diff --git a/mon/lp_optimizer/dsl_pgs.js b/mon/lp_optimizer/dsl_pgs.js
index 14f382fc..f492d61c 100644
--- a/mon/lp_optimizer/dsl_pgs.js
+++ b/mon/lp_optimizer/dsl_pgs.js
@@ -253,7 +253,7 @@ function random_custom_combinations(osd_tree, rules, count, ordered)
         for (let i = 1; i < rules.length; i++)
         {
             const filtered = filter_tree_by_rules(osd_tree, rules[i], selected);
-            const idx = select_murmur3(filtered.length, i => 'p:'+f.id+':'+filtered[i].id);
+            const idx = select_murmur3(filtered.length, i => 'p:'+f.id+':'+(filtered[i].name || filtered[i].id));
             selected.push(idx == null ? { levels: {}, id: null } : filtered[idx]);
         }
         const size = selected.filter(s => s.id !== null).length;
@@ -270,7 +270,7 @@ function random_custom_combinations(osd_tree, rules, count, ordered)
         for (const item_rules of rules)
         {
             const filtered = selected.length ? filter_tree_by_rules(osd_tree, item_rules, selected) : first;
-            const idx = select_murmur3(filtered.length, i => n+':'+filtered[i].id);
+            const idx = select_murmur3(filtered.length, i => n+':'+(filtered[i].name || filtered[i].id));
             selected.push(idx == null ? { levels: {}, id: null } : filtered[idx]);
         }
         const size = selected.filter(s => s.id !== null).length;
@@ -340,9 +340,9 @@ function filter_tree_by_rules(osd_tree, rules, selected)
 }
 
 // Convert from
-// node_list = { id: string|number, level: string, size?: number, parent?: string|number }[]
+// node_list = { id: string|number, name?: string, level: string, size?: number, parent?: string|number }[]
 // to
-// node_tree = { [node_id]: { id, level, size?, parent?, children?: child_node[], levels: { [level]: id, ... } } }
+// node_tree = { [node_id]: { id, name?, level, size?, parent?, children?: child_node[], levels: { [level]: id, ... } } }
 function index_tree(node_list)
 {
     const tree = { '': { children: [], levels: {} } };
diff --git a/mon/lp_optimizer/fold.js b/mon/lp_optimizer/fold.js
new file mode 100644
index 00000000..9a70c4d3
--- /dev/null
+++ b/mon/lp_optimizer/fold.js
@@ -0,0 +1,244 @@
+// Copyright (c) Vitaliy Filippov, 2019+
+// License: VNPL-1.1 (see README.md for details)
+
+// Extract OSDs from the lowest affected tree level into a separate (flat) map
+// to run PG optimisation on failure domains instead of individual OSDs
+//
+// node_list = same input as for index_tree()
+// rules = [ level, operator, value ][][]
+// returns { nodes: new_node_list, leaves: { new_folded_node_id: [ extracted_leaf_nodes... ] } }
+function fold_failure_domains(node_list, rules)
+{
+    const interest = {};
+    for (const level_rules of rules)
+    {
+        for (const rule of level_rules)
+            interest[rule[0]] = true;
+    }
+    const max_numeric_id = node_list.reduce((a, c) => a < (0|c.id) ? (0|c.id) : a, 0);
+    let next_id = max_numeric_id;
+    const node_map = node_list.reduce((a, c) => { a[c.id||''] = c; return a; }, {});
+    const old_ids_by_new = {};
+    const extracted_nodes = {};
+    let folded = true;
+    while (folded)
+    {
+        const per_parent = {};
+        for (const node_id in node_map)
+        {
+            const node = node_map[node_id];
+            const p = node.parent || '';
+            per_parent[p] = per_parent[p]||[];
+            per_parent[p].push(node);
+        }
+        folded = false;
