diff --git a/cache.h b/cache.h
index 84b8229748..8e691957e9 100644
--- a/cache.h
+++ b/cache.h
@@ -455,6 +455,7 @@ extern const char *prefix_filename(const char *prefix, int len, const char *path
 extern int check_filename(const char *prefix, const char *name);
 extern void verify_filename(const char *prefix, const char *name);
 extern void verify_non_filename(const char *prefix, const char *name);
+extern int path_inside_repo(const char *prefix, const char *path);
 
 #define INIT_DB_QUIET 0x0001
 
diff --git a/diff-no-index.c b/diff-no-index.c
index f0b0010aed..e6b9952b34 100644
--- a/diff-no-index.c
+++ b/diff-no-index.c
@@ -151,23 +151,6 @@ static int queue_diff(struct diff_options *o,
 	}
 }
 
-static int path_outside_repo(const char *path)
-{
-	const char *work_tree;
-	size_t len;
-
-	if (!is_absolute_path(path))
-		return 0;
-	work_tree = get_git_work_tree();
-	if (!work_tree)
-		return 1;
-	len = strlen(work_tree);
-	if (strncmp(path, work_tree, len) ||
-	    (path[len] != '\0' && path[len] != '/'))
-		return 1;
-	return 0;
-}
-
 void diff_no_index(struct rev_info *revs,
 		   int argc, const char **argv,
 		   int nongit, const char *prefix)
@@ -197,8 +180,8 @@ void diff_no_index(struct rev_info *revs,
 		 * a colourful "diff" replacement.
 		 */
 		if ((argc != i + 2) ||
-		    (!path_outside_repo(argv[i]) &&
-		     !path_outside_repo(argv[i+1])))
+		    (path_inside_repo(prefix, argv[i]) &&
+		     path_inside_repo(prefix, argv[i+1])))
 			return;
 	}
 	if (argc != i + 2)
diff --git a/setup.c b/setup.c
index 731851a4a8..2cfa037772 100644
--- a/setup.c
+++ b/setup.c
@@ -4,7 +4,7 @@
 static int inside_git_dir = -1;
 static int inside_work_tree = -1;
 
-char *prefix_path(const char *prefix, int len, const char *path)
+static char *prefix_path_gently(const char *prefix, int len, const char *path)
 {
 	const char *orig = path;
 	char *sanitized;
@@ -31,7 +31,8 @@ char *prefix_path(const char *prefix, int len, const char *path)
 		if (strncmp(sanitized, work_tree, len) ||
 		    (len > root_len && sanitized[len] != '\0' && sanitized[len] != '/')) {
 		error_out:
-			die("'%s' is outside repository", orig);
+			free(sanitized);
+			return NULL;
 		}
 		if (sanitized[len] == '/')
 			len++;
@@ -40,6 +41,25 @@ char *prefix_path(const char *prefix, int len, const char *path)
 	return sanitized;
 }
 
+char *prefix_path(const char *prefix, int len, const char *path)
+{
+	char *r = prefix_path_gently(prefix, len, path);
+	if (!r)
+		die("'%s' is outside repository", path);
+	return r;
+}
+
+int path_inside_repo(const char *prefix, const char *path)
+{
+	int len = prefix ? strlen(prefix) : 0;
+	char *r = prefix_path_gently(prefix, len, path);
+	if (r) {
+		free(r);
+		return 1;
+	}
+	return 0;
+}
+
 int check_filename(const char *prefix, const char *arg)
 {
 	const char *name;
diff --git a/t/t4053-diff-no-index.sh b/t/t4053-diff-no-index.sh
index 4dc8c67edc..979e98398b 100755
--- a/t/t4053-diff-no-index.sh
+++ b/t/t4053-diff-no-index.sh
@@ -8,7 +8,12 @@ test_expect_success 'setup' '
 	mkdir a &&
 	mkdir b &&
 	echo 1 >a/1 &&
-	echo 2 >a/2
+	echo 2 >a/2 &&
+	git init repo &&
+	echo 1 >repo/a &&
+	mkdir -p non/git &&
+	echo 1 >non/git/a &&
+	echo 1 >non/git/b
 '
 
 test_expect_success 'git diff --no-index directories' '
@@ -16,4 +21,12 @@ test_expect_success 'git diff --no-index directories' '
 	test $? = 1 && test_line_count = 14 cnt
 '
 
+test_expect_success 'git diff --no-index relative path outside repo' '
+	(
+		cd repo &&
+		test_expect_code 0 git diff --no-index a ../non/git/a &&
+		test_expect_code 0 git diff --no-index ../non/git/a ../non/git/b
+	)
+'
+
 test_done