diff --git a/test/coverage-test/coverage-report-tests/__snapshots__/istanbul.report.test.ts.snap b/test/coverage-test/coverage-report-tests/__snapshots__/istanbul.report.test.ts.snap
index 576b4ef0d1c7..9af54d6026c4 100644
--- a/test/coverage-test/coverage-report-tests/__snapshots__/istanbul.report.test.ts.snap
+++ b/test/coverage-test/coverage-report-tests/__snapshots__/istanbul.report.test.ts.snap
@@ -2,89 +2,6 @@
 
 exports[`istanbul json report 1`] = `
 {
-  "<process-cwd>/../test-utils/fixtures/math.ts": {
-    "b": {},
-    "branchMap": {},
-    "f": {
-      "0": 1,
-      "1": 0,
-    },
-    "fnMap": {
-      "0": {
-        "decl": {
-          "end": {
-            "column": 20,
-            "line": 1,
-          },
-          "start": {
-            "column": 16,
-            "line": 1,
-          },
-        },
-        "loc": {
-          "end": {
-            "column": null,
-            "line": 3,
-          },
-          "start": {
-            "column": 42,
-            "line": 1,
-          },
-        },
-        "name": "sum",
-      },
-      "1": {
-        "decl": {
-          "end": {
-            "column": 25,
-            "line": 5,
-          },
-          "start": {
-            "column": 16,
-            "line": 5,
-          },
-        },
-        "loc": {
-          "end": {
-            "column": null,
-            "line": 7,
-          },
-          "start": {
-            "column": 47,
-            "line": 5,
-          },
-        },
-        "name": "multiply",
-      },
-    },
-    "path": "<process-cwd>/../test-utils/fixtures/math.ts",
-    "s": {
-      "0": 1,
-      "1": 0,
-    },
-    "statementMap": {
-      "0": {
-        "end": {
-          "column": null,
-          "line": 2,
-        },
-        "start": {
-          "column": 2,
-          "line": 2,
-        },
-      },
-      "1": {
-        "end": {
-          "column": null,
-          "line": 6,
-        },
-        "start": {
-          "column": 2,
-          "line": 6,
-        },
-      },
-    },
-  },
   "<process-cwd>/src/Counter/Counter.component.ts": {
     "b": {},
     "branchMap": {},
diff --git a/test/coverage-test/coverage-report-tests/__snapshots__/v8.report.test.ts.snap b/test/coverage-test/coverage-report-tests/__snapshots__/v8.report.test.ts.snap
index 68990050c7cf..08c1cc21d00e 100644
--- a/test/coverage-test/coverage-report-tests/__snapshots__/v8.report.test.ts.snap
+++ b/test/coverage-test/coverage-report-tests/__snapshots__/v8.report.test.ts.snap
@@ -2,178 +2,6 @@
 
