diff --git a/cache.h b/cache.h
index 26f336b..9b2157f 100644
--- a/cache.h
+++ b/cache.h
@@ -518,6 +518,13 @@
 #define ALTERNATE_DB_ENVIRONMENT "GIT_ALTERNATE_OBJECT_DIRECTORIES"
 
 extern void setup_work_tree(void);
+/*
+ * Find GIT_DIR of the repository that contains the current working directory,
+ * without changing the working directory or other global state. The result is
+ * appended to gitdir. The return value is either NULL if no repository was
+ * found, or pointing to the path inside gitdir's buffer.
+ */
+extern const char *discover_git_directory(struct strbuf *gitdir);
 extern const char *setup_git_directory_gently(int *);
 extern const char *setup_git_directory(void);
 extern char *prefix_path(const char *prefix, int len, const char *path);
@@ -1842,6 +1849,7 @@
 				     const unsigned char *sha1, void *data);
 extern void git_config_push_parameter(const char *text);
 extern int git_config_from_parameters(config_fn_t fn, void *data);
+extern void read_early_config(config_fn_t cb, void *data);
 extern void git_config(config_fn_t fn, void *);
 extern int git_config_with_options(config_fn_t fn, void *,
 				   struct git_config_source *config_source,
diff --git a/config.c b/config.c
index bd286b3..eb7e310 100644
--- a/config.c
+++ b/config.c
@@ -1503,6 +1503,31 @@
 	}
 }
 
+void read_early_config(config_fn_t cb, void *data)
+{
+	struct strbuf buf = STRBUF_INIT;
+
+	git_config_with_options(cb, data, NULL, 1);
+
+	/*
+	 * When setup_git_directory() was not yet asked to discover the
+	 * GIT_DIR, we ask discover_git_directory() to figure out whether there
+	 * is any repository config we should use (but unlike
+	 * setup_git_directory_gently(), no global state is changed, most
+	 * notably, the current working directory is still the same after the
+	 * call).
+	 */
+	if (!have_git_dir() && discover_git_directory(&buf)) {
+		struct git_config_source repo_config;
+
+		memset(&repo_config, 0, sizeof(repo_config));
+		strbuf_addstr(&buf, "/config");
+		repo_config.file = buf.buf;
+		git_config_with_options(cb, data, &repo_config, 1);
+	}
+	strbuf_release(&buf);
+}
+
 static void git_config_check_init(void);
 
 void git_config(config_fn_t fn, void *data)
diff --git a/pager.c b/pager.c
index ae79643..73ca8bc 100644
--- a/pager.c
+++ b/pager.c
@@ -43,37 +43,6 @@
 	return 0;
 }
 
-static void read_early_config(config_fn_t cb, void *data)
-{
-	git_config_with_options(cb, data, NULL, 1);
-
-	/*
-	 * Note that this is a really dirty hack that does the wrong thing in
-	 * many cases. The crux of the problem is that we cannot run
-	 * setup_git_directory() early on in git's setup, so we have no idea if
-	 * we are in a repository or not, and therefore are not sure whether
-	 * and how to read repository-local config.
-	 *
-	 * So if we _aren't_ in a repository (or we are but we would reject its
-	 * core.repositoryformatversion), we'll read whatever is in .git/config
-	 * blindly. Similarly, if we _are_ in a repository, but not at the
-	 * root, we'll fail to find .git/config (because it's really
-	 * ../.git/config, etc). See t7006 for a complete set of failures.
-	 *
-	 * However, we have historically provided this hack because it does
-	 * work some of the time (namely when you are at the top-level of a
-	 * valid repository), and would rarely make things worse (i.e., you do
-	 * not generally have a .git/config file sitting around).
-	 */
-	if (!startup_info->have_repository) {
-		struct git_config_source repo_config;
-
-		memset(&repo_config, 0, sizeof(repo_config));
-		repo_config.file = ".git/config";
-		git_config_with_options(cb, data, &repo_config, 1);
-	}
-}
-
 const char *git_pager(int stdout_is_tty)
 {
 	const char *pager;
diff --git a/setup.c b/setup.c
index 8f64fbd..64f922a 100644
--- a/setup.c
+++ b/setup.c
@@ -531,6 +531,7 @@
 	ssize_t len;
 
