java.lang.InternalError: Recursive initialization of system class loader in initSystemClassLoader

Application fails to start with jdk-module-image with exception:

Error occurred during initialization of VM
java.lang.InternalError: Recursive initialization of system class loader
        at java.lang.ClassLoader.initSystemClassLoader(ClassLoader.java:1514)
        at java.lang.ClassLoader.getSystemClassLoader(ClassLoader.java:1493)
        at java.net.URL.getURLStreamHandler(URL.java:1167)
        at java.net.URL.<init>(URL.java:409)
        at java.net.URL.<init>(URL.java:300)
        at java.net.URL.<init>(URL.java:323)
        at sun.net.www.ParseUtil.fileToEncodedURL(ParseUtil.java:272)
        at sun.misc.Launcher.getFileURL(Launcher.java:460)
        at sun.misc.Launcher$ExtClassLoader.getExtURLs(Launcher.java:192)
        at sun.misc.Launcher$ExtClassLoader.<init>(Launcher.java:164)
        at sun.misc.Launcher$ExtClassLoader$1.run(Launcher.java:148)
        at sun.misc.Launcher$ExtClassLoader$1.run(Launcher.java:142)
        at java.security.AccessController.doPrivileged(Native Method)
        at sun.misc.Launcher$ExtClassLoader.getExtClassLoader(Launcher.java:141)
        at sun.misc.Launcher.<init>(Launcher.java:71)
        at sun.misc.Launcher.<clinit>(Launcher.java:57)
        at java.lang.ClassLoader.initLegacySystemClassLoader(ClassLoader.java:1531)
        at java.lang.ClassLoader.initSystemClassLoader(ClassLoader.java:1523)
        at java.lang.ClassLoader.getSystemClassLoader(ClassLoader.java:1493)