 exports[`v8 json report 1`] = `
 {
-  "<process-cwd>/../test-utils/fixtures/math.ts": {
-    "all": false,
-    "b": {
-      "0": [
-        1,
-      ],
-    },
-    "branchMap": {
-      "0": {
-        "line": 1,
-        "loc": {
-          "end": {
-            "column": 1,
-            "line": 3,
-          },
-          "start": {
-            "column": 7,
-            "line": 1,
-          },
-        },
-        "locations": [
-          {
-            "end": {
-              "column": 1,
-              "line": 3,
-            },
-            "start": {
-              "column": 7,
-              "line": 1,
-            },
-          },
-        ],
-        "type": "branch",
-      },
-    },
-    "f": {
-      "0": 1,
-      "1": 0,
-    },
-    "fnMap": {
-      "0": {
-        "decl": {
-          "end": {
-            "column": 1,
-            "line": 3,
-          },
-          "start": {
-            "column": 7,
-            "line": 1,
-          },
-        },
-        "line": 1,
-        "loc": {
-          "end": {
-            "column": 1,
-            "line": 3,
-          },
-          "start": {
-            "column": 7,
-            "line": 1,
-          },
-        },
-        "name": "sum",
-      },
-      "1": {
-        "decl": {
-          "end": {
-            "column": 1,
-            "line": 7,
-          },
-          "start": {
-            "column": 7,
-            "line": 5,
-          },
-        },
-        "line": 5,
-        "loc": {
-          "end": {
-            "column": 1,
-            "line": 7,
-          },
-          "start": {
-            "column": 7,
-            "line": 5,
-          },
-        },
-        "name": "multiply",
-      },
-    },
-    "path": "<process-cwd>/../test-utils/fixtures/math.ts",
-    "s": {
-      "0": 1,
-      "1": 1,
-      "2": 1,
-      "3": 1,
-      "4": 1,
-      "5": 0,
-      "6": 0,
-    },
-    "statementMap": {
-      "0": {
-        "end": {
-          "column": 43,
-          "line": 1,
-        },
-        "start": {
-          "column": 0,
-          "line": 1,
-        },
-      },
-      "1": {
-        "end": {
-          "column": 14,
-          "line": 2,
-        },
-        "start": {
-          "column": 0,
-          "line": 2,
-        },
-      },
-      "2": {
-        "end": {
-          "column": 1,
-          "line": 3,
-        },
-        "start": {
-          "column": 0,
-          "line": 3,
-        },
-      },
-      "3": {
-        "end": {
-          "column": 0,
-          "line": 4,
-        },
-        "start": {
-          "column": 0,
-          "line": 4,
-        },
-      },
-      "4": {
-        "end": {
-          "column": 48,
-          "line": 5,
-        },
-        "start": {
-          "column": 0,
-          "line": 5,
-        },
-      },
-      "5": {
-        "end": {
-          "column": 14,
-          "line": 6,
-        },
-        "start": {
-          "column": 0,
-          "line": 6,
-        },
-      },
-      "6": {
-        "end": {
-          "column": 1,
-          "line": 7,
-        },
-        "start": {
-          "column": 0,
-          "line": 7,
-        },
-      },
-    },
-  },
   "<process-cwd>/src/Counter/Counter.component.ts": {
     "all": false,
     "b": {
diff --git a/test/coverage-test/coverage-report-tests/allow-external.test.ts b/test/coverage-test/coverage-report-tests/allow-external.test.ts
new file mode 100644
index 000000000000..fecca62077c0
--- /dev/null
+++ b/test/coverage-test/coverage-report-tests/allow-external.test.ts
@@ -0,0 +1,20 @@
+import fs from 'node:fs'
+import { expect, test } from 'vitest'
+
+const allowExternal = import.meta.env.VITE_COVERAGE_ALLOW_EXTERNAL
+
+test.skipIf(!allowExternal)('{ allowExternal: true } includes files outside project root', async () => {
+  expect(fs.existsSync('./coverage/test-utils/fixtures/math.ts.html')).toBe(true)
+
+  // Files inside project root should always be included
+  expect(fs.existsSync('./coverage/coverage-test/src/utils.ts.html')).toBe(true)
+})
+
+test.skipIf(allowExternal)('{ allowExternal: false } excludes files outside project root', async () => {
+  expect(fs.existsSync('./coverage/test-utils/fixtures/math.ts.html')).toBe(false)
+  expect(fs.existsSync('./test-utils/fixtures/math.ts.html')).toBe(false)
+  expect(fs.existsSync('./fixtures/math.ts.html')).toBe(false)
+
+  // Files inside project root should always be included
+  expect(fs.existsSync('./coverage/utils.ts.html')).toBe(true)
+})
diff --git a/test/coverage-test/coverage-report-tests/generic.report.test.ts b/test/coverage-test/coverage-report-tests/generic.report.test.ts
index b84b2ed7e81e..350c23c3677e 100644
--- a/test/coverage-test/coverage-report-tests/generic.report.test.ts
+++ b/test/coverage-test/coverage-report-tests/generic.report.test.ts
@@ -10,7 +10,7 @@ import libCoverage from 'istanbul-lib-coverage'
 import { readCoverageJson } from './utils'
 
 test('html report', async () => {
-  const coveragePath = resolve('./coverage/coverage-test/src')
+  const coveragePath = resolve('./coverage/src')
   const files = fs.readdirSync(coveragePath)
 
   expect(files).toContain('index.html')
@@ -31,14 +31,14 @@ test('lcov report', async () => {
 })
 
