diff --git a/mercurial/commands.py b/mercurial/commands.py
--- a/mercurial/commands.py
+++ b/mercurial/commands.py
@@ -629,7 +629,7 @@ def bundle(ui, repo, fname, dest="defaul
     contents including permissions, rename data, and revision history.
     """
     f = open(fname, "wb")
-    dest = ui.expandpath(dest, repo.root)
+    dest = ui.expandpath(dest)
     other = hg.repository(ui, dest)
     o = repo.findoutgoing(other)
     cg = repo.changegroup(o, 'bundle')
@@ -1543,7 +1543,7 @@ def incoming(ui, repo, source="default",
 
     Currently only local repositories are supported.
     """
-    source = ui.expandpath(source, repo.root)
+    source = ui.expandpath(source)
     other = hg.repository(ui, source)
     if not other.local():
         raise util.Abort(_("incoming doesn't work for remote repositories yet"))
@@ -1730,7 +1730,7 @@ def outgoing(ui, repo, dest="default-pus
 
     See pull for valid source format details.
     """
-    dest = ui.expandpath(dest, repo.root)
+    dest = ui.expandpath(dest)
     other = hg.repository(ui, dest)
     o = repo.findoutgoing(other)
     o = repo.changelog.nodesbetween(o)[0]
@@ -1804,7 +1804,7 @@ def pull(ui, repo, source="default", **o
     to the remote user's home directory by default; use two slashes at
     the start of a path to specify it as relative to the filesystem root.
     """
-    source = ui.expandpath(source, repo.root)
+    source = ui.expandpath(source)
     ui.status(_('pulling from %s\n') % (source))
 
     if opts['ssh']:
@@ -1849,7 +1849,7 @@ def push(ui, repo, dest="default-push", 
     SSH requires an accessible shell account on the destination
     machine and a copy of hg in the remote path.
     """
-    dest = ui.expandpath(dest, repo.root)
+    dest = ui.expandpath(dest)
     ui.status('pushing to %s\n' % (dest))
 
     if opts['ssh']:
diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -47,7 +47,7 @@ class localrepository(object):
 
         self.dirstate = dirstate.dirstate(self.opener, self.ui, self.root)
         try:
-            self.ui.readconfig(self.join("hgrc"))
+            self.ui.readconfig(self.join("hgrc"), self.root)
         except IOError:
             pass
 
diff --git a/mercurial/ui.py b/mercurial/ui.py
--- a/mercurial/ui.py
+++ b/mercurial/ui.py
@@ -48,7 +48,7 @@ class ui(object):
         self.debugflag = (self.debugflag or debug)
         self.interactive = (self.interactive and interactive)
 
-    def readconfig(self, fn):
+    def readconfig(self, fn, root=None):
         if isinstance(fn, basestring):
             fn = [fn]
         for f in fn:
@@ -56,6 +56,12 @@ class ui(object):
                 self.cdata.read(f)
             except ConfigParser.ParsingError, inst:
                 raise util.Abort(_("Failed to parse %s\n%s") % (f, inst))
+        # translate paths relative to root (or home) into absolute paths
+        if root is None:
+            root = os.path.expanduser('~')
+        for name, path in self.configitems("paths"):
+            if path.find("://") == -1 and not os.path.isabs(path):
+                self.cdata.set("paths", name, os.path.join(root, path))
 
     def setconfig(self, section, name, val):
         self.overlay[(section, name)] = val
@@ -153,19 +159,12 @@ class ui(object):
                 user = user[f+1:]
         return user
 
-    def expandpath(self, loc, root=""):
+    def expandpath(self, loc):
         """Return repository location relative to cwd or from [paths]"""
-        if os.path.exists(loc):
+        if loc.find("://") != -1 or os.path.exists(loc):
             return loc
 
-        paths = {}
-        for name, path in self.configitems("paths"):
-            m = path.find("://")
-            if m == -1:
-                    path = os.path.join(root, path)
-            paths[name] = path
-
-        return paths.get(loc, loc)
+        return self.config("paths", loc, loc)
 
     def write(self, *args):
         for a in args: