diff --git a/cache-tree.c b/cache-tree.c
index 2fb483d3c0..5f07a39e50 100644
--- a/cache-tree.c
+++ b/cache-tree.c
@@ -6,6 +6,7 @@
 #include "object-store.h"
 #include "replace-object.h"
 #include "promisor-remote.h"
+#include "sparse-index.h"
 
 #ifndef DEBUG_CACHE_TREE
 #define DEBUG_CACHE_TREE 0
@@ -442,6 +443,8 @@ int cache_tree_update(struct index_state *istate, int flags)
 	if (i)
 		return i;
 
+	ensure_full_index(istate);
+
 	if (!istate->cache_tree)
 		istate->cache_tree = cache_tree();
 
diff --git a/cache.h b/cache.h
index 8c4464420d..74b43aaa2b 100644
--- a/cache.h
+++ b/cache.h
@@ -251,6 +251,8 @@ static inline unsigned int create_ce_mode(unsigned int mode)
 {
 	if (S_ISLNK(mode))
 		return S_IFLNK;
+	if (S_ISSPARSEDIR(mode))
+		return S_IFDIR;
 	if (S_ISDIR(mode) || S_ISGITLINK(mode))
 		return S_IFGITLINK;
 	return S_IFREG | ce_permissions(mode);
diff --git a/read-cache.c b/read-cache.c
index b8f092d1b7..2410e6e0df 100644
--- a/read-cache.c
+++ b/read-cache.c
@@ -25,6 +25,7 @@
 #include "fsmonitor.h"
 #include "thread-utils.h"
 #include "progress.h"
+#include "sparse-index.h"
 
 /* Mask for the name length in ce_flags in the on-disk index */
 
@@ -1003,8 +1004,14 @@ inside:
 
 			c = *path++;
 			if ((c == '.' && !verify_dotfile(path, mode)) ||
-			    is_dir_sep(c) || c == '\0')
+			    is_dir_sep(c))
 				return 0;
+			/*
+			 * allow terminating directory separators for
+			 * sparse directory entries.
+			 */
+			if (c == '\0')
+				return S_ISDIR(mode);
 		} else if (c == '\\' && protect_ntfs) {
 			if (is_ntfs_dotgit(path))
 				return 0;
@@ -3088,6 +3095,14 @@ static int do_write_locked_index(struct index_state *istate, struct lock_file *l
 				 unsigned flags)
 {
 	int ret;
+	int was_full = !istate->sparse_index;
+
+	ret = convert_to_sparse(istate);
+
+	if (ret) {
+		warning(_("failed to convert to a sparse-index"));
+		return ret;
+	}
 
 	/*
 	 * TODO trace2: replace "the_repository" with the actual repo instance
@@ -3099,6 +3114,9 @@ static int do_write_locked_index(struct index_state *istate, struct lock_file *l
 	trace2_region_leave_printf("index", "do_write_index", the_repository,
 				   "%s", get_lock_file_path(lock));
 
+	if (was_full)
+		ensure_full_index(istate);
+
 	if (ret)
 		return ret;
 	if (flags & COMMIT_LOCK)
@@ -3189,9 +3207,10 @@ static int write_shared_index(struct index_state *istate,
 			      struct tempfile **temp)
 {
 	struct split_index *si = istate->split_index;
-	int ret;
+	int ret, was_full = !istate->sparse_index;
 
 	move_cache_to_base_index(istate);
+	convert_to_sparse(istate);
 
 	trace2_region_enter_printf("index", "shared/do_write_index",
 				   the_repository, "%s", get_tempfile_path(*temp));
@@ -3199,6 +3218,9 @@ static int write_shared_index(struct index_state *istate,
 	trace2_region_leave_printf("index", "shared/do_write_index",
 				   the_repository, "%s", get_tempfile_path(*temp));
 
