diff --git a/src/lib/core/a11y/list-key-manager.spec.ts b/src/lib/core/a11y/list-key-manager.spec.ts
index c0b3e28021d1..e552e2642ddd 100644
--- a/src/lib/core/a11y/list-key-manager.spec.ts
+++ b/src/lib/core/a11y/list-key-manager.spec.ts
@@ -48,7 +48,6 @@ describe('Key managers', () => {
     TAB_EVENT = new FakeEvent(TAB) as KeyboardEvent;
     HOME_EVENT = new FakeEvent(HOME) as KeyboardEvent;
     END_EVENT = new FakeEvent(END) as KeyboardEvent;
-
   });
 
 
@@ -218,11 +217,11 @@ describe('Key managers', () => {
       });
 
       it('should emit tabOut when the tab key is pressed', () => {
-        let tabOutEmitted = false;
-        keyManager.tabOut.first().subscribe(() => tabOutEmitted = true);
+        let spy = jasmine.createSpy('tabOut spy');
+        keyManager.tabOut.first().subscribe(spy);
         keyManager.onKeydown(TAB_EVENT);
 
-        expect(tabOutEmitted).toBe(true);
+        expect(spy).toHaveBeenCalled();
       });
 
       it('should prevent the default keyboard action', () => {
diff --git a/src/lib/core/a11y/list-key-manager.ts b/src/lib/core/a11y/list-key-manager.ts
index d54bf1a1521d..b9e8cbb7b6b2 100644
--- a/src/lib/core/a11y/list-key-manager.ts
+++ b/src/lib/core/a11y/list-key-manager.ts
@@ -18,7 +18,7 @@ export interface CanDisable {
 export class ListKeyManager<T extends CanDisable> {
   private _activeItemIndex: number = null;
   private _activeItem: T;
-  private _tabOut: Subject<any> = new Subject();
+  private _tabOut = new Subject<void>();
   private _wrap: boolean = false;
 
   constructor(private _items: QueryList<T>) {
diff --git a/src/lib/core/overlay/overlay-directives.spec.ts b/src/lib/core/overlay/overlay-directives.spec.ts
index 3af7f42e7911..8b9817cbc6ae 100644
--- a/src/lib/core/overlay/overlay-directives.spec.ts
+++ b/src/lib/core/overlay/overlay-directives.spec.ts
@@ -6,6 +6,8 @@ import {OverlayContainer} from './overlay-container';
 import {ConnectedPositionStrategy} from './position/connected-position-strategy';
 import {ConnectedOverlayPositionChange} from './position/connected-position';
 import {Dir} from '../rtl/dir';
+import {dispatchKeyboardEvent} from '../testing/dispatch-events';
+import {ESCAPE} from '../keyboard/keycodes';
 
 
 describe('Overlay directives', () => {
@@ -98,6 +100,17 @@ describe('Overlay directives', () => {
     expect(getPaneElement().getAttribute('dir')).toBe('ltr');
   });
 
+  it('should close when pressing escape', () => {
+    fixture.componentInstance.isOpen = true;
+    fixture.detectChanges();
+
+    dispatchKeyboardEvent(document, 'keydown', ESCAPE);
+    fixture.detectChanges();
+
+    expect(overlayContainerElement.textContent.trim()).toBe('',
+        'Expected overlay to have been detached.');
+  });
+
   describe('inputs', () => {
 
     it('should set the width', () => {
diff --git a/src/lib/core/overlay/overlay-directives.ts b/src/lib/core/overlay/overlay-directives.ts
index e643256c11cf..5efd42f100c0 100644
--- a/src/lib/core/overlay/overlay-directives.ts
+++ b/src/lib/core/overlay/overlay-directives.ts
@@ -9,7 +9,8 @@ import {
     Input,
     OnDestroy,
     Output,
-    ElementRef
+    ElementRef,
+    Renderer2,
 } from '@angular/core';
 import {Overlay, OVERLAY_PROVIDERS} from './overlay';
 import {OverlayRef} from './overlay-ref';
@@ -21,10 +22,12 @@ import {
 } from './position/connected-position';
 import {PortalModule} from '../portal/portal-directives';
 import {ConnectedPositionStrategy} from './position/connected-position-strategy';
-import {Subscription} from 'rxjs/Subscription';
 import {Dir, LayoutDirection} from '../rtl/dir';
 import {Scrollable} from './scroll/scrollable';
 import {coerceBooleanProperty} from '../coercion/boolean-property';
+import {ESCAPE} from '../keyboard/keycodes';
+import {Subscription} from 'rxjs/Subscription';
+
 