 	if (stat(path, &st)) {
+		/* NEEDSWORK: discern between ENOENT vs other errors */
 		error_code = READ_GITFILE_ERR_STAT_FAILED;
 		goto cleanup_return;
 	}
@@ -721,8 +722,10 @@
 	if (offset == cwd->len)
 		return NULL;
 
-	/* Make "offset" point to past the '/', and add a '/' at the end */
-	offset++;
+	/* Make "offset" point past the '/' (already the case for root dirs) */
+	if (offset != offset_1st_component(cwd->buf))
+		offset++;
+	/* Add a '/' at the end */
 	strbuf_addch(cwd, '/');
 	return cwd->buf + offset;
 }
@@ -816,22 +819,172 @@
 	}
 }
 
+enum discovery_result {
+	GIT_DIR_NONE = 0,
+	GIT_DIR_EXPLICIT,
+	GIT_DIR_DISCOVERED,
+	GIT_DIR_BARE,
+	/* these are errors */
+	GIT_DIR_HIT_CEILING = -1,
+	GIT_DIR_HIT_MOUNT_POINT = -2,
+	GIT_DIR_INVALID_GITFILE = -3
+};
+
 /*
  * We cannot decide in this function whether we are in the work tree or
  * not, since the config can only be read _after_ this function was called.
+ *
+ * Also, we avoid changing any global state (such as the current working
+ * directory) to allow early callers.
+ *
+ * The directory where the search should start needs to be passed in via the
+ * `dir` parameter; upon return, the `dir` buffer will contain the path of
+ * the directory where the search ended, and `gitdir` will contain the path of
+ * the discovered .git/ directory, if any. If `gitdir` is not absolute, it
+ * is relative to `dir` (i.e. *not* necessarily the cwd).
  */
-static const char *setup_git_directory_gently_1(int *nongit_ok)
+static enum discovery_result setup_git_directory_gently_1(struct strbuf *dir,
+							  struct strbuf *gitdir,
+							  int die_on_error)
 {
 	const char *env_ceiling_dirs = getenv(CEILING_DIRECTORIES_ENVIRONMENT);
 	struct string_list ceiling_dirs = STRING_LIST_INIT_DUP;
-	static struct strbuf cwd = STRBUF_INIT;
-	const char *gitdirenv, *ret;
-	char *gitfile;
-	int offset, offset_parent, ceil_offset = -1;
+	const char *gitdirenv;
+	int ceil_offset = -1, min_offset = has_dos_drive_prefix(dir->buf) ? 3 : 1;
 	dev_t current_device = 0;
 	int one_filesystem = 1;
 