+	if (was_full)
+		ensure_full_index(istate);
+
 	if (ret)
 		return ret;
 	ret = adjust_shared_perm(get_tempfile_path(*temp));
diff --git a/sparse-index.c b/sparse-index.c
index 7095378a1b..619ff7c2e2 100644
--- a/sparse-index.c
+++ b/sparse-index.c
@@ -4,6 +4,145 @@
 #include "tree.h"
 #include "pathspec.h"
 #include "trace2.h"
+#include "cache-tree.h"
+#include "config.h"
+#include "dir.h"
+#include "fsmonitor.h"
+
+static struct cache_entry *construct_sparse_dir_entry(
+				struct index_state *istate,
+				const char *sparse_dir,
+				struct cache_tree *tree)
+{
+	struct cache_entry *de;
+
+	de = make_cache_entry(istate, S_IFDIR, &tree->oid, sparse_dir, 0, 0);
+
+	de->ce_flags |= CE_SKIP_WORKTREE;
+	return de;
+}
+
+/*
+ * Returns the number of entries "inserted" into the index.
+ */
+static int convert_to_sparse_rec(struct index_state *istate,
+				 int num_converted,
+				 int start, int end,
+				 const char *ct_path, size_t ct_pathlen,
+				 struct cache_tree *ct)
+{
+	int i, can_convert = 1;
+	int start_converted = num_converted;
+	enum pattern_match_result match;
+	int dtype;
+	struct strbuf child_path = STRBUF_INIT;
+	struct pattern_list *pl = istate->sparse_checkout_patterns;
+
+	/*
+	 * Is the current path outside of the sparse cone?
+	 * Then check if the region can be replaced by a sparse
+	 * directory entry (everything is sparse and merged).
+	 */
+	match = path_matches_pattern_list(ct_path, ct_pathlen,
+					  NULL, &dtype, pl, istate);
+	if (match != NOT_MATCHED)
+		can_convert = 0;
+
+	for (i = start; can_convert && i < end; i++) {
+		struct cache_entry *ce = istate->cache[i];
+
+		if (ce_stage(ce) ||
+		    !(ce->ce_flags & CE_SKIP_WORKTREE))
+			can_convert = 0;
+	}
+
+	if (can_convert) {
+		struct cache_entry *se;
+		se = construct_sparse_dir_entry(istate, ct_path, ct);
+
+		istate->cache[num_converted++] = se;
+		return 1;
+	}
+
+	for (i = start; i < end; ) {
+		int count, span, pos = -1;
+		const char *base, *slash;
+		struct cache_entry *ce = istate->cache[i];
+
+		/*
+		 * Detect if this is a normal entry outside of any subtree
+		 * entry.
+		 */
+		base = ce->name + ct_pathlen;
+		slash = strchr(base, '/');
+
+		if (slash)
+			pos = cache_tree_subtree_pos(ct, base, slash - base);
+
+		if (pos < 0) {
+			istate->cache[num_converted++] = ce;
+			i++;
+			continue;
+		}
+
+		strbuf_setlen(&child_path, 0);
+		strbuf_add(&child_path, ce->name, slash - ce->name + 1);
+
+		span = ct->down[pos]->cache_tree->entry_count;
+		count = convert_to_sparse_rec(istate,
+					      num_converted, i, i + span,
+					      child_path.buf, child_path.len,
+					      ct->down[pos]->cache_tree);
+		num_converted += count;
+		i += span;
+	}
+
+	strbuf_release(&child_path);
+	return num_converted - start_converted;
+}
+
+int convert_to_sparse(struct index_state *istate)
+{
+	if (istate->split_index || istate->sparse_index ||
+	    !core_apply_sparse_checkout || !core_sparse_checkout_cone)
+		return 0;
+
+	/*
+	 * For now, only create a sparse index with the
+	 * GIT_TEST_SPARSE_INDEX environment variable. We will relax
+	 * this once we have a proper way to opt-in (and later still,
+	 * opt-out).
+	 */
+	if (!git_env_bool("GIT_TEST_SPARSE_INDEX", 0))
+		return 0;
+
+	if (!istate->sparse_checkout_patterns) {
+		istate->sparse_checkout_patterns = xcalloc(1, sizeof(struct pattern_list));
+		if (get_sparse_checkout_patterns(istate->sparse_checkout_patterns) < 0)
+			return 0;
+	}
+
+	if (!istate->sparse_checkout_patterns->use_cone_patterns) {
+		warning(_("attempting to use sparse-index without cone mode"));
+		return -1;
+	}
+
+	if (cache_tree_update(istate, 0)) {
+		warning(_("unable to update cache-tree, staying full"));
+		return -1;
+	}
+
+	remove_fsmonitor(istate);
+
+	trace2_region_enter("index", "convert_to_sparse", istate->repo);
+	istate->cache_nr = convert_to_sparse_rec(istate,
+						 0, 0, istate->cache_nr,
+						 "", 0, istate->cache_tree);
+	istate->drop_cache_tree = 1;
+	istate->sparse_index = 1;
+	trace2_region_leave("index", "convert_to_sparse", istate->repo);
+	return 0;
+}
 
 static void set_index_entry(struct index_state *istate, int nr, struct cache_entry *ce)
 {
diff --git a/sparse-index.h b/sparse-index.h
index 09a20d036c..64380e121d 100644
--- a/sparse-index.h
+++ b/sparse-index.h
@@ -3,5 +3,6 @@
 
 struct index_state;
 void ensure_full_index(struct index_state *istate);
+int convert_to_sparse(struct index_state *istate);
 
