diff --git a/src/libstore/binary-cache-store.cc b/src/libstore/binary-cache-store.cc
index ff717a5dc..411d10130 100644
--- a/src/libstore/binary-cache-store.cc
+++ b/src/libstore/binary-cache-store.cc
@@ -87,7 +87,10 @@ void BinaryCacheStore::addToCache(const ValidPathInfo & info, ref<std::string> n
         % duration);
 
     /* Atomically write the NAR file. */
-    narInfo->url = "nar/" + printHash32(narInfo->fileHash) + ".nar.xz";
+    narInfo->url = "nar/" + printHash32(narInfo->fileHash) + ".nar"
+        + (compression == "xz" ? ".xz" :
+           compression == "bzip2" ? ".bz2" :
+           "");
     if (!fileExists(narInfo->url)) {
         stats.narWrite++;
         upsertFile(narInfo->url, *narCompressed);
diff --git a/src/libutil/compression.cc b/src/libutil/compression.cc
index e8a820d30..4d15d2acd 100644
--- a/src/libutil/compression.cc
+++ b/src/libutil/compression.cc
@@ -1,51 +1,88 @@
 #include "compression.hh"
 #include "util.hh"
+#include "finally.hh"
 
 #include <lzma.h>
+#include <bzlib.h>
 #include <cstdio>
+#include <cstring>
 
 namespace nix {
 
-/* RAII wrapper around lzma_stream. */
-struct LzmaStream
-{
-    lzma_stream strm;
-    LzmaStream() : strm(LZMA_STREAM_INIT) { };
-    ~LzmaStream() { lzma_end(&strm); };
-    lzma_stream & operator()() { return strm; }
-};
-
 static ref<std::string> compressXZ(const std::string & in)
 {
-    LzmaStream strm;
+    lzma_stream strm;
 
     // FIXME: apply the x86 BCJ filter?
 
     lzma_ret ret = lzma_easy_encoder(
-        &strm(), 6, LZMA_CHECK_CRC64);
+        &strm, 6, LZMA_CHECK_CRC64);
     if (ret != LZMA_OK)
         throw Error("unable to initialise lzma encoder");
 
+    Finally free([&]() { lzma_end(&strm); });
+
     lzma_action action = LZMA_RUN;
     uint8_t outbuf[BUFSIZ];
     ref<std::string> res = make_ref<std::string>();
-    strm().next_in = (uint8_t *) in.c_str();
-    strm().avail_in = in.size();
-    strm().next_out = outbuf;
-    strm().avail_out = sizeof(outbuf);
+    strm.next_in = (uint8_t *) in.c_str();
+    strm.avail_in = in.size();
+    strm.next_out = outbuf;
+    strm.avail_out = sizeof(outbuf);
 
     while (true) {
         checkInterrupt();
 
-        if (strm().avail_in == 0)
+        if (strm.avail_in == 0)
             action = LZMA_FINISH;
 
-        lzma_ret ret = lzma_code(&strm(), action);
+        lzma_ret ret = lzma_code(&strm, action);
 
-        if (strm().avail_out == 0 || ret == LZMA_STREAM_END) {
-            res->append((char *) outbuf, sizeof(outbuf) - strm().avail_out);
-            strm().next_out = outbuf;
-            strm().avail_out = sizeof(outbuf);
+        if (strm.avail_out == 0 || ret == LZMA_STREAM_END) {
+            res->append((char *) outbuf, sizeof(outbuf) - strm.avail_out);
+            strm.next_out = outbuf;
+            strm.avail_out = sizeof(outbuf);
+        }
+
+        if (ret == LZMA_STREAM_END)
+            return res;
+
+        if (ret != LZMA_OK)
+            throw Error("error while compressing xz file");
+    }
+}
+
+static ref<std::string> decompressXZ(const std::string & in)
+{
+    lzma_stream strm;
+
+    lzma_ret ret = lzma_stream_decoder(
+        &strm, UINT64_MAX, LZMA_CONCATENATED);
+    if (ret != LZMA_OK)
+        throw Error("unable to initialise lzma decoder");
+
+    Finally free([&]() { lzma_end(&strm); });
+
+    lzma_action action = LZMA_RUN;
+    uint8_t outbuf[BUFSIZ];
+    ref<std::string> res = make_ref<std::string>();
+    strm.next_in = (uint8_t *) in.c_str();
+    strm.avail_in = in.size();
+    strm.next_out = outbuf;
+    strm.avail_out = sizeof(outbuf);
+
+    while (true) {
+        checkInterrupt();
+
+        if (strm.avail_in == 0)
+            action = LZMA_FINISH;
+
+        lzma_ret ret = lzma_code(&strm, action);
+
+        if (strm.avail_out == 0 || ret == LZMA_STREAM_END) {
+            res->append((char *) outbuf, sizeof(outbuf) - strm.avail_out);
+            strm.next_out = outbuf;
+            strm.avail_out = sizeof(outbuf);
         }
 
         if (ret == LZMA_STREAM_END)
@@ -56,42 +93,83 @@ static ref<std::string> compressXZ(const std::string & in)
     }
 }
 
