diff --git a/setup.c b/setup.c
index 6c3f85ff7a..5e55306083 100644
--- a/setup.c
+++ b/setup.c
@@ -5,6 +5,70 @@
 static int inside_git_dir = -1;
 static int inside_work_tree = -1;
 
+/*
+ * The input parameter must contain an absolute path, and it must already be
+ * normalized.
+ *
+ * Find the part of an absolute path that lies inside the work tree by
+ * dereferencing symlinks outside the work tree, for example:
+ * /dir1/repo/dir2/file   (work tree is /dir1/repo)      -> dir2/file
+ * /dir/file              (work tree is /)               -> dir/file
+ * /dir/symlink1/symlink2 (symlink1 points to work tree) -> symlink2
+ * /dir/repolink/file     (repolink points to /dir/repo) -> file
+ * /dir/repo              (exactly equal to work tree)   -> (empty string)
+ */
+static int abspath_part_inside_repo(char *path)
+{
+	size_t len;
+	size_t wtlen;
+	char *path0;
+	int off;
+	const char *work_tree = get_git_work_tree();
+
+	if (!work_tree)
+		return -1;
+	wtlen = strlen(work_tree);
+	len = strlen(path);
+	off = offset_1st_component(path);
+
+	/* check if work tree is already the prefix */
+	if (wtlen <= len && !strncmp(path, work_tree, wtlen)) {
+		if (path[wtlen] == '/') {
+			memmove(path, path + wtlen + 1, len - wtlen);
+			return 0;
+		} else if (path[wtlen - 1] == '/' || path[wtlen] == '\0') {
+			/* work tree is the root, or the whole path */
+			memmove(path, path + wtlen, len - wtlen + 1);
+			return 0;
+		}
+		/* work tree might match beginning of a symlink to work tree */
+		off = wtlen;
+	}
+	path0 = path;
+	path += off;
+
+	/* check each '/'-terminated level */
+	while (*path) {
+		path++;
+		if (*path == '/') {
+			*path = '\0';
+			if (strcmp(real_path(path0), work_tree) == 0) {
+				memmove(path0, path + 1, len - (path - path0));
+				return 0;
+			}
+			*path = '/';
+		}
+	}
+
+	/* check whole path */
+	if (strcmp(real_path(path0), work_tree) == 0) {
+		*path0 = '\0';
+		return 0;
+	}
+
+	return -1;
+}
+
 /*
  * Normalize "path", prepending the "prefix" for relative paths. If
  * remaining_prefix is not NULL, return the actual prefix still
@@ -22,11 +86,17 @@ char *prefix_path_gently(const char *prefix, int len,
 	const char *orig = path;
 	char *sanitized;
 	if (is_absolute_path(orig)) {
-		const char *temp = real_path(path);
-		sanitized = xmalloc(len + strlen(temp) + 1);
-		strcpy(sanitized, temp);
+		sanitized = xmalloc(strlen(path) + 1);
 		if (remaining_prefix)
 			*remaining_prefix = 0;
+		if (normalize_path_copy_len(sanitized, path, remaining_prefix)) {
+			free(sanitized);
+			return NULL;
+		}
+		if (abspath_part_inside_repo(sanitized)) {
+			free(sanitized);
+			return NULL;
+		}
 	} else {
 		sanitized = xmalloc(len + strlen(path) + 1);
 		if (len)
@@ -34,26 +104,10 @@ char *prefix_path_gently(const char *prefix, int len,
 		strcpy(sanitized + len, path);
 		if (remaining_prefix)
 			*remaining_prefix = len;
-	}
-	if (normalize_path_copy_len(sanitized, sanitized, remaining_prefix))
-		goto error_out;
-	if (is_absolute_path(orig)) {
-		size_t root_len, len, total;
-		const char *work_tree = get_git_work_tree();
-		if (!work_tree)
-			goto error_out;
-		len = strlen(work_tree);
-		root_len = offset_1st_component(work_tree);
-		total = strlen(sanitized) + 1;
-		if (strncmp(sanitized, work_tree, len) ||
-		    (len > root_len && sanitized[len] != '\0' && sanitized[len] != '/')) {
-		error_out:
+		if (normalize_path_copy_len(sanitized, sanitized, remaining_prefix)) {
 			free(sanitized);
 			return NULL;
 		}
-		if (sanitized[len] == '/')
-			len++;
-		memmove(sanitized, sanitized + len, total - len);
 	}
 	return sanitized;
 }
diff --git a/t/t0060-path-utils.sh b/t/t0060-path-utils.sh
index 07c10c8dca..c0143a0a70 100755
--- a/t/t0060-path-utils.sh
+++ b/t/t0060-path-utils.sh
@@ -190,6 +190,27 @@ test_expect_success SYMLINKS 'real path works on symlinks' '
 	test "$sym" = "$(test-path-utils real_path "$dir2/syml")"
 '
 
+test_expect_success SYMLINKS 'prefix_path works with absolute paths to work tree symlinks' '
+	ln -s target symlink &&
+	test "$(test-path-utils prefix_path prefix "$(pwd)/symlink")" = "symlink"
+'
+
+test_expect_success 'prefix_path works with only absolute path to work tree' '
+	echo "" >expected &&
+	test-path-utils prefix_path prefix "$(pwd)" >actual &&
+	test_cmp expected actual
+'
+
+test_expect_success 'prefix_path rejects absolute path to dir with same beginning as work tree' '
+	test_must_fail test-path-utils prefix_path prefix "$(pwd)a"
+'
+
+test_expect_success SYMLINKS 'prefix_path works with absolute path to a symlink to work tree having  same beginning as work tree' '
+	git init repo &&
+	ln -s repo repolink &&
+	test "a" = "$(cd repo && test-path-utils prefix_path prefix "$(pwd)/../repolink/a")"
+'
+
 relative_path /foo/a/b/c/	/foo/a/b/	c/
 relative_path /foo/a/b/c/	/foo/a/b	c/
 relative_path /foo/a//b//c/	///foo/a/b//	c/		POSIX
diff --git a/t/t3004-ls-files-basic.sh b/t/t3004-ls-files-basic.sh
index 8d9bc3c2af..9c7adbdbe1 100755
--- a/t/t3004-ls-files-basic.sh
+++ b/t/t3004-ls-files-basic.sh
@@ -36,4 +36,21 @@ test_expect_success 'ls-files -h in corrupt repository' '
 	test_i18ngrep "[Uu]sage: git ls-files " broken/usage
 '
 
+test_expect_success SYMLINKS 'ls-files with absolute paths to symlinks' '
+	mkdir subs &&
+	ln -s nosuch link &&
+	ln -s ../nosuch subs/link &&
+	git add link subs/link &&
+	git ls-files -s link subs/link >expect &&
+	git ls-files -s "$(pwd)/link" "$(pwd)/subs/link" >actual &&
+	test_cmp expect actual &&
+
+	(
+		cd subs &&
+		git ls-files -s link >../expect &&
+		git ls-files -s "$(pwd)/link" >../actual
+	) &&
+	test_cmp expect actual
+'
+
 test_done