+        for (const node_id in per_parent)
+        {
+            const fold_node = per_parent[node_id].filter(child => per_parent[child.id||''] || interest[child.level]).length == 0;
+            if (fold_node)
+            {
+                const old_node = node_map[node_id];
+                const new_id = ++next_id;
+                node_map[new_id] = {
+                    ...old_node,
+                    id: new_id,
+                    name: node_id, // for use in murmur3 hashes
+                    size: per_parent[node_id].reduce((a, c) => a + (Number(c.size)||0), 0),
+                };
+                delete node_map[node_id];
+                old_ids_by_new[new_id] = node_id;
+                extracted_nodes[new_id] = [];
+                for (const child of per_parent[node_id])
+                {
+                    if (old_ids_by_new[child.id])
+                    {
+                        extracted_nodes[new_id].push(...extracted_nodes[child.id]);
+                        delete extracted_nodes[child.id];
+                    }
+                    else
+                        extracted_nodes[new_id].push(child);
+                    delete node_map[child.id];
+                }
+                folded = true;
+            }
+        }
+    }
+    return { nodes: Object.values(node_map), leaves: extracted_nodes };
+}
+
+// Distribute PGs mapped to "folded" nodes to individual OSDs according to their weights
+// folded_pgs = optimize_result.int_pgs before folding
+// prev_pgs = optional previous PGs from optimize_change() input
+// extracted_nodes = output from fold_failure_domains
+function unfold_failure_domains(folded_pgs, prev_pgs, extracted_nodes)
+{
+    const maps = {};
+    let found = false;
+    for (const new_id in extracted_nodes)
+    {
+        const weights = {};
+        for (const sub_node of extracted_nodes[new_id])
+        {
+            weights[sub_node.id] = sub_node.size;
+        }
+        maps[new_id] = { weights, prev: [], next: [], pos: 0 };
+        found = true;
+    }
+    if (!found)
+    {
+        return folded_pgs;
+    }
+    for (let i = 0; i < folded_pgs.length; i++)
+    {
+        for (let j = 0; j < folded_pgs[i].length; j++)
+        {
+            if (maps[folded_pgs[i][j]])
+            {
+                maps[folded_pgs[i][j]].prev.push(prev_pgs && prev_pgs[i] && prev_pgs[i][j] || 0);
+            }
+        }
+    }
+    for (const new_id in maps)
+    {
+        maps[new_id].next = adjust_distribution(maps[new_id].weights, maps[new_id].prev);
+    }
+    const mapped_pgs = [];
+    for (let i = 0; i < folded_pgs.length; i++)
+    {
+        mapped_pgs.push(folded_pgs[i].map(osd => (maps[osd] ? maps[osd].next[maps[osd].pos++] : osd)));
+    }
+    return mapped_pgs;
+}
+
+// Return the new array of items re-distributed as close as possible to weights in wanted_weights
+// wanted_weights = { [key]: weight }
+// cur_items = key[]
+function adjust_distribution(wanted_weights, cur_items)
+{
+    const item_map = {};
+    for (let i = 0; i < cur_items.length; i++)
+    {
+        const item = cur_items[i];
+        item_map[item] = (item_map[item] || { target: 0, cur: [] });
+        item_map[item].cur.push(i);
+    }
+    let total_weight = 0;
+    for (const item in wanted_weights)
+    {
+        total_weight += Number(wanted_weights[item]) || 0;
+    }
+    for (const item in wanted_weights)
+    {
+        const weight = wanted_weights[item] / total_weight * cur_items.length;
