diff --git a/changelog.md b/changelog.md
index 891ebd5a0..7dc8d0ce6 100644
--- a/changelog.md
+++ b/changelog.md
@@ -5,6 +5,14 @@
 * `FIX` Improve type narrow with **literal alias type** during completion and signature help
 * `NEW` Setting: `Lua.type.inferTableSize`: A Small Table array can be infered
 * `NEW` Add custom repository support for addonManager. New configuration setting: `Lua.addonManager.repositoryBranch` and `Lua.addonManager.repositoryPath`
+* `NEW` Infer function parameter types when the function is used as an callback argument and that argument has a `fun()` annotation. Enable with `Lua.type.inferParamType` setting. [#2695](https://github.com/LuaLS/lua-language-server/pull/2695)
+  ```lua
+  ---@param callback fun(a: integer)
+  function register(callback) end
+
+  local function callback(a) end  --> a: integer
+  register(callback)
+  ```
 
 ## 3.12.0
 `2024-10-30`
diff --git a/script/vm/compiler.lua b/script/vm/compiler.lua
index a3053f589..55406da68 100644
--- a/script/vm/compiler.lua
+++ b/script/vm/compiler.lua
@@ -1209,7 +1209,56 @@ local function compileFunctionParam(func, source)
             end
             ::continue::
         end
-        return found
+        if found then
+            return true
+        end
+        -- infer local callback function param type
+        --[[
+            ---@param callback fun(a: integer)
+            function register(callback) end
+
+            local function callback(a) end  --> a: integer
+            register(callback)
+        ]]
+        for _, ref in ipairs(refs) do
+            if ref.parent.type ~= 'callargs' then
+                goto continue
+            end
+            -- the parent function is a variable used as callback param, find the callback arg index first
+            local call = ref.parent.parent
+            local cbIndex
+            for i, arg in ipairs(call.args) do
+                if arg == ref then
+                    cbIndex = i
+                    break
+                end
+            end
+            ---@cast cbIndex integer
+
+            -- simulate a completion at `cbIndex` to infer this callback function type
+            ---@diagnostic disable-next-line: missing-fields
+            local node = vm.compileCallArg({ type = 'dummyarg', uri = guide.getUri(call) }, call, cbIndex)
+            if not node then
+                goto continue
+            end
+            for n in node:eachObject() do
+                -- check if the inferred function has arg at `aindex`
+                if n.type == 'doc.type.function' and n.args and n.args[aindex] then
+                    -- use type info on this `aindex` arg
+                    local argNode = vm.compileNode(n.args[aindex])
+                    for an in argNode:eachObject() do
+                        if an.type ~= 'doc.generic.name' then
+                            vm.setNode(source, an)
+                            found = true
+                        end
+                    end
+                end
+            end
+            ::continue::
+        end
+        if found then
+            return true
+        end
     end
 
     do
diff --git a/test/type_inference/common.lua b/test/type_inference/common.lua
index fa56fbe56..69e83508a 100644
--- a/test/type_inference/common.lua
+++ b/test/type_inference/common.lua
@@ -1135,6 +1135,80 @@ xpcall(work, debug.traceback, function (<?value?>)
 end)
 ]]
 
+config.set(nil, "Lua.type.inferParamType", true)
+
+TEST 'Class' [[
+---@class Class
+
+---@param callback fun(value: Class)
+function work(callback) end
+
+local function cb(<?value?>) end
+work(cb)
+]]
+
+TEST 'any' [[
+---@class Class
+
+---@param callback fun(value: Class)
+function work(callback) end
+
+---@param value any
+local function cb(<?value?>) end
+work(cb)
+]]
+
+TEST 'any' [[
+---@class Class
+
+function work(callback) end
+
+local function cb(<?value?>) end
+work(cb)
+]]
+
+TEST 'string' [[
+---@class Class
+
+function work(callback) end
+
+---@param value string
+local function cb(<?value?>) end
+work(cb)
+]]
+
+
+TEST 'Parent' [[
+---@class Parent
+local Parent
+
+---@generic T
+---@param self T
+---@param callback fun(self: T)
+function Parent:work(callback) end
+
+local function cb(<?self?>) end
+Parent:work(cb)
+]]
+
+TEST 'Child' [[
+---@class Parent
+local Parent
+
+---@generic T
+---@param self T
+---@param callback fun(self: T)
+function Parent:work(callback) end
+
+---@class Child: Parent
+local Child
+
+local function cb(<?self?>) end
+Child:work(cb)
+]]
+
+config.set(nil, "Lua.type.inferParamType", false)
+
 TEST 'string' [[
 ---@generic T
 ---@param x T