diff --git a/git-mergetool.sh b/git-mergetool.sh
index a4855d9444bfe5..a9d2e29d451c0e 100755
--- a/git-mergetool.sh
+++ b/git-mergetool.sh
@@ -13,7 +13,6 @@ SUBDIRECTORY_OK=Yes
 OPTIONS_SPEC=
 . git-sh-setup
 require_work_tree
-prefix=$(git rev-parse --show-prefix)
 
 # Returns true if the mode reflects a symlink
 is_symlink () {
@@ -131,7 +130,7 @@ checkout_staged_file () {
     tmpfile=$(expr "$(git checkout-index --temp --stage="$1" "$2")" : '\([^	]*\)	')
 
     if test $? -eq 0 -a -n "$tmpfile" ; then
-	mv -- "$tmpfile" "$3"
+	mv -- "$(git rev-parse --show-cdup)$tmpfile" "$3"
     fi
 }
 
@@ -161,9 +160,9 @@ merge_file () {
     local_mode=`git ls-files -u -- "$MERGED" | awk '{if ($3==2) print $1;}'`
     remote_mode=`git ls-files -u -- "$MERGED" | awk '{if ($3==3) print $1;}'`
 
-    base_present   && checkout_staged_file 1 "$prefix$MERGED" "$BASE"
-    local_present  && checkout_staged_file 2 "$prefix$MERGED" "$LOCAL"
-    remote_present && checkout_staged_file 3 "$prefix$MERGED" "$REMOTE"
+    base_present   && checkout_staged_file 1 "$MERGED" "$BASE"
+    local_present  && checkout_staged_file 2 "$MERGED" "$LOCAL"
+    remote_present && checkout_staged_file 3 "$MERGED" "$REMOTE"
 
     if test -z "$local_mode" -o -z "$remote_mode"; then
 	echo "Deleted merge conflict for '$MERGED':"
diff --git a/t/t7610-mergetool.sh b/t/t7610-mergetool.sh
index ee8589e8cde0bf..e768c3eb2d48a9 100755
--- a/t/t7610-mergetool.sh
+++ b/t/t7610-mergetool.sh
@@ -66,7 +66,7 @@ test_expect_success 'mergetool crlf' '
     git reset --hard
 '
 
-test_expect_failure 'mergetool in subdir' '
+test_expect_success 'mergetool in subdir' '
     git checkout -b test3 branch1
     cd subdir && (
     test_must_fail git merge master >/dev/null 2>&1 &&