Maven test dependency in multi module project

I use maven to build a multi module project. My module 2 depends on Module 1 src at compile scope and module 1 tests in test scope.

Module 2 -

   <dependency>
       <groupId>blah</groupId>
       <artifactId>MODULE1</artifactId>
       <version>blah</version>
       <classifier>tests</classifier>
       <scope>test</scope>
   </dependency>

This works fine. Say my module 3 depends on Module1 src and tests at compile time.

Module 3 -

   <dependency>
       <groupId>blah</groupId>
       <artifactId>MODULE1</artifactId>
       <version>blah</version>
       <classifier>tests</classifier>
       <scope>compile</scope>
   </dependency>

When I run mvn clean install, my build runs till module 3, fails at module 3 as it couldn't resolve the module 1 test dependency. Then I do a mvn install on module 3 alone, go back and run mvn install on my parent pom to make it build. How can I fix this?

I have a doubt about what you are trying to do but but I'll assume you want to reuse the tests that you have created for a project (module1) in another. As explained in the note at the bottom of the Guide to using attached tests:

Note that previous editions of this guide suggested to use <classifier>tests</classifier> instead of <type>test-jar</type>. While this currently works for some cases, it does not properly work during a reactor build of the test JAR module and any consumer if a lifecycle phase prior to install is invoked. In such a scenario, Maven will not resolve the test JAR from the output of the reactor build but from the local/remote repository. Apparently, the JAR from the repositories could be outdated or completely missing, causing a build failure (cf. MNG-2045).

So, first, to package up compiled tests in a JAR and deploy them for general reuse, configure the maven-jar-plugin as follows:

<project>
  <build>
    <plugins>
     <plugin>
       <groupId>org.apache.maven.plugins</groupId>
       <artifactId>maven-jar-plugin</artifactId>
       <version>2.2</version>
       <executions>
         <execution>
           <goals>
             <goal>test-jar</goal>
           </goals>
         </execution>
       </executions>
     </plugin>
    </plugins>
  </build>
</project>

Then, install/deploy the test JAR artifact as usual (using mvn install or mvn deploy).

Finally, to use the test JAR, you should specify a dependency with a specified type of test-jar:

<project>
  ...
  <dependencies>
    <dependency>
      <groupId>com.myco.app</groupId>
      <artifactId>foo</artifactId>
      <version>1.0-SNAPSHOT</version>
      <type>test-jar</type>
      <scope>test</scope>
    </dependency>
  </dependencies>
  ...
</project>