+        if (weight > 0)
+        {
+            item_map[item] = (item_map[item] || { target: 0, cur: [] });
+            item_map[item].target = weight;
+        }
+    }
+    const diff = (item) => (item_map[item].cur.length - item_map[item].target);
+    const most_underweighted = Object.keys(item_map)
+        .filter(item => item_map[item].target > 0)
+        .sort((a, b) => diff(a) - diff(b));
+    // Items with zero target weight MUST never be selected - remove them
+    // and remap each of them to a most underweighted item
+    for (const item in item_map)
+    {
+        if (!item_map[item].target)
+        {
+            const prev = item_map[item];
+            delete item_map[item];
+            for (const idx of prev.cur)
+            {
+                const move_to = most_underweighted[0];
+                item_map[move_to].cur.push(idx);
+                move_leftmost(most_underweighted, diff);
+            }
+        }
+    }
+    // Other over-weighted items are only moved if it improves the distribution
+    while (most_underweighted.length > 1)
+    {
+        const first = most_underweighted[0];
+        const last = most_underweighted[most_underweighted.length-1];
+        const first_diff = diff(first);
+        const last_diff = diff(last);
+        if (Math.abs(first_diff+1)+Math.abs(last_diff-1) < Math.abs(first_diff)+Math.abs(last_diff))
+        {
+            item_map[first].cur.push(item_map[last].cur.pop());
+            move_leftmost(most_underweighted, diff);
+            move_rightmost(most_underweighted, diff);
+        }
+        else
+        {
+            break;
+        }
+    }
+    const new_items = new Array(cur_items.length);
+    for (const item in item_map)
+    {
+        for (const idx of item_map[item].cur)
+        {
+            new_items[idx] = item;
+        }
+    }
+    return new_items;
+}
+
+function move_leftmost(sorted_array, diff)
+{
+    // Re-sort by moving the leftmost item to the right if it changes position
+    const first = sorted_array[0];
+    const new_diff = diff(first);
+    let r = 0;
+    while (r < sorted_array.length-1 && diff(sorted_array[r+1]) <= new_diff)
+        r++;
+    if (r > 0)
+    {
+        for (let i = 0; i < r; i++)
+            sorted_array[i] = sorted_array[i+1];
+        sorted_array[r] = first;
+    }
+}
+
+function move_rightmost(sorted_array, diff)
+{
+    // Re-sort by moving the rightmost item to the left if it changes position
+    const last = sorted_array[sorted_array.length-1];
+    const new_diff = diff(last);
+    let r = sorted_array.length-1;
+    while (r > 0 && diff(sorted_array[r-1]) > new_diff)
+        r--;
+    if (r < sorted_array.length-1)
+    {
+        for (let i = sorted_array.length-1; i > r; i--)
+            sorted_array[i] = sorted_array[i-1];
+        sorted_array[r] = last;
+    }
+}
+
+// map previous PGs to folded nodes
+function fold_prev_pgs(pgs, extracted_nodes)
+{
+    const unmap = {};
+    for (const new_id in extracted_nodes)
+    {
+        for (const sub_node of extracted_nodes[new_id])
+        {
+            unmap[sub_node.id] = new_id;
+        }
+    }
+    const mapped_pgs = [];
+    for (let i = 0; i < pgs.length; i++)
+    {
+        mapped_pgs.push(pgs[i].map(osd => (unmap[osd] || osd)));
+    }
+    return mapped_pgs;
+}
+
+module.exports = {
+    fold_failure_domains,
+    unfold_failure_domains,
+    adjust_distribution,
+    fold_prev_pgs,
+};
