diff --git a/src/compiler/codegen/directives.js b/src/compiler/codegen/directives.js
index 952d17830..4f019193f 100644
--- a/src/compiler/codegen/directives.js
+++ b/src/compiler/codegen/directives.js
@@ -17,7 +17,7 @@ export function genDirectives (el) {
     } else {
       // runtime directive
       hasRuntime = true
-      res += `{name:"${dir.name}"${
+      res += `{def:__d__("${dir.name}")${
         dir.value ? `,value:(${dir.value})` : ''
       }${
         dir.modifiers ? `,modifiers:${JSON.stringify(dir.modifiers)}` : ''
diff --git a/src/runtime/directives/cloak.js b/src/runtime/directives/cloak.js
new file mode 100644
index 000000000..b1c6ea436
--- /dev/null
+++ b/src/runtime/directives/cloak.js
@@ -0,0 +1 @@
+export default {}
diff --git a/src/runtime/directives/index.js b/src/runtime/directives/index.js
new file mode 100644
index 000000000..aab07f2a4
--- /dev/null
+++ b/src/runtime/directives/index.js
@@ -0,0 +1,4 @@
+import cloak from './cloak'
+import show from './show'
+
+export { cloak, show }
diff --git a/src/runtime/directives/show.js b/src/runtime/directives/show.js
new file mode 100644
index 000000000..b1c6ea436
--- /dev/null
+++ b/src/runtime/directives/show.js
@@ -0,0 +1 @@
+export default {}
diff --git a/src/runtime/global-api.js b/src/runtime/global-api.js
index ed3832931..a0927f9d8 100644
--- a/src/runtime/global-api.js
+++ b/src/runtime/global-api.js
@@ -1,4 +1,5 @@
 import config from './config'
+import * as directives from './directives/index'
 import * as util from './util/index'
 import h from './vdom/h'
 import {
@@ -23,7 +24,7 @@ export function initGlobalAPI (Vue) {
   Vue.nextTick = nextTick
 
   Vue.options = {
-    directives: Object.create(null),
+    directives,
     filters: Object.create(null),
     components: Object.create(null),
     transitions: Object.create(null)
diff --git a/src/runtime/instance/render.js b/src/runtime/instance/render.js
index 90970a2c1..48e54ac3f 100644
--- a/src/runtime/instance/render.js
+++ b/src/runtime/instance/render.js
@@ -1,5 +1,5 @@
 import Watcher from '../observer/watcher'
-import { query } from '../util/index'
+import { query, resolveAsset } from '../util/index'
 import { h, patch } from '../vdom/index'
 import { callHook } from './lifecycle'
 
@@ -11,7 +11,11 @@ export function initRender (vm) {
 }
 
 export function renderMixin (Vue) {
+  // shorthands used in render functions
   Vue.prototype.__h__ = h
+  Vue.prototype.__d__ = function (id) {
+    return resolveAsset(this.$options, 'directives', id, true)
+  }
 
   Vue.prototype._update = function (vtree) {
     callHook(this, 'beforeUpdate')
diff --git a/src/runtime/instance/state.js b/src/runtime/instance/state.js
index 7fd498b40..8ead82527 100644
--- a/src/runtime/instance/state.js
+++ b/src/runtime/instance/state.js
@@ -100,8 +100,8 @@ function initWatch (vm) {
       let handler = watch[key]
       let options
       if (typeof handler === 'object') {
-        handler = handler.handler
         options = handler
+        handler = handler.handler
       }
       vm.$watch(key, handler, options)
     }
diff --git a/src/runtime/util/options.js b/src/runtime/util/options.js
index 2ab48c6d8..990d59e12 100644
--- a/src/runtime/util/options.js
+++ b/src/runtime/util/options.js
@@ -282,6 +282,19 @@ function guardProps (options) {
   }
 }
 
+function guardDirectives (options) {
+  var dirs = options.directives
+  if (dirs) {
+    var keys = Object.keys(dirs)
+    var i = keys.length
+    while (i--) {
+      if (typeof dirs[keys[i]] === 'function') {
+        dirs[keys[i]] = { update: dirs[keys[i]] }
+      }
+    }
+  }
+}
+
 /**
  * Merge two option objects into a new one.
  * Core utility used in both instantiation and inheritance.
@@ -295,6 +308,7 @@ function guardProps (options) {
 export function mergeOptions (parent, child, vm) {
   guardComponents(child)
   guardProps(child)
+  guardDirectives(child)
   var options = {}
   var key
   if (child.mixins) {
diff --git a/src/runtime/vdom/index.js b/src/runtime/vdom/index.js
index 8a79b037f..3cc788f17 100644
--- a/src/runtime/vdom/index.js
+++ b/src/runtime/vdom/index.js
@@ -11,13 +11,15 @@ import style from './modules/style'
 import props from './modules/props'
 import attrs from './modules/attrs'
 import events from './modules/events'
+import directives from './modules/directives'
 
 const patch = createPatchFunction([
   classes,
   props,
   attrs,
   style,
-  events
+  events,
+  directives
 ])
 
 export { patch, h }
diff --git a/src/runtime/vdom/modules/directives.js b/src/runtime/vdom/modules/directives.js
index e69de29bb..83245fe2c 100644
--- a/src/runtime/vdom/modules/directives.js
+++ b/src/runtime/vdom/modules/directives.js
@@ -0,0 +1,28 @@
+export default {
+  create: function (oldVnode, vnode) {
+    applyDirectives(oldVnode, vnode, 'bind')
+  },
+  update: function (oldVnode, vnode) {
+    applyDirectives(oldVnode, vnode, 'update', true)
+  }
+}
+
+function applyDirectives (oldVnode, vnode, hook, update) {
+  const dirs = vnode.data.directives
+  if (dirs) {
+    for (let i = 0; i < dirs.length; i++) {
+      let dir = dirs[i]
+      let fn = dir.def[hook]
+      if (fn) {
+        // only call update if value has changed
+        if (update) {
+          let oldValue = oldVnode.data.directives[i].value
+          if (oldValue === dir.value) {
+            continue
+          }
+        }
+        fn(vnode.elm, dir.value, dir.modifiers)
+      }
+    }
+  }
+}