 	/*
+	 * If GIT_DIR is set explicitly, we're not going
+	 * to do any discovery, but we still do repository
+	 * validation.
+	 */
+	gitdirenv = getenv(GIT_DIR_ENVIRONMENT);
+	if (gitdirenv) {
+		strbuf_addstr(gitdir, gitdirenv);
+		return GIT_DIR_EXPLICIT;
+	}
+
+	if (env_ceiling_dirs) {
+		int empty_entry_found = 0;
+
+		string_list_split(&ceiling_dirs, env_ceiling_dirs, PATH_SEP, -1);
+		filter_string_list(&ceiling_dirs, 0,
+				   canonicalize_ceiling_entry, &empty_entry_found);
+		ceil_offset = longest_ancestor_length(dir->buf, &ceiling_dirs);
+		string_list_clear(&ceiling_dirs, 0);
+	}
+
+	if (ceil_offset < 0)
+		ceil_offset = min_offset - 2;
+
+	/*
+	 * Test in the following order (relative to the dir):
+	 * - .git (file containing "gitdir: <path>")
+	 * - .git/
+	 * - ./ (bare)
+	 * - ../.git
+	 * - ../.git/
+	 * - ../ (bare)
+	 * - ../../.git/
+	 *   etc.
+	 */
+	one_filesystem = !git_env_bool("GIT_DISCOVERY_ACROSS_FILESYSTEM", 0);
+	if (one_filesystem)
+		current_device = get_device_or_die(dir->buf, NULL, 0);
+	for (;;) {
+		int offset = dir->len, error_code = 0;
+
+		if (offset > min_offset)
+			strbuf_addch(dir, '/');
+		strbuf_addstr(dir, DEFAULT_GIT_DIR_ENVIRONMENT);
+		gitdirenv = read_gitfile_gently(dir->buf, die_on_error ?
+						NULL : &error_code);
+		if (!gitdirenv) {
+			if (die_on_error ||
+			    error_code == READ_GITFILE_ERR_NOT_A_FILE) {
+				/* NEEDSWORK: fail if .git is not file nor dir */
+				if (is_git_directory(dir->buf))
+					gitdirenv = DEFAULT_GIT_DIR_ENVIRONMENT;
+			} else if (error_code != READ_GITFILE_ERR_STAT_FAILED)
+				return GIT_DIR_INVALID_GITFILE;
+		}
+		strbuf_setlen(dir, offset);
+		if (gitdirenv) {
+			strbuf_addstr(gitdir, gitdirenv);
+			return GIT_DIR_DISCOVERED;
+		}
+
+		if (is_git_directory(dir->buf)) {
+			strbuf_addstr(gitdir, ".");
+			return GIT_DIR_BARE;
+		}
+
+		if (offset <= min_offset)
+			return GIT_DIR_HIT_CEILING;
+
+		while (--offset > ceil_offset && !is_dir_sep(dir->buf[offset]))
+			; /* continue */
+		if (offset <= ceil_offset)
+			return GIT_DIR_HIT_CEILING;
+
+		strbuf_setlen(dir, offset > min_offset ?  offset : min_offset);
+		if (one_filesystem &&
+		    current_device != get_device_or_die(dir->buf, NULL, offset))
+			return GIT_DIR_HIT_MOUNT_POINT;
+	}
+}
+
+const char *discover_git_directory(struct strbuf *gitdir)
+{
+	struct strbuf dir = STRBUF_INIT, err = STRBUF_INIT;
+	size_t gitdir_offset = gitdir->len, cwd_len;
+	struct repository_format candidate;
+
+	if (strbuf_getcwd(&dir))
+		return NULL;
+
+	cwd_len = dir.len;
+	if (setup_git_directory_gently_1(&dir, gitdir, 0) <= 0) {
+		strbuf_release(&dir);
+		return NULL;
+	}
+
+	/*
+	 * The returned gitdir is relative to dir, and if dir does not reflect
+	 * the current working directory, we simply make the gitdir absolute.
+	 */
+	if (dir.len < cwd_len && !is_absolute_path(gitdir->buf + gitdir_offset)) {
+		/* Avoid a trailing "/." */
+		if (!strcmp(".", gitdir->buf + gitdir_offset))
+			strbuf_setlen(gitdir, gitdir_offset);
+		else
+			strbuf_addch(&dir, '/');
+		strbuf_insert(gitdir, gitdir_offset, dir.buf, dir.len);
+	}
+
+	strbuf_reset(&dir);
+	strbuf_addf(&dir, "%s/config", gitdir->buf + gitdir_offset);
+	read_repository_format(&candidate, dir.buf);
+	strbuf_release(&dir);
+
+	if (verify_repository_format(&candidate, &err) < 0) {
+		warning("ignoring git dir '%s': %s",
+			gitdir->buf + gitdir_offset, err.buf);
+		strbuf_release(&err);
+		return NULL;
+	}
+
+	return gitdir->buf + gitdir_offset;
+}
+
+const char *setup_git_directory_gently(int *nongit_ok)
+{
+	static struct strbuf cwd = STRBUF_INIT;
+	struct strbuf dir = STRBUF_INIT, gitdir = STRBUF_INIT;
+	const char *prefix;
+
+	/*
 	 * We may have read an incomplete configuration before
 	 * setting-up the git directory. If so, clear the cache so
 	 * that the next queries to the configuration reload complete
@@ -850,98 +1003,43 @@
 
 	if (strbuf_getcwd(&cwd))
 		die_errno(_("Unable to read current working directory"));
-	offset = cwd.len;
+	strbuf_addbuf(&dir, &cwd);
 
