diff --git a/mysql-test/suite/innodb/r/shrink_cached_undo.result b/mysql-test/suite/innodb/r/shrink_cached_undo.result
new file mode 100644
index 00000000000..39c6be4615b
--- /dev/null
+++ b/mysql-test/suite/innodb/r/shrink_cached_undo.result
@@ -0,0 +1,23 @@
+#
+# MDEV-35398 Improve shrinking of system tablespace
+#
+# restart: --debug_dbug=d,skip_cached_undo
+SET GLOBAL innodb_file_per_table= 0;
+Warnings:
+Warning	1287	'@@innodb_file_per_table' is deprecated and will be removed in a future release
+CREATE TABLE t1(f1 INT PRIMARY KEY)ENGINE=InnoDB;
+CREATE TABLE t2(f1 INT PRIMARY KEY)ENGINE=InnoDB;
+SET STATEMENT unique_checks=0,foreign_key_checks=0 FOR
+INSERT INTO t1 SELECT seq FROM seq_1_to_24576;
+SET STATEMENT unique_checks=0,foreign_key_checks=0 FOR
+INSERT INTO t2 SELECT seq FROM seq_1_to_24576;
+# Insert 34 transaction which has undo cached records
+DROP TABLE t2, t1;
+SET GLOBAL innodb_fast_shutdown=0;
+SELECT NAME, FILE_SIZE FROM information_schema.innodb_sys_tablespaces WHERE SPACE = 0;
+NAME	FILE_SIZE
+innodb_system	79691776
+# restart
+SELECT NAME, FILE_SIZE FROM information_schema.innodb_sys_tablespaces WHERE SPACE = 0;
+NAME	FILE_SIZE
+innodb_system	12582912
diff --git a/mysql-test/suite/innodb/t/shrink_cached_undo.opt b/mysql-test/suite/innodb/t/shrink_cached_undo.opt
new file mode 100644
index 00000000000..e8459f850f8
--- /dev/null
+++ b/mysql-test/suite/innodb/t/shrink_cached_undo.opt
@@ -0,0 +1,2 @@
+--innodb_undo_tablespaces=0
+--innodb_sys_tablespaces
diff --git a/mysql-test/suite/innodb/t/shrink_cached_undo.test b/mysql-test/suite/innodb/t/shrink_cached_undo.test
new file mode 100644
index 00000000000..8274556d8fd
--- /dev/null
+++ b/mysql-test/suite/innodb/t/shrink_cached_undo.test
@@ -0,0 +1,47 @@
+--source include/have_innodb.inc
+--source include/have_sequence.inc
+--source include/have_debug.inc
+--source include/not_embedded.inc
+--source include/big_test.inc
+--echo #
+--echo # MDEV-35398 Improve shrinking of system tablespace
+--echo #
+# Make pre-10.6.13 version data directory which skips the
+# purging of cached undo log records
+let $restart_parameters=--debug_dbug=d,skip_cached_undo;
+--source include/restart_mysqld.inc
+SET GLOBAL innodb_file_per_table= 0;
+CREATE TABLE t1(f1 INT PRIMARY KEY)ENGINE=InnoDB;
+CREATE TABLE t2(f1 INT PRIMARY KEY)ENGINE=InnoDB;
+
+SET STATEMENT unique_checks=0,foreign_key_checks=0 FOR
+INSERT INTO t1 SELECT seq FROM seq_1_to_24576;
+SET STATEMENT unique_checks=0,foreign_key_checks=0 FOR
+INSERT INTO t2 SELECT seq FROM seq_1_to_24576;
+
+--echo # Insert 34 transaction which has undo cached records
+--disable_query_log
+let $c = 34;
+while ($c)
+{
+  connect (con$c,localhost,root,,);
+  START TRANSACTION;
+  eval INSERT INTO t1 SELECT seq+$c*32768 FROM seq_1_to_3753;
+  dec $c;
+}
+
+connection default;
+let $c = 34;
+while ($c)
+{
+  disconnect con$c;
+  dec $c;
+}
+--enable_query_log
+
+DROP TABLE t2, t1;
+SET GLOBAL innodb_fast_shutdown=0;
+SELECT NAME, FILE_SIZE FROM information_schema.innodb_sys_tablespaces WHERE SPACE = 0;
+let $restart_parameters=;
+--source include/restart_mysqld.inc
+SELECT NAME, FILE_SIZE FROM information_schema.innodb_sys_tablespaces WHERE SPACE = 0;
diff --git a/storage/innobase/fsp/fsp0fsp.cc b/storage/innobase/fsp/fsp0fsp.cc
index 3b91bacd38e..7bb12a2d79a 100644
--- a/storage/innobase/fsp/fsp0fsp.cc
+++ b/storage/innobase/fsp/fsp0fsp.cc
@@ -3851,22 +3851,6 @@ static dberr_t fsp_get_sys_used_segment(inode_info *inodes, mtr_t *mtr)
                               TRX_RSEG_FSEG_HEADER))
         err= DB_CORRUPTION;
       block->page.unfix();
-
-      /* Even after slow shutdown, there is a possiblity that
-      cached undo log can exist. So store the segment as used one */
-      for (trx_undo_t *undo= UT_LIST_GET_FIRST(rseg->undo_cached);
-           undo && err == DB_SUCCESS;
-           undo= UT_LIST_GET_NEXT(undo_list, undo))
-      {
-        block= buf_pool.page_fix(page_id_t{0, undo->hdr_page_no}, &err,
-                                 buf_pool_t::FIX_WAIT_READ);
-        if (!block)
-	  return err;
-	if (!inodes->insert_seg(block->page.frame + TRX_UNDO_SEG_HDR +
-                                TRX_UNDO_FSEG_HEADER))
-          err= DB_CORRUPTION;
-        block->page.unfix();
-      }
     }
   }
 
