u32 {
 	let param_ref = CHAIN_TYPE.read();
@@ -275,6 +289,12 @@ pub fn is_floonet() -> bool {
 	ChainTypes::Floonet == *param_ref
 }
 
+/// Are we for real?
+pub fn is_mainnet() -> bool {
+	let param_ref = CHAIN_TYPE.read();
+	ChainTypes::Mainnet == *param_ref
+}
+
 /// Helper function to get a nonce known to create a valid POW on
 /// the genesis block, to prevent it taking ages. Should be fine for now
 /// as the genesis block POW solution turns out to be the same for every new
diff --git a/core/tests/block.rs b/core/tests/block.rs
index a74246d6a..9cc259935 100644
--- a/core/tests/block.rs
+++ b/core/tests/block.rs
@@ -14,7 +14,7 @@
 
 pub mod common;
 use crate::common::{new_block, tx1i2o, tx2i1o, txspend1i1o};
-use crate::core::consensus::{BLOCK_OUTPUT_WEIGHT, MAX_BLOCK_WEIGHT};
+use crate::core::consensus::BLOCK_OUTPUT_WEIGHT;
 use crate::core::core::block::Error;
 use crate::core::core::hash::Hashed;
 use crate::core::core::id::ShortIdentifiable;
@@ -43,7 +43,7 @@ fn verifier_cache() -> Arc<RwLock<dyn VerifierCache>> {
 #[allow(dead_code)]
 fn too_large_block() {
 	let keychain = ExtKeychain::from_random_seed(false).unwrap();
-	let max_out = MAX_BLOCK_WEIGHT / BLOCK_OUTPUT_WEIGHT;
+	let max_out = global::max_block_weight() / BLOCK_OUTPUT_WEIGHT;
 
 	let mut pks = vec![];
 	for n in 0..(max_out + 1) {
diff --git a/p2p/src/msg.rs b/p2p/src/msg.rs
index 0eaccc194..3f9a6d733 100644
--- a/p2p/src/msg.rs
+++ b/p2p/src/msg.rs
@@ -40,10 +40,6 @@ const OTHER_MAGIC: [u8; 2] = [73, 43];
 const FLOONET_MAGIC: [u8; 2] = [83, 59];
 const MAINNET_MAGIC: [u8; 2] = [97, 61];
 
-/// Max theoretical size of a block filled with outputs.
-const MAX_BLOCK_SIZE: u64 =
-	(consensus::MAX_BLOCK_WEIGHT / consensus::BLOCK_OUTPUT_WEIGHT * 708) as u64;
-
 /// Types of messages.
 /// Note: Values here are *important* so we should only add new values at the
 /// end.
@@ -74,6 +70,11 @@ enum_from_primitive! {
 	}
 }
 
+/// Max theoretical size of a block filled with outputs.
+fn max_block_size() -> u64 {
+	(global::max_block_weight() / consensus::BLOCK_OUTPUT_WEIGHT * 708) as u64
+}
+
 // Max msg size for each msg type.
 fn max_msg_size(msg_type: Type) -> u64 {
 	match msg_type {
@@ -88,11 +89,11 @@ fn max_msg_size(msg_type: Type) -> u64 {
 		Type::Header => 365,
 		Type::Headers => 2 + 365 * MAX_BLOCK_HEADERS as u64,
 		Type::GetBlock => 32,
-		Type::Block => MAX_BLOCK_SIZE,
+		Type::Block => max_block_size(),
 		Type::GetCompactBlock => 32,
-		Type::CompactBlock => MAX_BLOCK_SIZE / 10,
-		Type::StemTransaction => MAX_BLOCK_SIZE,
-		Type::Transaction => MAX_BLOCK_SIZE,
+		Type::CompactBlock => max_block_size() / 10,
+		Type::StemTransaction => max_block_size(),
+		Type::Transaction => max_block_size(),
 		Type::TxHashSetRequest => 40,
 		Type::TxHashSetArchive => 64,
 		Type::BanReason => 64,
diff --git a/pool/src/pool.rs b/pool/src/pool.rs
index 856181445..5f2e94420 100644
--- a/pool/src/pool.rs
+++ b/pool/src/pool.rs
@@ -123,35 +123,27 @@ impl Pool {
 		max_weight: usize,
 	) -> Result<Vec<Transaction>, PoolError> {
 		let header = self.blockchain.chain_head()?;
-		let tx_buckets = self.bucket_transactions();
+		let mut tx_buckets = self.bucket_transactions(max_weight);
 
-		// flatten buckets using aggregate (with cut-through)
-		let mut flat_txs: Vec<Transaction> = tx_buckets
-			.into_iter()
-			.filter_map(|bucket| transaction::aggregate(bucket).ok())
-			.filter(|x| {
-				// Here we validate the tx, subject to regular tx weight limits.
-				x.validate(Weighting::AsTransaction, self.verifier_cache.clone())
-					.is_ok()
-			})
-			.collect();
+		// At this point we know that all "buckets" are valid and that
+		// there are no dependencies between them.
+		// This allows us to arbitrarily sort them and filter them safely.
 
