diff --git a/embed/etcd.go b/embed/etcd.go
index 5b7a17ca99a..c5c0d2d699f 100644
--- a/embed/etcd.go
+++ b/embed/etcd.go
@@ -192,11 +192,29 @@ func (e *Etcd) Config() Config {
 func (e *Etcd) Close() {
 	e.closeOnce.Do(func() { close(e.stopc) })
 
-	// (gRPC server) stops accepting new connections,
-	// RPCs, and blocks until all pending RPCs are finished
+	timeout := 2 * time.Second
+	if e.Server != nil {
+		timeout = e.Server.Cfg.ReqTimeout()
+	}
 	for _, sctx := range e.sctxs {
 		for gs := range sctx.grpcServerC {
-			gs.GracefulStop()
+			ch := make(chan struct{})
+			go func() {
+				defer close(ch)
+				// close listeners to stop accepting new connections,
+				// will block on any existing transports
+				gs.GracefulStop()
+			}()
+			// wait until all pending RPCs are finished
+			select {
+			case <-ch:
+			case <-time.After(timeout):
+				// took too long, manually close open transports
+				// e.g. watch streams
+				gs.Stop()
+				// concurrent GracefulStop should be interrupted
+				<-ch
+			}
 		}
 	}
 
diff --git a/integration/embed_test.go b/integration/embed_test.go
index 8cba0b39605..751494eaea0 100644
--- a/integration/embed_test.go
+++ b/integration/embed_test.go
@@ -15,13 +15,16 @@
 package integration
 
 import (
+	"context"
 	"fmt"
 	"net/url"
 	"os"
 	"path/filepath"
 	"strings"
 	"testing"
+	"time"
 
+	"github.com/coreos/etcd/clientv3"
 	"github.com/coreos/etcd/embed"
 )
 
@@ -102,6 +105,47 @@ func TestEmbedEtcd(t *testing.T) {
 	}
 }
 
+// TestEmbedEtcdGracefulStop ensures embedded server stops
+// cutting existing transports.
+func TestEmbedEtcdGracefulStop(t *testing.T) {
+	cfg := embed.NewConfig()
+
+	urls := newEmbedURLs(2)
+	setupEmbedCfg(cfg, []url.URL{urls[0]}, []url.URL{urls[1]})
+
+	cfg.Dir = filepath.Join(os.TempDir(), fmt.Sprintf("embed-etcd"))
+	os.RemoveAll(cfg.Dir)
+	defer os.RemoveAll(cfg.Dir)
+
+	e, err := embed.StartEtcd(cfg)
+	if err != nil {
+		t.Fatal(err)
+	}
+	<-e.Server.ReadyNotify() // wait for e.Server to join the cluster
+
+	cli, err := clientv3.New(clientv3.Config{Endpoints: []string{urls[0].String()}})
+	if err != nil {
+		t.Fatal(err)
+	}
+	defer cli.Close()
+
+	// open watch connection
+	cli.Watch(context.Background(), "foo")
+
+	donec := make(chan struct{})
+	go func() {
+		e.Close()
+		close(donec)
+	}()
+	select {
+	case err := <-e.Err():
+		t.Fatal(err)
+	case <-donec:
+	case <-time.After(2*time.Second + e.Server.Cfg.ReqTimeout()):
+		t.Fatalf("took too long to close server")
+	}
+}
+
 func newEmbedURLs(n int) (urls []url.URL) {
 	for i := 0; i < n; i++ {
 		u, _ := url.Parse(fmt.Sprintf("unix://localhost:%d%06d", os.Getpid(), i))