@@ -4010,6 +3994,33 @@ dberr_t fil_space_t::garbage_collect(bool shutdown)
     return err;
   }
 
+  /* Reset the undo log segments slots in the rollback segment header
+  which exist in system tablespace. Undo cached segment will be
+  treated as unused file segment. These segments will be freed as a
+  part of inode_info::free_segs  */
+  mtr.start();
+  mtr.x_lock_space(fil_system.sys_space);
+  for (trx_rseg_t &rseg : trx_sys.rseg_array)
+  {
+    if (rseg.space == fil_system.sys_space &&
+        UT_LIST_GET_LEN(rseg.undo_cached))
+    {
+      buf_block_t *block=
+        buf_page_get_gen(page_id_t{0, rseg.page_no}, 0,
+                         RW_X_LATCH, nullptr, BUF_GET, &mtr, &err);
+      if (!block)
+      {
+        mtr.commit();
+        return err;
+      }
+
+      mtr.memset(block, TRX_RSEG_UNDO_SLOTS + TRX_RSEG,
+                 TRX_RSEG_N_SLOTS * TRX_RSEG_SLOT_SIZE, 0xff);
+      rseg.reinit(rseg.page_no);
+    }
+  }
+  mtr.commit();
+
   return unused_inodes.free_segs();
 }
 
diff --git a/storage/innobase/trx/trx0purge.cc b/storage/innobase/trx/trx0purge.cc
index d543468d465..c135b1afd02 100644
--- a/storage/innobase/trx/trx0purge.cc
+++ b/storage/innobase/trx/trx0purge.cc
@@ -497,6 +497,7 @@ loop:
       if (UNIV_UNLIKELY(mach_read_from_4(TRX_RSEG + TRX_RSEG_FORMAT +
                                          rseg_hdr->page.frame)))
         trx_rseg_format_upgrade(rseg_hdr, &mtr);
+      DBUG_EXECUTE_IF("skip_cached_undo", goto skip_purge_free;);
       if (UNIV_LIKELY(undo != nullptr))
       {
         UT_LIST_REMOVE(rseg.undo_cached, undo);