-		// sort by fees over weight, multiplying by 1000 to keep some precision
-		// don't think we'll ever see a >max_u64/1000 fee transaction
-		flat_txs.sort_unstable_by_key(|tx| tx.fee() * 1000 / tx.tx_weight() as u64);
-
-		// accumulate as long as we're not above the block weight
-		let mut weight = 0;
-		flat_txs.retain(|tx| {
-			weight += tx.tx_weight_as_block() as usize;
-			weight < max_weight
-		});
+		// Sort them by fees over weight, multiplying by 1000 to keep some precision
+		// don't think we'll ever see a >max_u64/1000 fee transaction.
+		// We want to select the txs with highest fee per unit of weight first.
+		tx_buckets.sort_unstable_by_key(|tx| tx.fee() * 1000 / tx.tx_weight() as u64);
 
 		// Iteratively apply the txs to the current chain state,
 		// rejecting any that do not result in a valid state.
 		// Verify these txs produce an aggregated tx below max tx weight.
 		// Return a vec of all the valid txs.
-		let txs = self.validate_raw_txs(flat_txs, None, &header, Weighting::AsTransaction)?;
+		let txs = self.validate_raw_txs(
+			tx_buckets,
+			None,
+			&header,
+			Weighting::AsLimitedTransaction { max_weight },
+		)?;
 		Ok(txs)
 	}
 
@@ -345,36 +337,91 @@ impl Pool {
 		Ok(())
 	}
 
-	// Group dependent transactions in buckets (vectors), each bucket
-	// is therefore independent from the others. Relies on the entries
-	// Vec having parent transactions first (should always be the case)
-	fn bucket_transactions(&self) -> Vec<Vec<Transaction>> {
+	// Group dependent transactions in buckets (aggregated txs).
+	// Each bucket is independent from the others. Relies on the entries
+	// vector having parent transactions first (should always be the case).
+	fn bucket_transactions(&self, max_weight: usize) -> Vec<Transaction> {
 		let mut tx_buckets = vec![];
 		let mut output_commits = HashMap::new();
+		let mut rejected = HashSet::new();
 
 		for entry in &self.entries {
 			// check the commits index to find parents and their position
-			// picking the last one for bucket (so all parents come first)
-			let mut insert_pos: i32 = -1;
+			// if single parent then we are good, we can bucket it with its parent
+			// if multiple parents then we need to combine buckets, but for now simply reject it (rare case)
+			let mut insert_pos = None;
+			let mut is_rejected = false;
+
 			for input in entry.tx.inputs() {
-				if let Some(pos) = output_commits.get(&input.commitment()) {
-					if *pos > insert_pos {
-						insert_pos = *pos;
+				if rejected.contains(&input.commitment()) {
+					// Depends on a rejected tx, so reject this one.
+					is_rejected = true;
+					continue;
+				} else if let Some(pos) = output_commits.get(&input.commitment()) {
+					if insert_pos.is_some() {
+						// Multiple dependencies so reject this tx (pick it up in next block).
+						is_rejected = true;
+						continue;
+					} else {
+						// Track the pos of the bucket we fall into.
+						insert_pos = Some(*pos);
 					}
 				}
 			}
-			if insert_pos == -1 {
-				// no parent, just add to the end in its own bucket
-				insert_pos = tx_buckets.len() as i32;
-				tx_buckets.push(vec![entry.tx.clone()]);
-			} else {
-				// parent found, add to its bucket
-				tx_buckets[insert_pos as usize].push(entry.tx.clone());
+
+			// If this tx is rejected then store all output commitments in our rejected set.
+			if is_rejected {
+				for out in entry.tx.outputs() {
+					rejected.insert(out.commitment());
+				}
+
+				// Done with this entry (rejected), continue to next entry.
+				continue;
 			}
 