-	/*
-	 * If GIT_DIR is set explicitly, we're not going
-	 * to do any discovery, but we still do repository
-	 * validation.
-	 */
-	gitdirenv = getenv(GIT_DIR_ENVIRONMENT);
-	if (gitdirenv)
-		return setup_explicit_git_dir(gitdirenv, &cwd, nongit_ok);
-
-	if (env_ceiling_dirs) {
-		int empty_entry_found = 0;
-
-		string_list_split(&ceiling_dirs, env_ceiling_dirs, PATH_SEP, -1);
-		filter_string_list(&ceiling_dirs, 0,
-				   canonicalize_ceiling_entry, &empty_entry_found);
-		ceil_offset = longest_ancestor_length(cwd.buf, &ceiling_dirs);
-		string_list_clear(&ceiling_dirs, 0);
+	switch (setup_git_directory_gently_1(&dir, &gitdir, 1)) {
+	case GIT_DIR_NONE:
+		prefix = NULL;
+		break;
+	case GIT_DIR_EXPLICIT:
+		prefix = setup_explicit_git_dir(gitdir.buf, &cwd, nongit_ok);
+		break;
+	case GIT_DIR_DISCOVERED:
+		if (dir.len < cwd.len && chdir(dir.buf))
+			die(_("Cannot change to '%s'"), dir.buf);
+		prefix = setup_discovered_git_dir(gitdir.buf, &cwd, dir.len,
+						  nongit_ok);
+		break;
+	case GIT_DIR_BARE:
+		if (dir.len < cwd.len && chdir(dir.buf))
+			die(_("Cannot change to '%s'"), dir.buf);
+		prefix = setup_bare_git_dir(&cwd, dir.len, nongit_ok);
+		break;
+	case GIT_DIR_HIT_CEILING:
+		prefix = setup_nongit(cwd.buf, nongit_ok);
+		break;
+	case GIT_DIR_HIT_MOUNT_POINT:
+		if (nongit_ok) {
+			*nongit_ok = 1;
+			strbuf_release(&cwd);
+			strbuf_release(&dir);
+			return NULL;
+		}
+		die(_("Not a git repository (or any parent up to mount point %s)\n"
+		      "Stopping at filesystem boundary (GIT_DISCOVERY_ACROSS_FILESYSTEM not set)."),
+		    dir.buf);
+	default:
+		die("BUG: unhandled setup_git_directory_1() result");
 	}
 