-static ref<std::string> decompressXZ(const std::string & in)
+static ref<std::string> compressBzip2(const std::string & in)
 {
-    LzmaStream strm;
+    bz_stream strm;
+    memset(&strm, 0, sizeof(strm));
 
-    lzma_ret ret = lzma_stream_decoder(
-        &strm(), UINT64_MAX, LZMA_CONCATENATED);
-    if (ret != LZMA_OK)
-        throw Error("unable to initialise lzma decoder");
+    int ret = BZ2_bzCompressInit(&strm, 9, 0, 30);
+    if (ret != BZ_OK)
+        throw Error("unable to initialise bzip2 encoder");
 
-    lzma_action action = LZMA_RUN;
-    uint8_t outbuf[BUFSIZ];
+    Finally free([&]() { BZ2_bzCompressEnd(&strm); });
+
+    int action = BZ_RUN;
+    char outbuf[BUFSIZ];
     ref<std::string> res = make_ref<std::string>();
-    strm().next_in = (uint8_t *) in.c_str();
-    strm().avail_in = in.size();
-    strm().next_out = outbuf;
-    strm().avail_out = sizeof(outbuf);
+    strm.next_in = (char *) in.c_str();
+    strm.avail_in = in.size();
+    strm.next_out = outbuf;
+    strm.avail_out = sizeof(outbuf);
 
     while (true) {
         checkInterrupt();
 
-        if (strm().avail_in == 0)
-            action = LZMA_FINISH;
+        if (strm.avail_in == 0)
+            action = BZ_FINISH;
 
-        lzma_ret ret = lzma_code(&strm(), action);
+        int ret = BZ2_bzCompress(&strm, action);
 
-        if (strm().avail_out == 0 || ret == LZMA_STREAM_END) {
-            res->append((char *) outbuf, sizeof(outbuf) - strm().avail_out);
-            strm().next_out = outbuf;
-            strm().avail_out = sizeof(outbuf);
+        if (strm.avail_out == 0 || ret == BZ_STREAM_END) {
+            res->append(outbuf, sizeof(outbuf) - strm.avail_out);
+            strm.next_out = outbuf;
+            strm.avail_out = sizeof(outbuf);
         }
 
-        if (ret == LZMA_STREAM_END)
+        if (ret == BZ_STREAM_END)
             return res;
 
-        if (ret != LZMA_OK)
-            throw Error("error while decompressing xz file");
+        if (ret != BZ_OK && ret != BZ_FINISH_OK)
+             Error("error while compressing bzip2 file");
+    }
+
+    return res;
+}
+
+static ref<std::string> decompressBzip2(const std::string & in)
+{
+    bz_stream strm;
+    memset(&strm, 0, sizeof(strm));
+
+    int ret = BZ2_bzDecompressInit(&strm, 0, 0);
+    if (ret != BZ_OK)
+        throw Error("unable to initialise bzip2 decoder");
+
+    Finally free([&]() { BZ2_bzDecompressEnd(&strm); });
+
+    char outbuf[BUFSIZ];
+    ref<std::string> res = make_ref<std::string>();
+    strm.next_in = (char *) in.c_str();
+    strm.avail_in = in.size();
+    strm.next_out = outbuf;
+    strm.avail_out = sizeof(outbuf);
+
+    while (true) {
+        checkInterrupt();
+
+        int ret = BZ2_bzDecompress(&strm);
+
+        if (strm.avail_out == 0 || ret == BZ_STREAM_END) {
+            res->append(outbuf, sizeof(outbuf) - strm.avail_out);
+            strm.next_out = outbuf;
+            strm.avail_out = sizeof(outbuf);
+        }
+
+        if (ret == BZ_STREAM_END)
+            return res;
+
+        if (ret != BZ_OK)
+            throw Error("error while decompressing bzip2 file");
     }
 }
 
@@ -101,6 +179,8 @@ ref<std::string> compress(const std::string & method, ref<std::string> in)
         return in;
     else if (method == "xz")
         return compressXZ(*in);
+    else if (method == "bzip2")
+        return compressBzip2(*in);
     else
         throw UnknownCompressionMethod(format("unknown compression method ‘%s’") % method);
 }
@@ -111,6 +191,8 @@ ref<std::string> decompress(const std::string & method, ref<std::string> in)
         return in;
     else if (method == "xz")
         return decompressXZ(*in);
+    else if (method == "bzip2")
+        return decompressBzip2(*in);
     else
         throw UnknownCompressionMethod(format("unknown compression method ‘%s’") % method);
 }
diff --git a/src/libutil/local.mk b/src/libutil/local.mk
index 2e5d2672e..98cad00d6 100644
--- a/src/libutil/local.mk
+++ b/src/libutil/local.mk
@@ -6,6 +6,6 @@ libutil_DIR := $(d)
 
 libutil_SOURCES := $(wildcard $(d)/*.cc)
 
-libutil_LDFLAGS = -llzma -pthread $(OPENSSL_LIBS)
+libutil_LDFLAGS = -llzma -lbz2 -pthread $(OPENSSL_LIBS)
 
 libutil_LIBS = libformat