 test('all includes untested files', () => {
-  const coveragePath = resolve('./coverage/coverage-test/src')
+  const coveragePath = resolve('./coverage/src')
   const files = fs.readdirSync(coveragePath)
 
   expect(files).toContain('untested-file.ts.html')
 })
 
 test('files should not contain query parameters', () => {
-  const coveragePath = resolve('./coverage/coverage-test/src/Counter')
+  const coveragePath = resolve('./coverage/src/Counter')
   const files = fs.readdirSync(coveragePath)
 
   expect(files).toContain('index.html')
@@ -48,19 +48,20 @@ test('files should not contain query parameters', () => {
 })
 
 test('file using import.meta.env is included in report', async () => {
-  const coveragePath = resolve('./coverage/coverage-test/src')
+  const coveragePath = resolve('./coverage/src')
   const files = fs.readdirSync(coveragePath)
 
   expect(files).toContain('importEnv.ts.html')
 })
 
 test('files should not contain a setup file', () => {
-  const coveragePath = resolve('./coverage/coverage-test')
+  const coveragePath = resolve('./coverage')
   const files = fs.readdirSync(coveragePath)
 
+  expect(files).not.toContain('coverage-test')
   expect(files).not.toContain('setup.ts.html')
 
-  const coverageSrcPath = resolve('./coverage/coverage-test/src')
+  const coverageSrcPath = resolve('./coverage/src')
   const srcFiles = fs.readdirSync(coverageSrcPath)
 
   expect(srcFiles).not.toContain('another-setup.ts.html')
@@ -102,8 +103,8 @@ test('coverage provider does not conflict with built-in reporter\'s outputFile',
 })
 
 test('virtual files should be excluded', () => {
-  const files = fs.readdirSync(resolve('./coverage/coverage-test'))
-  const srcFiles = fs.readdirSync(resolve('./coverage/coverage-test/src'))
+  const files = fs.readdirSync(resolve('./coverage'))
+  const srcFiles = fs.readdirSync(resolve('./coverage/src'))
 
   for (const file of [...files, ...srcFiles]) {
     expect(file).not.toContain('virtual:')
diff --git a/test/coverage-test/coverage-report-tests/utils.ts b/test/coverage-test/coverage-report-tests/utils.ts
index 3833379bd7a0..d06aa62cc71f 100644
--- a/test/coverage-test/coverage-report-tests/utils.ts
+++ b/test/coverage-test/coverage-report-tests/utils.ts
@@ -31,7 +31,5 @@ export async function readCoverageJson() {
 }
 
 export function normalizeFilename(filename: string) {
-  return normalize(filename)
-    .replace(normalize(process.cwd()), '<process-cwd>')
-    .replace(normalize(process.cwd().replace('coverage-test', '')), '<process-cwd>/../')
+  return normalize(filename).replace(normalize(process.cwd()), '<process-cwd>')
 }
diff --git a/test/coverage-test/option-tests/allow-external.test.ts b/test/coverage-test/option-tests/allow-external.test.ts
new file mode 100644
index 000000000000..95299ebf5d6b
--- /dev/null
+++ b/test/coverage-test/option-tests/allow-external.test.ts
@@ -0,0 +1,12 @@
+import { expect, test } from 'vitest'
+
+import { multiply } from '../src/utils'
+import * as ExternalMath from '../../test-utils/fixtures/math'
+
+test('calling files outside project root', () => {
+  expect(ExternalMath.sum(2, 3)).toBe(5)
+})
+
+test('multiply - add some files to report', () => {
+  expect(multiply(2, 3)).toBe(6)
+})
diff --git a/test/coverage-test/package.json b/test/coverage-test/package.json
index a699b16448cb..16525ea6e1bb 100644
--- a/test/coverage-test/package.json
+++ b/test/coverage-test/package.json
@@ -2,11 +2,12 @@
   "name": "@vitest/test-coverage",
   "private": true,
   "scripts": {
-    "test": "pnpm test:v8 && pnpm test:istanbul && pnpm test:custom && pnpm test:browser && pnpm test:types",
+    "test": "pnpm test:v8 && pnpm test:istanbul && pnpm test:custom && pnpm test:browser && pnpm test:options && pnpm test:types",
     "test:v8": "node ./testing.mjs --provider v8",
     "test:custom": "node ./testing.mjs --provider custom",
     "test:istanbul": "node ./testing.mjs --provider istanbul",
     "test:browser": "node ./testing.mjs --browser --provider istanbul",
+    "test:options": "node ./testing-options.mjs",
     "test:types": "vitest typecheck --run --reporter verbose"
   },
   "devDependencies": {
diff --git a/test/coverage-test/test/coverage.test.ts b/test/coverage-test/test/coverage.test.ts
index f284a750a433..254d4f47902d 100644
--- a/test/coverage-test/test/coverage.test.ts
+++ b/test/coverage-test/test/coverage.test.ts
@@ -3,8 +3,6 @@ import { describe, expect, test } from 'vitest'
 // @ts-expect-error -- untyped virtual file provided by custom plugin
 import virtualFile1 from 'virtual:vitest-custom-virtual-file-1'
 