-	if (ceil_offset < 0 && has_dos_drive_prefix(cwd.buf))
-		ceil_offset = 1;
-
-	/*
-	 * Test in the following order (relative to the cwd):
-	 * - .git (file containing "gitdir: <path>")
-	 * - .git/
-	 * - ./ (bare)
-	 * - ../.git
-	 * - ../.git/
-	 * - ../ (bare)
-	 * - ../../.git/
-	 *   etc.
-	 */
-	one_filesystem = !git_env_bool("GIT_DISCOVERY_ACROSS_FILESYSTEM", 0);
-	if (one_filesystem)
-		current_device = get_device_or_die(".", NULL, 0);
-	for (;;) {
-		gitfile = (char*)read_gitfile(DEFAULT_GIT_DIR_ENVIRONMENT);
-		if (gitfile)
-			gitdirenv = gitfile = xstrdup(gitfile);
-		else {
-			if (is_git_directory(DEFAULT_GIT_DIR_ENVIRONMENT))
-				gitdirenv = DEFAULT_GIT_DIR_ENVIRONMENT;
-		}
-
-		if (gitdirenv) {
-			ret = setup_discovered_git_dir(gitdirenv,
-						       &cwd, offset,
-						       nongit_ok);
-			free(gitfile);
-			return ret;
-		}
-		free(gitfile);
-
-		if (is_git_directory("."))
-			return setup_bare_git_dir(&cwd, offset, nongit_ok);
-
-		offset_parent = offset;
-		while (--offset_parent > ceil_offset && cwd.buf[offset_parent] != '/');
-		if (offset_parent <= ceil_offset)
-			return setup_nongit(cwd.buf, nongit_ok);
-		if (one_filesystem) {
-			dev_t parent_device = get_device_or_die("..", cwd.buf,
-								offset);
-			if (parent_device != current_device) {
-				if (nongit_ok) {
-					if (chdir(cwd.buf))
-						die_errno(_("Cannot come back to cwd"));
-					*nongit_ok = 1;
-					return NULL;
-				}
-				strbuf_setlen(&cwd, offset);
-				die(_("Not a git repository (or any parent up to mount point %s)\n"
-				"Stopping at filesystem boundary (GIT_DISCOVERY_ACROSS_FILESYSTEM not set)."),
-				    cwd.buf);
-			}
-		}
-		if (chdir("..")) {
-			strbuf_setlen(&cwd, offset);
-			die_errno(_("Cannot change to '%s/..'"), cwd.buf);
-		}
-		offset = offset_parent;
-	}
-}
-
-const char *setup_git_directory_gently(int *nongit_ok)
-{
-	const char *prefix;
-
-	prefix = setup_git_directory_gently_1(nongit_ok);
 	if (prefix)
 		setenv(GIT_PREFIX_ENVIRONMENT, prefix, 1);
 	else
@@ -950,6 +1048,9 @@
 	startup_info->have_repository = !nongit_ok || !*nongit_ok;
 	startup_info->prefix = prefix;
 
+	strbuf_release(&dir);
+	strbuf_release(&gitdir);
+
 	return prefix;
 }
 
diff --git a/t/helper/test-config.c b/t/helper/test-config.c
index 83a4f2a..8e3ed6a 100644
--- a/t/helper/test-config.c
+++ b/t/helper/test-config.c
@@ -66,6 +66,16 @@
 	return 0;
 }
 
+static int early_config_cb(const char *var, const char *value, void *vdata)
+{
+	const char *key = vdata;
+
+	if (!strcmp(key, var))
+		printf("%s\n", value);
+
+	return 0;
+}
+
 int cmd_main(int argc, const char **argv)
 {
 	int i, val;
@@ -73,6 +83,11 @@
 	const struct string_list *strptr;
 	struct config_set cs;
 
+	if (argc == 3 && !strcmp(argv[1], "read_early_config")) {
+		read_early_config(early_config_cb, (void *)argv[2]);
+		return 0;
+	}
+
 	setup_git_directory();
 