 /** Default set of positions for the overlay. Follows the behavior of a dropdown. */
 let defaultPositionList = [
@@ -68,6 +71,7 @@ export class ConnectedOverlayDirective implements OnDestroy {
   private _offsetX: number = 0;
   private _offsetY: number = 0;
   private _position: ConnectedPositionStrategy;
+  private _escapeListener: Function;
 
   /** Origin for the connected overlay. */
   @Input() origin: OverlayOrigin;
@@ -152,6 +156,7 @@ export class ConnectedOverlayDirective implements OnDestroy {
 
   constructor(
       private _overlay: Overlay,
+      private _renderer: Renderer2,
       templateRef: TemplateRef<any>,
       viewContainerRef: ViewContainerRef,
       @Optional() private _dir: Dir) {
@@ -249,6 +254,7 @@ export class ConnectedOverlayDirective implements OnDestroy {
 
     this._position.withDirection(this.dir);
     this._overlayRef.getState().direction = this.dir;
+    this._initEscapeListener();
 
     if (!this._overlayRef.hasAttached()) {
       this._overlayRef.attach(this._templatePortal);
@@ -273,6 +279,10 @@ export class ConnectedOverlayDirective implements OnDestroy {
       this._backdropSubscription.unsubscribe();
       this._backdropSubscription = null;
     }
+
+    if (this._escapeListener) {
+      this._escapeListener();
+    }
   }
 
   /** Destroys the overlay created by this directive. */
@@ -284,9 +294,23 @@ export class ConnectedOverlayDirective implements OnDestroy {
     if (this._backdropSubscription) {
       this._backdropSubscription.unsubscribe();
     }
+
     if (this._positionSubscription) {
       this._positionSubscription.unsubscribe();
     }
+
+    if (this._escapeListener) {
+      this._escapeListener();
+    }
+  }
+
+  /** Sets the event listener that closes the overlay when pressing Escape. */
+  private _initEscapeListener() {
+    this._escapeListener = this._renderer.listen('document', 'keydown', (event: KeyboardEvent) => {
+      if (event.keyCode === ESCAPE) {
+        this._detachOverlay();
+      }
+    });
   }
 }
 
diff --git a/src/lib/select/select.html b/src/lib/select/select.html
index 9c9f0eefac97..c31a4b3f3518 100644
--- a/src/lib/select/select.html
+++ b/src/lib/select/select.html
@@ -15,7 +15,7 @@
 
 <ng-template cdk-connected-overlay [origin]="origin" [open]="panelOpen" hasBackdrop (backdropClick)="close()"
   backdropClass="cdk-overlay-transparent-backdrop" [positions]="_positions" [minWidth]="_triggerWidth"
-  [offsetY]="_offsetY" [offsetX]="_offsetX" (attach)="_setScrollTop()">
+  [offsetY]="_offsetY" [offsetX]="_offsetX" (attach)="_setScrollTop()" (detach)="close()">
   <div class="mat-select-panel" [@transformPanel]="'showing'" (@transformPanel.done)="_onPanelDone()"
     (keydown)="_keyManager.onKeydown($event)" [style.transformOrigin]="_transformOrigin"
       [class.mat-select-panel-done-animating]="_panelDoneAnimating">
diff --git a/src/lib/select/select.spec.ts b/src/lib/select/select.spec.ts
index b53781ede656..0e74b9cc4eda 100644
--- a/src/lib/select/select.spec.ts
+++ b/src/lib/select/select.spec.ts
@@ -20,8 +20,9 @@ import {
   ControlValueAccessor, FormControl, FormsModule, NG_VALUE_ACCESSOR, ReactiveFormsModule
 } from '@angular/forms';
 import {ViewportRuler} from '../core/overlay/position/viewport-ruler';
-import {dispatchFakeEvent} from '../core/testing/dispatch-events';
+import {dispatchFakeEvent, dispatchKeyboardEvent} from '../core/testing/dispatch-events';
 import {wrappedErrorMessage} from '../core/testing/wrapped-error-message';
+import {TAB} from '../core/keyboard/keycodes';
 
 
 describe('MdSelect', () => {
@@ -205,6 +206,20 @@ describe('MdSelect', () => {
       });
     }));
 
+    it('should close the panel when tabbing out', async(() => {
+      trigger.click();
+      fixture.detectChanges();
+      expect(fixture.componentInstance.select.panelOpen).toBe(true);
+
+      const panel = overlayContainerElement.querySelector('.mat-select-panel');
+      dispatchKeyboardEvent(panel, 'keydown', TAB);
+      fixture.detectChanges();
+
+      fixture.whenStable().then(() => {
+        expect(fixture.componentInstance.select.panelOpen).toBe(false);
+      });
+    }));
+
   });
 
   describe('selection logic', () => {