diff --git a/mon/lp_optimizer/lp_optimizer.js b/mon/lp_optimizer/lp_optimizer.js
index f26441df..dbb0cf30 100644
--- a/mon/lp_optimizer/lp_optimizer.js
+++ b/mon/lp_optimizer/lp_optimizer.js
@@ -98,6 +98,7 @@ async function optimize_initial({ osd_weights, combinator, pg_count, pg_size = 3
         score: lp_result.score,
         weights: lp_result.vars,
         int_pgs,
+        pg_effsize,
         space: eff * pg_effsize,
         total_space: total_weight,
     };
@@ -409,6 +410,7 @@ async function optimize_change({ prev_pgs: prev_int_pgs, osd_weights, combinator
         int_pgs: new_pgs,
         differs,
         osd_differs,
+        pg_effsize,
         space: pg_effsize * pg_list_space_efficiency(new_pgs, osd_weights, pg_minsize, parity_space),
         total_space: total_weight,
     };
diff --git a/mon/lp_optimizer/test-optimize-fold.js b/mon/lp_optimizer/test-optimize-fold.js
new file mode 100644
index 00000000..aac5a3d2
--- /dev/null
+++ b/mon/lp_optimizer/test-optimize-fold.js
@@ -0,0 +1,96 @@
+// Copyright (c) Vitaliy Filippov, 2019+
+// License: VNPL-1.1 (see README.md for details)
+
+const assert = require('assert');
+const { fold_failure_domains, unfold_failure_domains, adjust_distribution } = require('./fold.js');
+const DSL = require('./dsl_pgs.js');
+const LPOptimizer = require('./lp_optimizer.js');
+const stableStringify = require('../stable-stringify.js');
+
+async function run()
+{
+    // Test run adjust_distribution
+    console.log('adjust_distribution');
+    const rand = [];
+    for (let i = 0; i < 100; i++)
+    {
+        rand.push(1 + Math.floor(10*Math.random()));
+        // or rand.push(0);
+    }
+    const adj = adjust_distribution({ 1: 1, 2: 1, 3: 1, 4: 1, 5: 1, 6: 1, 7: 1, 8: 1, 9: 1, 10: 1 }, rand);
+    //console.log(rand.join(' '));
+    console.log(rand.reduce((a, c) => { a[c] = (a[c]||0)+1; return a; }, {}));
+    //console.log(adj.join(' '));
+    console.log(adj.reduce((a, c) => { a[c] = (a[c]||0)+1; return a; }, {}));
+    console.log('Movement: '+rand.reduce((a, c, i) => a+(rand[i] != adj[i] ? 1 : 0), 0)+'/'+rand.length);
+
+    console.log('\nfold_failure_domains');
+    console.log(JSON.stringify(fold_failure_domains(
+        [
+            { id: 1,       level: 'osd',  size: 1, parent: 'disk1' },
+            { id: 2,       level: 'osd',  size: 2, parent: 'disk1' },
+            { id: 'disk1', level: 'disk', parent: 'host1' },
+            { id: 'host1', level: 'host', parent: 'dc1' },
+            { id: 'dc1',   level: 'dc' },
+        ],
+        [ [ [ 'dc' ], [ 'host' ] ] ]
+    ), 0, 2));
+
+    console.log('\noptimize_folded');
+    // 5 DCs, 2 hosts per DC, 10 OSD per host
+    const nodes = [];
+    for (let i = 1; i <= 100; i++)
+    {
+        nodes.push({ id: i, level: 'osd', size: 1, parent: 'host'+(1+(0|((i-1)/10))) });
+    }
+    for (let i = 1; i <= 10; i++)
+    {
+        nodes.push({ id: 'host'+i, level: 'host', parent: 'dc'+(1+(0|((i-1)/2))) });
+    }
+    for (let i = 1; i <= 5; i++)
+    {
+        nodes.push({ id: 'dc'+i, level: 'dc' });
+    }
+
+    // Check rules
+    const rules = DSL.parse_level_indexes({ dc: '112233', host: '123456' }, [ 'dc', 'host', 'osd' ]);
+    assert.deepEqual(rules, [[],[["dc","=",1],["host","!=",[1]]],[["dc","!=",[1]]],[["dc","=",3],["host","!=",[3]]],[["dc","!=",[1,3]]],[["dc","=",5],["host","!=",[5]]]]);
+
+    // Check tree folding
+    const { nodes: folded_nodes, leaves: folded_leaves } = fold_failure_domains(nodes, rules);
