diff --git a/setup.c b/setup.c
index 20a1f0f..27a31de 100644
--- a/setup.c
+++ b/setup.c
@@ -818,22 +818,119 @@
 	}
 }
 
+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
+};
+
 /*
  * 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)
 {
 	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;
+
+		if (offset > min_offset)
+			strbuf_addch(dir, '/');
+		strbuf_addstr(dir, DEFAULT_GIT_DIR_ENVIRONMENT);
+		gitdirenv = read_gitfile(dir->buf);
+		if (!gitdirenv && is_git_directory(dir->buf))
+			gitdirenv = DEFAULT_GIT_DIR_ENVIRONMENT;
+		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 *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
@@ -852,100 +949,43 @@
 
 	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)) {
+	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 &&
-		       !is_dir_sep(cwd.buf[offset_parent]))
-			; /* continue */
-		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
@@ -954,6 +994,9 @@
 	startup_info->have_repository = !nongit_ok || !*nongit_ok;
 	startup_info->prefix = prefix;
 
+	strbuf_release(&dir);
+	strbuf_release(&gitdir);
+
 	return prefix;
 }