-import * as ExternalMath from '../../test-utils/fixtures/math'
-
 import { implicitElse } from '../src/implicitElse'
 import { useImportEnv } from '../src/importEnv'
 import { second } from '../src/function-count'
@@ -60,10 +58,6 @@ describe('Multiple test suites', () => {
   })
 })
 
-test('calling files outside project root', () => {
-  expect(ExternalMath.sum(2, 3)).toBe(5)
-})
-
 test.skipIf(skipDynamicFiles)('run dynamic ESM file', async () => {
   await runDynamicFileESM()
 })
diff --git a/test/coverage-test/testing-options.mjs b/test/coverage-test/testing-options.mjs
new file mode 100644
index 000000000000..f86568c0720e
--- /dev/null
+++ b/test/coverage-test/testing-options.mjs
@@ -0,0 +1,69 @@
+import { startVitest } from 'vitest/node'
+
+/** @type {Record<string, Partial<import('vitest/config').UserConfig['test']>>[]} */
+const testCases = [
+  {
+    testConfig: {
+      name: 'allowExternal: true',
+      include: ['option-tests/allow-external.test.ts'],
+      coverage: {
+        allowExternal: true,
+        include: ['**/src/**', '**/test-utils/fixtures/**'],
+        reporter: 'html',
+      },
+    },
+    assertionConfig: {
+      include: ['coverage-report-tests/allow-external.test.ts'],
+      env: { VITE_COVERAGE_ALLOW_EXTERNAL: true },
+    },
+  },
+  {
+    testConfig: {
+      name: 'allowExternal: false',
+      include: ['option-tests/allow-external.test.ts'],
+      coverage: {
+        allowExternal: false,
+        include: ['**/src/**', '**/test-utils/fixtures/**'],
+        reporter: 'html',
+      },
+    },
+    assertionConfig: {
+      include: ['coverage-report-tests/allow-external.test.ts'],
+    },
+  },
+]
+
+for (const provider of ['v8', 'istanbul']) {
+  for (const { testConfig, assertionConfig } of testCases) {
+    // Run test case
+    await startVitest('test', ['option-tests/'], {
+      config: false,
+      watch: false,
+      ...testConfig,
+      name: `${provider} - ${testConfig.name}`,
+      coverage: {
+        enabled: true,
+        clean: true,
+        provider,
+        ...testConfig.coverage,
+      },
+    })
+
+    checkExit()
+
+    // Check generated coverage report
+    await startVitest('test', ['coverage-report-tests'], {
+      config: false,
+      watch: false,
+      ...assertionConfig,
+      name: `${provider} - assert ${testConfig.name}`,
+    })
+
+    checkExit()
+  }
+}
+
+function checkExit() {
+  if (process.exitCode)
+    process.exit(process.exitCode)
+}
diff --git a/test/coverage-test/vitest.config.ts b/test/coverage-test/vitest.config.ts
index 42fb266ee1d5..258ea5e8bf7b 100644
--- a/test/coverage-test/vitest.config.ts
+++ b/test/coverage-test/vitest.config.ts
@@ -43,8 +43,7 @@ export default defineConfig({
     coverage: {
       provider: provider as any,
       customProviderModule: provider === 'custom' ? 'custom-provider' : undefined,
-      include: ['**/src/**', '**/test-utils/fixtures/**'],
-      allowExternal: true,
+      include: ['src/**'],
       clean: true,
       all: true,
       reporter: [