diff --git a/environment/integration/repository_test.go b/environment/integration/repository_test.go
index 9e0ede64..1d161a7c 100644
--- a/environment/integration/repository_test.go
+++ b/environment/integration/repository_test.go
@@ -297,6 +297,36 @@ func TestRepositoryWithSubmodule(t *testing.T) {
 	})
 }
 
+func TestRepositoryWithNestedSubmodule(t *testing.T) {
+	t.Parallel()
+	WithRepository(t, "repository-with-nested-submodule", SetupEmptyRepo, func(t *testing.T, repo *repository.Repository, user *UserActions) {
+		ctx := t.Context()
+
+		// Add a submodule at a nested path (not at the repo root)
+		user.GitCommand("submodule", "add", "https://github.com/dagger/dagger-test-modules.git", "libs/nested-submodule")
+		user.GitCommand("submodule", "update", "--init")
+
+		user.GitCommand("commit", "-am", "add nested submodule")
+
+		env := user.CreateEnvironment("Test Nested Submodule", "Testing repository with nested submodule")
+
+		// Add a file to the base repo (triggers exportEnvironment + commitWorktreeChanges)
+		user.FileWrite(env.ID, "test.txt", "initial content\n", "Initial commit")
+
+		assert.NoError(t, repo.Update(ctx, env, "write the env back to the repo"))
+
+		// Check that the nested submodule content is readable inside the container
+		readmeContent, err := env.FileRead(ctx, "libs/nested-submodule/README.md", true, 0, 0)
+		require.NoError(t, err, "Should be able to read libs/nested-submodule/README.md from inside container")
+		assert.Contains(t, readmeContent, "Test fixtures used by dagger integration tests.")
+
+		// Verify that the git working tree remains clean
+		gitStatus, err := repository.RunGitCommand(ctx, repo.SourcePath(), "status", "--porcelain")
+		require.NoError(t, err, "Should be able to check git status")
+		assert.Empty(t, strings.TrimSpace(gitStatus), "Git working tree should remain clean")
+	})
+}
+
 func TestRepositoryWithRecursiveSubmodule(t *testing.T) {
 	t.Parallel()
 	WithRepository(t, "repository-with-submodule", SetupEmptyRepo, func(t *testing.T, repo *repository.Repository, user *UserActions) {
diff --git a/repository/git.go b/repository/git.go
index 55dacfbb..7a00ae52 100644
--- a/repository/git.go
+++ b/repository/git.go
@@ -300,7 +300,18 @@ func readSubmoduleGitdirPath(worktreePath, submodulePath string) (string, error)
 		return "", fmt.Errorf("invalid .git file format in submodule %s: %s", submoduleGitPath, gitContentStr)
 	}
 
-	return gitContentStr, nil
+	gitdirValue := strings.TrimPrefix(gitContentStr, "gitdir: ")
+
+	// Resolve relative paths to absolute, matching the approach used for
+	// the root .git pointer in exportEnvironment. Relative paths like
+	// "../../.git/modules/libs/foo" break after the worktree is wiped and
+	// the root .git is recreated as a pointer file (not a directory).
+	if !filepath.IsAbs(gitdirValue) {
+		submoduleDir := filepath.Join(worktreePath, submodulePath)
+		gitdirValue = filepath.Clean(filepath.Join(submoduleDir, gitdirValue))
+	}
+
+	return fmt.Sprintf("gitdir: %s", gitdirValue), nil
 }
 
 // addSubmoduleGitdirFiles adds .git files for all submodules to the provided directory
diff --git a/repository/git_test.go b/repository/git_test.go
index 702f0874..7fef8790 100644
--- a/repository/git_test.go
+++ b/repository/git_test.go
@@ -172,6 +172,71 @@ func TestCommitWorktreeChanges(t *testing.T) {
 	})
 }
 
+func TestReadSubmoduleGitdirPath(t *testing.T) {
+	t.Run("root_level_submodule_relative_path", func(t *testing.T) {
+		dir := t.TempDir()
+		// Simulate a root-level submodule at "sub" with a relative gitdir pointer
+		subPath := filepath.Join(dir, "sub")
+		require.NoError(t, os.MkdirAll(subPath, 0755))
+		// Relative path from sub/.git: ../.git/modules/sub -> resolves to dir/.git/modules/sub
+		require.NoError(t, os.WriteFile(filepath.Join(subPath, ".git"), []byte("gitdir: ../.git/modules/sub"), 0644))
+
+		result, err := readSubmoduleGitdirPath(dir, "sub")
+		require.NoError(t, err)
+
+		expected := filepath.Clean(filepath.Join(dir, ".git/modules/sub"))
+		assert.Equal(t, "gitdir: "+expected, result)
+	})
+
+	t.Run("nested_submodule_relative_path", func(t *testing.T) {
+		dir := t.TempDir()
+		// Simulate a nested submodule at "libs/nested-sub" with a relative gitdir pointer
+		subPath := filepath.Join(dir, "libs", "nested-sub")
+		require.NoError(t, os.MkdirAll(subPath, 0755))
+		// Relative path from libs/nested-sub/.git: ../../.git/modules/libs/nested-sub
+		require.NoError(t, os.WriteFile(filepath.Join(subPath, ".git"), []byte("gitdir: ../../.git/modules/libs/nested-sub"), 0644))
+
+		result, err := readSubmoduleGitdirPath(dir, "libs/nested-sub")
+		require.NoError(t, err)
+
+		expected := filepath.Clean(filepath.Join(dir, ".git/modules/libs/nested-sub"))
+		assert.Equal(t, "gitdir: "+expected, result)
+	})
+
+	t.Run("already_absolute_path", func(t *testing.T) {
+		dir := t.TempDir()
+		subPath := filepath.Join(dir, "sub")
+		require.NoError(t, os.MkdirAll(subPath, 0755))
+		absGitdir := "/abs/path/modules/sub"
+		require.NoError(t, os.WriteFile(filepath.Join(subPath, ".git"), []byte("gitdir: "+absGitdir), 0644))
+
+		result, err := readSubmoduleGitdirPath(dir, "sub")
+		require.NoError(t, err)
+		assert.Equal(t, "gitdir: "+absGitdir, result)
+	})
+
+	t.Run("malformed_git_file", func(t *testing.T) {
+		dir := t.TempDir()
+		subPath := filepath.Join(dir, "sub")
+		require.NoError(t, os.MkdirAll(subPath, 0755))
+		require.NoError(t, os.WriteFile(filepath.Join(subPath, ".git"), []byte("not-a-gitdir-file"), 0644))
+
+		_, err := readSubmoduleGitdirPath(dir, "sub")
+		assert.Error(t, err)
+		assert.Contains(t, err.Error(), "invalid .git file format")
+	})
+
+	t.Run("missing_git_file", func(t *testing.T) {
+		dir := t.TempDir()
+		subPath := filepath.Join(dir, "sub")
+		require.NoError(t, os.MkdirAll(subPath, 0755))
+
+		_, err := readSubmoduleGitdirPath(dir, "sub")
+		assert.Error(t, err)
+		assert.Contains(t, err.Error(), "failed to read submodule .git file")
+	})
+}
+
 // Test helper functions
 func writeFile(t *testing.T, dir, name, content string) {
 	t.Helper()