-			// update the commits index
-			for out in entry.tx.outputs() {
-				output_commits.insert(out.commitment(), insert_pos);
+			match insert_pos {
+				None => {
+					// No parent tx, just add to the end in its own bucket.
+					// This is the common case for non 0-conf txs in the txpool.
+					// We assume the tx is valid here as we validated it on the way into the txpool.
+					insert_pos = Some(tx_buckets.len());
+					tx_buckets.push(entry.tx.clone());
+				}
+				Some(pos) => {
+					// We found a single parent tx, so aggregate in the bucket
+					// if the aggregate tx is a valid tx.
+					// Otherwise discard and let the next block pick this tx up.
+					let current = tx_buckets[pos].clone();
+					if let Ok(agg_tx) = transaction::aggregate(vec![current, entry.tx.clone()]) {
+						if agg_tx
+							.validate(
+								Weighting::AsLimitedTransaction { max_weight },
+								self.verifier_cache.clone(),
+							)
+							.is_ok()
+						{
+							tx_buckets[pos] = agg_tx;
+						} else {
+							// Aggregated tx is not valid so discard this new tx.
+							is_rejected = true;
+						}
+					} else {
+						// Aggregation failed so discard this new tx.
+						is_rejected = true;
+					}
+				}
+			}
+
+			if is_rejected {
+				for out in entry.tx.outputs() {
+					rejected.insert(out.commitment());
+				}
+			} else if let Some(insert_pos) = insert_pos {
+				// We successfully added this tx to our set of buckets.
+				// Update commits index for subsequent txs.
+				for out in entry.tx.outputs() {
+					output_commits.insert(out.commitment(), insert_pos);
+				}
 			}
 		}
 		tx_buckets
diff --git a/pool/src/types.rs b/pool/src/types.rs
index 82e8a26ff..41233e122 100644
--- a/pool/src/types.rs
+++ b/pool/src/types.rs
@@ -17,12 +17,12 @@
 
 use chrono::prelude::{DateTime, Utc};
 
-use self::core::consensus;
 use self::core::core::block;
 use self::core::core::committed;
 use self::core::core::hash::Hash;
 use self::core::core::transaction::{self, Transaction};
 use self::core::core::{BlockHeader, BlockSums};
+use self::core::{consensus, global};
 use grin_core as core;
 use grin_keychain as keychain;
 
@@ -130,7 +130,7 @@ fn default_max_stempool_size() -> usize {
 	50_000
 }
 fn default_mineable_max_weight() -> usize {
-	consensus::MAX_BLOCK_WEIGHT - consensus::BLOCK_OUTPUT_WEIGHT - consensus::BLOCK_KERNEL_WEIGHT
+	global::max_block_weight()
 }
 