 #endif
diff --git a/t/t1092-sparse-checkout-compatibility.sh b/t/t1092-sparse-checkout-compatibility.sh
index a1aea141c6..1e888d1951 100755
--- a/t/t1092-sparse-checkout-compatibility.sh
+++ b/t/t1092-sparse-checkout-compatibility.sh
@@ -2,6 +2,11 @@
 
 test_description='compare full workdir to sparse workdir'
 
+# The verify_cache_tree() check is not sparse-aware (yet).
+# So, disable the check until that integration is complete.
+GIT_TEST_CHECK_CACHE_TREE=0
+GIT_TEST_SPLIT_INDEX=0
+
 . ./test-lib.sh
 
 test_expect_success 'setup' '
@@ -121,7 +126,9 @@ run_on_all () {
 test_all_match () {
 	run_on_all "$@" &&
 	test_cmp full-checkout-out sparse-checkout-out &&
-	test_cmp full-checkout-err sparse-checkout-err
+	test_cmp full-checkout-out sparse-index-out &&
+	test_cmp full-checkout-err sparse-checkout-err &&
+	test_cmp full-checkout-err sparse-index-err
 }
 
 test_sparse_match () {
@@ -130,6 +137,38 @@ test_sparse_match () {
 	test_cmp sparse-checkout-err sparse-index-err
 }
 
+test_expect_success 'sparse-index contents' '
+	init_repos &&
+
+	test-tool -C sparse-index read-cache --table >cache &&
+	for dir in folder1 folder2 x
+	do
+		TREE=$(git -C sparse-index rev-parse HEAD:$dir) &&
+		grep "040000 tree $TREE	$dir/" cache \
+			|| return 1
+	done &&
+
+	GIT_TEST_SPARSE_INDEX=1 git -C sparse-index sparse-checkout set folder1 &&
+
+	test-tool -C sparse-index read-cache --table >cache &&
+	for dir in deep folder2 x
+	do
+		TREE=$(git -C sparse-index rev-parse HEAD:$dir) &&
+		grep "040000 tree $TREE	$dir/" cache \
+			|| return 1
+	done &&
+
+	GIT_TEST_SPARSE_INDEX=1 git -C sparse-index sparse-checkout set deep/deeper1 &&
+
+	test-tool -C sparse-index read-cache --table >cache &&
+	for dir in deep/deeper2 folder1 folder2 x
+	do
+		TREE=$(git -C sparse-index rev-parse HEAD:$dir) &&
+		grep "040000 tree $TREE	$dir/" cache \
+			|| return 1
+	done
+'
+
 test_expect_success 'expanded in-memory index matches full index' '
 	init_repos &&
 	test_sparse_match test-tool read-cache --expand --table
@@ -137,6 +176,7 @@ test_expect_success 'expanded in-memory index matches full index' '
 
 test_expect_success 'status with options' '
 	init_repos &&
+	test_sparse_match ls &&
 	test_all_match git status --porcelain=v2 &&
 	test_all_match git status --porcelain=v2 -z -u &&
 	test_all_match git status --porcelain=v2 -uno &&
@@ -273,6 +313,17 @@ test_expect_failure 'checkout and reset (mixed)' '
 	test_all_match git reset update-folder2
 '
 
+# Ensure that sparse-index behaves identically to
+# sparse-checkout with a full index.
+test_expect_success 'checkout and reset (mixed) [sparse]' '
+	init_repos &&
+
+	test_sparse_match git checkout -b reset-test update-deep &&
+	test_sparse_match git reset deepest &&
+	test_sparse_match git reset update-folder1 &&
+	test_sparse_match git reset update-folder2
+'
+
 test_expect_success 'merge' '
 	init_repos &&
 
@@ -309,14 +360,20 @@ test_expect_success 'clean' '
 	test_all_match git status --porcelain=v2 &&
 	test_all_match git clean -f &&
 	test_all_match git status --porcelain=v2 &&
+	test_sparse_match ls &&
+	test_sparse_match ls folder1 &&
 
 	test_all_match git clean -xf &&
 	test_all_match git status --porcelain=v2 &&
+	test_sparse_match ls &&
+	test_sparse_match ls folder1 &&
 
 	test_all_match git clean -xdf &&
 	test_all_match git status --porcelain=v2 &&
+	test_sparse_match ls &&
+	test_sparse_match ls folder1 &&
 
-	test_path_is_dir sparse-checkout/folder1
+	test_sparse_match test_path_is_dir folder1
 '
 
 test_done