diff --git a/org.eclipse.jgit.test/tst/org/eclipse/jgit/api/CloneCommandTest.java b/org.eclipse.jgit.test/tst/org/eclipse/jgit/api/CloneCommandTest.java
index 06829fa4d..ece1b324b 100644
--- a/org.eclipse.jgit.test/tst/org/eclipse/jgit/api/CloneCommandTest.java
+++ b/org.eclipse.jgit.test/tst/org/eclipse/jgit/api/CloneCommandTest.java
@@ -410,6 +410,18 @@ public void testCloneRepositoryWithSubmodules() throws Exception {
 		assertEquals(SubmoduleStatusType.INITIALIZED, pathStatus.getType());
 		assertEquals(commit, pathStatus.getHeadId());
 		assertEquals(commit, pathStatus.getIndexId());
+
+		SubmoduleWalk walk = SubmoduleWalk.forIndex(git2.getRepository());
+		assertTrue(walk.next());
+		Repository clonedSub1 = walk.getRepository();
+		addRepoToClose(clonedSub1);
+		assertNotNull(clonedSub1);
+		assertEquals(
+				new File(git2.getRepository().getWorkTree(), walk.getPath()),
+				clonedSub1.getWorkTree());
+		assertEquals(new File(new File(git2.getRepository().getDirectory(),
+				"modules"), walk.getPath()), clonedSub1.getDirectory());
+		walk.release();
 	}
 
 	@Test
@@ -492,6 +504,12 @@ public void testCloneRepositoryWithNestedSubmodules() throws Exception {
 		assertTrue(walk.next());
 		Repository clonedSub1 = walk.getRepository();
 		assertNotNull(clonedSub1);
+		assertEquals(
+				new File(git2.getRepository().getWorkTree(), walk.getPath()),
+				clonedSub1.getWorkTree());
+		assertEquals(new File(new File(git2.getRepository().getDirectory(),
+				"modules"), walk.getPath()),
+				clonedSub1.getDirectory());
 		status = new SubmoduleStatusCommand(clonedSub1);
 		statuses = status.call();
 		clonedSub1.close();
diff --git a/org.eclipse.jgit/src/org/eclipse/jgit/api/SubmoduleUpdateCommand.java b/org.eclipse.jgit/src/org/eclipse/jgit/api/SubmoduleUpdateCommand.java
index de1a3e9fd..81a30156a 100644
--- a/org.eclipse.jgit/src/org/eclipse/jgit/api/SubmoduleUpdateCommand.java
+++ b/org.eclipse.jgit/src/org/eclipse/jgit/api/SubmoduleUpdateCommand.java
@@ -42,6 +42,7 @@
  */
 package org.eclipse.jgit.api;
 
+import java.io.File;
 import java.io.IOException;
 import java.util.ArrayList;
 import java.util.Collection;
@@ -163,6 +164,8 @@ public Collection<String> call() throws InvalidConfigurationException,
 					configure(clone);
 					clone.setURI(url);
 					clone.setDirectory(generator.getDirectory());
+					clone.setGitDir(new File(new File(repo.getDirectory(),
+							Constants.MODULES), generator.getPath()));
 					if (monitor != null)
 						clone.setProgressMonitor(monitor);
 					submoduleRepo = clone.call().getRepository();
diff --git a/org.eclipse.jgit/src/org/eclipse/jgit/lib/Constants.java b/org.eclipse.jgit/src/org/eclipse/jgit/lib/Constants.java
index 32ccc7c33..f14974984 100644
--- a/org.eclipse.jgit/src/org/eclipse/jgit/lib/Constants.java
+++ b/org.eclipse.jgit/src/org/eclipse/jgit/lib/Constants.java
@@ -372,6 +372,13 @@ public final class Constants {
 	 */
 	public static final String GITDIR = "gitdir: ";
 
+	/**
+	 * Name of the folder (inside gitDir) where submodules are stored
+	 *
+	 * @since 3.6
+	 */
+	public static final String MODULES = "modules";
+
 	/**
 	 * Create a new digest function for objects.
 	 *