Does the .git local repository have to be contained in the local working directory?

Specifically I'm using Eclipse and egit:

using the wizard to share a project with egit, it moved the working directory out of the eclipse workspace into the folder I had chosen to hold git depositories
the .git repository was contained in this folder

My questions are:

I read that the git repository should not be in the Eclipse workspace but why can't the working directory be in the Eclipse workspace?
Is it because the local repository have to be contained inside the git working directory?

I've found a few questions about moving the directory back, but I don't want to do that without knowing why it was moved in the first place (I don't want to create problems for later).

Solution

No, the .git directory does not have to be in your working directory. You can point a Git repository at another directory as its working directory using the --work-tree option:

--work-tree=<path>

Set the path to the working tree. It can be an absolute path or a path relative to the current working directory. This can also be controlled by setting the GIT_WORK_TREE environment variable and the core.worktree configuration variable (see core.worktree in git-config(1) for a more detailed discussion).

Consider the following example:

$ # Create a Git repository
$ mkdir project
$ cd project
$ git init
Initialized empty Git repository in /path/to/project/.git/
$ ls -a
. .. .git

$ # Now, start working in another directory
$ cd ..
$ mkdir working-directory
$ cd working-directory
$ echo foo > foo.txt

$ # And now, commit to the initially created repository
$ cd ../project
$ git --work-tree=../working-directory status
$ git --work-tree=../working-directory add foo.txt
$ git --work-tree=../working-directory commi

It is very likely that Eclipse is using this option internally.