diff --git a/spec/compiler/semantic/module_spec.cr b/spec/compiler/semantic/module_spec.cr
index bc4289bdafd6..2b8320141be9 100644
--- a/spec/compiler/semantic/module_spec.cr
+++ b/spec/compiler/semantic/module_spec.cr
@@ -1352,4 +1352,20 @@ describe "Semantic: module" do
       Gen(Int32).foo
       )) { int32.metaclass }
   end
+
+  it "doesn't look up initialize past module that defines initialize (#7007)" do
+    assert_error %(
+      module Moo
+        def initialize(x)
+        end
+      end
+
+      class Foo
+        include Moo
+      end
+
+      Foo.new
+      ),
+      "wrong number of arguments"
+  end
 end
diff --git a/src/compiler/crystal/semantic/call_error.cr b/src/compiler/crystal/semantic/call_error.cr
index 6b8408056a53..de168c441095 100644
--- a/src/compiler/crystal/semantic/call_error.cr
+++ b/src/compiler/crystal/semantic/call_error.cr
@@ -61,10 +61,10 @@ class Crystal::Call
       end
     end
 
-    # Another special case: initialize is only looked up one level,
+    # Another special case: `new` and `initialize` are only looked up one level,
     # so we must find the first one defined.
     new_owner = owner
-    while defs.empty? && def_name == "initialize"
+    while defs.empty? && (def_name == "initialize" || def_name == "new")
       new_owner = new_owner.superclass
       if new_owner
         defs = new_owner.lookup_defs(def_name)
diff --git a/src/compiler/crystal/semantic/method_lookup.cr b/src/compiler/crystal/semantic/method_lookup.cr
index 32fe3cf6adc0..049dfc619fc5 100644
--- a/src/compiler/crystal/semantic/method_lookup.cr
+++ b/src/compiler/crystal/semantic/method_lookup.cr
@@ -36,7 +36,7 @@ module Crystal
       # `new` must only be searched in ancestors if this type itself doesn't define
       # an `initialize` or `self.new` method. This was already computed in `new.cr`
       # and can be known by invoking `lookup_new_in_ancestors?`
-      if my_parents && !(!lookup_new_in_ancestors? && is_new)
+      if my_parents && !(is_new && !lookup_new_in_ancestors?)
         my_parents.each do |parent|
           matches = parent.lookup_matches(signature, owner, parent, matches_array)
           if matches.cover_all?
@@ -44,6 +44,11 @@ module Crystal
           else
             matches_array = matches.matches
           end
+
+          # If this is a `new` method, once a parent defines an `initialize`
+          # method and we couldn't find any matches we must not go up in the
+          # hierarchy.
+          break if is_new && parent.has_def_without_parents?(signature.name)
         end
       end
 
diff --git a/src/compiler/crystal/types.cr b/src/compiler/crystal/types.cr
index 0d8b55bbd35e..90857dd85432 100644
--- a/src/compiler/crystal/types.cr
+++ b/src/compiler/crystal/types.cr
@@ -393,10 +393,25 @@ module Crystal
         all_defs << item.def unless all_defs.find(&.same?(item.def))
       end
 
-      if lookup_ancestors_for_new || self.lookup_new_in_ancestors? ||
-         !(name == "new" || name == "initialize")
-        parents.try &.each do |parent|
+      is_new = name == "new"
+      is_new_or_initialize = is_new || name == "initialize"
+      return if is_new_or_initialize && !all_defs.empty?
+
+      if !is_new_or_initialize || (lookup_ancestors_for_new || self.lookup_new_in_ancestors?)
+        if is_new
+          # For a `new` method we need to do this in case a `new` is defined
+          # in a module type
+          my_parents = instance_type.parents.try &.map(&.metaclass)
+        else
+          my_parents = parents
+        end
+
+        my_parents.try &.each do |parent|
+          old_size = all_defs.size
           parent.lookup_defs(name, all_defs, lookup_ancestors_for_new)
+
+          # Don't lookup new or initialize in parents once we found some defs
+          break if is_new_or_initialize && all_defs.size > old_size
         end
       end
     end