 /// Represents a single entry in the pool.
diff --git a/pool/tests/block_max_weight.rs b/pool/tests/block_max_weight.rs
new file mode 100644
index 000000000..a72148134
--- /dev/null
+++ b/pool/tests/block_max_weight.rs
@@ -0,0 +1,143 @@
+// Copyright 2018 The Grin Developers
+//
+// Licensed under the Apache License, Version 2.0 (the "License");
+// you may not use this file except in compliance with the License.
+// You may obtain a copy of the License at
+//
+//     http://www.apache.org/licenses/LICENSE-2.0
+//
+// Unless required by applicable law or agreed to in writing, software
+// distributed under the License is distributed on an "AS IS" BASIS,
+// WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+// See the License for the specific language governing permissions and
+// limitations under the License.
+
+//! Test coverage for block building at the limit of max_block_weight.
+
+pub mod common;
+
+use self::core::core::hash::Hashed;
+use self::core::core::verifier_cache::LruVerifierCache;
+use self::core::core::{Block, BlockHeader, Transaction};
+use self::core::global;
+use self::core::libtx;
+use self::core::pow::Difficulty;
+use self::keychain::{ExtKeychain, Keychain};
+use self::util::RwLock;
+use crate::common::*;
+use grin_core as core;
+use grin_keychain as keychain;
+use grin_util as util;
+use std::sync::Arc;
+
+#[test]
+fn test_block_building_max_weight() {
+	util::init_test_logger();
+	global::set_mining_mode(global::ChainTypes::AutomatedTesting);
+
+	let keychain: ExtKeychain = Keychain::from_random_seed(false).unwrap();
+
+	let db_root = ".grin_block_building_max_weight".to_string();
+	clean_output_dir(db_root.clone());
+
+	let mut chain = ChainAdapter::init(db_root.clone()).unwrap();
+
+	let verifier_cache = Arc::new(RwLock::new(LruVerifierCache::new()));
+
+	// Convenient was to add a new block to the chain.
+	let add_block = |prev_header: BlockHeader, txs: Vec<Transaction>, chain: &mut ChainAdapter| {
+		let height = prev_header.height + 1;
+		let key_id = ExtKeychain::derive_key_id(1, height as u32, 0, 0, 0);
+		let fee = txs.iter().map(|x| x.fee()).sum();
+		let reward = libtx::reward::output(&keychain, &key_id, fee).unwrap();
+		let mut block = Block::new(&prev_header, txs, Difficulty::min(), reward).unwrap();
+
+		// Set the prev_root to the prev hash for testing purposes (no MMR to obtain a root from).
+		block.header.prev_root = prev_header.hash();
+
+		chain.update_db_for_block(&block);
+		block
+	};
+
+	// Initialize the chain/txhashset with an initial block
+	// so we have a non-empty UTXO set.
+	let block = add_block(BlockHeader::default(), vec![], &mut chain);
+	let header = block.header;
+
+	// Now create tx to spend that first coinbase (now matured).
+	// Provides us with some useful outputs to test with.
+	let initial_tx = test_transaction_spending_coinbase(&keychain, &header, vec![100, 200, 300]);
+
+	// Mine that initial tx so we can spend it with multiple txs
+	let block = add_block(header, vec![initial_tx], &mut chain);
+	let header = block.header;
+
+	// Initialize a new pool with our chain adapter.
+	let pool = RwLock::new(test_setup(Arc::new(chain.clone()), verifier_cache));
+
+	// Build some dependent txs to add to the txpool.
+	// We will build a block from a subset of these.
+	let txs = vec![
+		test_transaction(&keychain, vec![100], vec![90, 1]),
+		test_transaction(&keychain, vec![90], vec![80, 2]),
+		test_transaction(&keychain, vec![200], vec![199]),
+		test_transaction(&keychain, vec![300], vec![290, 3]),
+		test_transaction(&keychain, vec![290], vec![280, 4]),
+	];
+
+	// Populate our txpool with the txs.
+	{
+		let mut write_pool = pool.write();
+		for tx in txs {
+			write_pool
+				.add_to_pool(test_source(), tx, false, &header)
+				.unwrap();
+		}
+	}
+
+	// Check we added them all to the txpool successfully.
+	assert_eq!(pool.read().total_size(), 5);
+
+	// Prepare some "mineable txs" from the txpool.
+	// Note: We cannot fit all the txs from the txpool into a block.
+	let txs = pool.read().prepare_mineable_transactions().unwrap();
+
+	// Check resulting tx aggregation is what we expect.
+	// We expect to produce 2 aggregated txs based on txpool contents.
+	assert_eq!(txs.len(), 2);
+
+	// Check the tx we built is the aggregation of the correct set of underlying txs.
+	// We included 4 out of the 5 txs here.
+	assert_eq!(txs[0].kernels().len(), 1);
+	assert_eq!(txs[1].kernels().len(), 2);
+
+	// Check our weights after aggregation.
+	assert_eq!(txs[0].inputs().len(), 1);
+	assert_eq!(txs[0].outputs().len(), 1);
+	assert_eq!(txs[0].kernels().len(), 1);
+	assert_eq!(txs[0].tx_weight_as_block(), 25);
+
+	assert_eq!(txs[1].inputs().len(), 1);
+	assert_eq!(txs[1].outputs().len(), 3);
+	assert_eq!(txs[1].kernels().len(), 2);
+	assert_eq!(txs[1].tx_weight_as_block(), 70);
+
+	let block = add_block(header, txs, &mut chain);
+
+	// Check contents of the block itself (including coinbase reward).
+	assert_eq!(block.inputs().len(), 2);
+	assert_eq!(block.outputs().len(), 5);
+	assert_eq!(block.kernels().len(), 4);
+
+	// Now reconcile the transaction pool with the new block
+	// and check the resulting contents of the pool are what we expect.
+	{
+		let mut write_pool = pool.write();
+		write_pool.reconcile_block(&block).unwrap();
+
+		// We should still have 2 tx in the pool after accepting the new block.
+		// This one exceeded the max block weight when building the block so
+		// remained in the txpool.
+		assert_eq!(write_pool.total_size(), 2);
+	}
+}
diff --git a/src/bin/cmd/wallet_tests.rs b/src/bin/cmd/wallet_tests.rs
index 6aa6eff7d..189dffb54 100644
--- a/src/bin/cmd/wallet_tests.rs
+++ b/src/bin/cmd/wallet_tests.rs
@@ -432,7 +432,7 @@ mod wallet_tests {
 			"-g",
 			"Self love",
 			"-o",
-			"75",
+			"3",
 			"-s",
 			"smallest",
 			"10",