+    const expected_folded = [];
+    const expected_leaves = {};
+    for (let i = 1; i <= 10; i++)
+    {
+        expected_folded.push({ id: 100+i, name: 'host'+i, level: 'host', size: 10, parent: 'dc'+(1+(0|((i-1)/2))) });
+        expected_leaves[100+i] = [ ...new Array(10).keys() ].map(k => ({ id: 10*(i-1)+k+1, level: 'osd', size: 1, parent: 'host'+i }));
+    }
+    for (let i = 1; i <= 5; i++)
+    {
+        expected_folded.push({ id: 'dc'+i, level: 'dc' });
+    }
+    assert.equal(stableStringify(folded_nodes), stableStringify(expected_folded));
+    assert.equal(stableStringify(folded_leaves), stableStringify(expected_leaves));
+
+    // Now optimise it
+    console.log('1000 PGs, EC 112233');
+    const leaf_weights = folded_nodes.reduce((a, c) => { if (Number(c.id)) { a[c.id] = c.size; } return a; }, {});
+    let res = await LPOptimizer.optimize_initial({
+        osd_weights: leaf_weights,
+        combinator: new DSL.RuleCombinator(folded_nodes, rules, 10000, false),
+        pg_size: 6,
+        pg_count: 1000,
+        ordered: false,
+    });
+    LPOptimizer.print_change_stats(res, false);
+    assert.equal(res.space, 100, 'Initial distribution');
+
+    const unfolded_res = { ...res };
+    unfolded_res.int_pgs = unfold_failure_domains(res.int_pgs, null, folded_leaves);
+    const osd_weights = nodes.reduce((a, c) => { if (Number(c.id)) { a[c.id] = c.size; } return a; }, {});
+    unfolded_res.space = unfolded_res.pg_effsize * LPOptimizer.pg_list_space_efficiency(unfolded_res.int_pgs, osd_weights, 0, 1);
+    LPOptimizer.print_change_stats(unfolded_res, false);
+    assert.equal(res.space, 100, 'Initial distribution');
+}
+
+run().catch(console.error);
diff --git a/mon/osd_tree.js b/mon/osd_tree.js
index d4f7e610..a0fa9b4e 100644
--- a/mon/osd_tree.js
+++ b/mon/osd_tree.js
@@ -87,7 +87,7 @@ function make_hier_tree(global_config, tree)
     tree[''] = { children: [] };
     for (const node_id in tree)
     {
-        if (node_id === '' || tree[node_id].level === 'osd' && (!tree[node_id].size || tree[node_id].size <= 0))
+        if (node_id === '' || !(tree[node_id].children||[]).length && (tree[node_id].size||0) <= 0)
         {
             continue;
         }
@@ -107,7 +107,7 @@ function make_hier_tree(global_config, tree)
         deleted = 0;
         for (const node_id in tree)
         {
-            if (tree[node_id].level !== 'osd' && (!tree[node_id].children || !tree[node_id].children.length))
+            if (!(tree[node_id].children||[]).length && (tree[node_id].size||0) <= 0)
             {
                 const parent = tree[node_id].parent;
                 if (parent)
diff --git a/mon/pg_gen.js b/mon/pg_gen.js
index cabdf7e0..25814f6b 100644
--- a/mon/pg_gen.js
+++ b/mon/pg_gen.js
@@ -3,6 +3,7 @@
 
 const { RuleCombinator } = require('./lp_optimizer/dsl_pgs.js');
 const { SimpleCombinator, flatten_tree } = require('./lp_optimizer/simple_pgs.js');
+const { fold_failure_domains, unfold_failure_domains, fold_prev_pgs } = require('./lp_optimizer/fold.js');
 const { validate_pool_cfg, get_pg_rules } = require('./pool_config.js');
 const LPOptimizer = require('./lp_optimizer/lp_optimizer.js');
 const { scale_pg_count } = require('./pg_utils.js');
@@ -160,7 +161,6 @@ async function generate_pool_pgs(state, global_config, pool_id, osd_tree, levels
         pool_cfg.bitmap_granularity || global_config.bitmap_granularity || 4096,