 	git_configset_init(&cs);
diff --git a/t/t1309-early-config.sh b/t/t1309-early-config.sh
new file mode 100755
index 0000000..b97357b
--- /dev/null
+++ b/t/t1309-early-config.sh
@@ -0,0 +1,74 @@
+#!/bin/sh
+
+test_description='Test read_early_config()'
+
+. ./test-lib.sh
+
+test_expect_success 'read early config' '
+	test_config early.config correct &&
+	test-config read_early_config early.config >output &&
+	test correct = "$(cat output)"
+'
+
+test_expect_success 'in a sub-directory' '
+	test_config early.config sub &&
+	mkdir -p sub &&
+	(
+		cd sub &&
+		test-config read_early_config early.config
+	) >output &&
+	test sub = "$(cat output)"
+'
+
+test_expect_success 'ceiling' '
+	test_config early.config ceiling &&
+	mkdir -p sub &&
+	(
+		GIT_CEILING_DIRECTORIES="$PWD" &&
+		export GIT_CEILING_DIRECTORIES &&
+		cd sub &&
+		test-config read_early_config early.config
+	) >output &&
+	test -z "$(cat output)"
+'
+
+test_expect_success 'ceiling #2' '
+	mkdir -p xdg/git &&
+	git config -f xdg/git/config early.config xdg &&
+	test_config early.config ceiling &&
+	mkdir -p sub &&
+	(
+		XDG_CONFIG_HOME="$PWD"/xdg &&
+		GIT_CEILING_DIRECTORIES="$PWD" &&
+		export GIT_CEILING_DIRECTORIES XDG_CONFIG_HOME &&
+		cd sub &&
+		test-config read_early_config early.config
+	) >output &&
+	test xdg = "$(cat output)"
+'
+
+test_with_config () {
+	rm -rf throwaway &&
+	git init throwaway &&
+	(
+		cd throwaway &&
+		echo "$*" >.git/config &&
+		test-config read_early_config early.config
+	)
+}
+
+test_expect_success 'ignore .git/ with incompatible repository version' '
+	test_with_config "[core]repositoryformatversion = 999999" 2>err &&
+	grep "warning:.* Expected git repo version <= [1-9]" err
+'
+
+test_expect_failure 'ignore .git/ with invalid repository version' '
+	test_with_config "[core]repositoryformatversion = invalid"
+'
+
+
+test_expect_failure 'ignore .git/ with invalid config' '
+	test_with_config "["
+'
+
+test_done
diff --git a/t/t7006-pager.sh b/t/t7006-pager.sh
index c8dc665..4f3794d 100755
--- a/t/t7006-pager.sh
+++ b/t/t7006-pager.sh
@@ -360,27 +360,37 @@
 test_default_pager        expect_success 'git -p aliasedlog'
 test_PAGER_overrides      expect_success 'git -p aliasedlog'
 test_core_pager_overrides expect_success 'git -p aliasedlog'
-test_core_pager_subdir    expect_failure 'git -p aliasedlog'
+test_core_pager_subdir    expect_success 'git -p aliasedlog'
 test_GIT_PAGER_overrides  expect_success 'git -p aliasedlog'
 
 test_default_pager        expect_success 'git -p true'
 test_PAGER_overrides      expect_success 'git -p true'
 test_core_pager_overrides expect_success 'git -p true'
-test_core_pager_subdir    expect_failure 'git -p true'
+test_core_pager_subdir    expect_success 'git -p true'
 test_GIT_PAGER_overrides  expect_success 'git -p true'
 
 test_default_pager        expect_success test_must_fail 'git -p request-pull'
 test_PAGER_overrides      expect_success test_must_fail 'git -p request-pull'
 test_core_pager_overrides expect_success test_must_fail 'git -p request-pull'
-test_core_pager_subdir    expect_failure test_must_fail 'git -p request-pull'
+test_core_pager_subdir    expect_success test_must_fail 'git -p request-pull'
 test_GIT_PAGER_overrides  expect_success test_must_fail 'git -p request-pull'
 
 test_default_pager        expect_success test_must_fail 'git -p'
 test_PAGER_overrides      expect_success test_must_fail 'git -p'
 test_local_config_ignored expect_failure test_must_fail 'git -p'
-test_no_local_config_subdir expect_success test_must_fail 'git -p'
 test_GIT_PAGER_overrides  expect_success test_must_fail 'git -p'
 
+test_expect_success TTY 'core.pager in repo config works and retains cwd' '
+	sane_unset GIT_PAGER &&
+	test_config core.pager "cat >cwd-retained" &&
+	(
+		cd sub &&
+		rm -f cwd-retained &&
+		test_terminal git -p rev-parse HEAD &&
+		test_path_is_file cwd-retained
+	)
+'
+
 test_doesnt_paginate      expect_failure test_must_fail 'git -p nonsense'
 
 test_pager_choices                       'git shortlog'