         pool_cfg.immediate_commit || global_config.immediate_commit || 'all'
     );
-    pool_tree = make_hier_tree(global_config, pool_tree);
     // First try last_clean_pgs to minimize data movement
     let prev_pgs = [];
     for (const pg in ((state.history.last_clean_pgs.items||{})[pool_id]||{}))
@@ -175,14 +175,19 @@ async function generate_pool_pgs(state, global_config, pool_id, osd_tree, levels
             prev_pgs[pg-1] = [ ...state.pg.config.items[pool_id][pg].osd_set ];
         }
     }
+    const use_rules = !global_config.use_old_pg_combinator || pool_cfg.level_placement || pool_cfg.raw_placement;
+    const rules = use_rules ? get_pg_rules(pool_id, pool_cfg, global_config.placement_levels) : null;
+    const folded = fold_failure_domains(Object.values(pool_tree), use_rules ? rules : [ [ [ pool_cfg.failure_domain ] ] ]);
+    // FIXME: Remove/merge make_hier_tree() step somewhere, however it's needed to remove empty nodes
+    const folded_tree = make_hier_tree(global_config, folded.nodes);
     const old_pg_count = prev_pgs.length;
     const optimize_cfg = {
-        osd_weights: Object.values(pool_tree).filter(item => item.level === 'osd').reduce((a, c) => { a[c.id] = c.size; return a; }, {}),
-        combinator: !global_config.use_old_pg_combinator || pool_cfg.level_placement || pool_cfg.raw_placement
+        osd_weights: folded.nodes.reduce((a, c) => { if (Number(c.id)) { a[c.id] = c.size; } return a; }, {}),
+        combinator: use_rules
             // new algorithm:
-            ? new RuleCombinator(pool_tree, get_pg_rules(pool_id, pool_cfg, global_config.placement_levels), pool_cfg.max_osd_combinations)
+            ? new RuleCombinator(folded_tree, rules, pool_cfg.max_osd_combinations)
             // old algorithm:
-            : new SimpleCombinator(flatten_tree(pool_tree[''].children, levels, pool_cfg.failure_domain, 'osd'), pool_cfg.pg_size, pool_cfg.max_osd_combinations),
+            : new SimpleCombinator(flatten_tree(folded_tree[''].children, levels, pool_cfg.failure_domain, 'osd'), pool_cfg.pg_size, pool_cfg.max_osd_combinations),
         pg_count: pool_cfg.pg_count,
         pg_size: pool_cfg.pg_size,
         pg_minsize: pool_cfg.pg_minsize,
@@ -202,12 +207,11 @@ async function generate_pool_pgs(state, global_config, pool_id, osd_tree, levels
         for (const pg of prev_pgs)
         {
             while (pg.length < pool_cfg.pg_size)
-            {
                 pg.push(0);
-            }
         }
+        const folded_prev_pgs = fold_prev_pgs(prev_pgs, folded.leaves);
         optimize_result = await LPOptimizer.optimize_change({
-            prev_pgs,
+            prev_pgs: folded_prev_pgs,
             ...optimize_cfg,
         });
     }
@@ -215,6 +219,10 @@ async function generate_pool_pgs(state, global_config, pool_id, osd_tree, levels
     {
         optimize_result = await LPOptimizer.optimize_initial(optimize_cfg);
     }
+    optimize_result.int_pgs = unfold_failure_domains(optimize_result.int_pgs, prev_pgs, folded.leaves);
+    const osd_weights = Object.values(pool_tree).reduce((a, c) => { if (c.level === 'osd') { a[c.id] = c.size; } return a; }, {});
+    optimize_result.space = optimize_result.pg_effsize * LPOptimizer.pg_list_space_efficiency(optimize_result.int_pgs,
+        osd_weights, optimize_cfg.pg_minsize, 1);
     console.log(`Pool ${pool_id} (${pool_cfg.name || 'unnamed'}):`);
     LPOptimizer.print_change_stats(optimize_result);
     let pg_effsize = pool_cfg.pg_size;