diff --git a/easybuild/framework/extensioneasyblock.py b/easybuild/framework/extensioneasyblock.py
index c9aa1eeacb..db75ad0c77 100644
--- a/easybuild/framework/extensioneasyblock.py
+++ b/easybuild/framework/extensioneasyblock.py
@@ -100,18 +100,27 @@ def __init__(self, *args, **kwargs):
         self.ext_dir = None  # dir where extension source was unpacked
 
     def _set_start_dir(self):
-        """Set value for self.start_dir
+        """Set absolute path of self.start_dir similarly to EasyBlock.guess_start_dir
 
-        Uses existing value of self.start_dir if it is already set and exists
-        otherwise self.ext_dir (path to extracted source) if that is set and exists, similar to guess_start_dir
+        Uses existing value of self.start_dir if it is already set, an absolute path and exists
+        otherwise use self.ext_dir (path to extracted source) as base dir if that is set and exists.
         """
-        possible_dirs = (self.start_dir, self.ext_dir)
-        for possible_dir in possible_dirs:
-            if possible_dir and os.path.isdir(possible_dir):
-                self.cfg['start_dir'] = possible_dir
-                self.log.debug("Using start_dir: %s", self.start_dir)
-                return
-        self.log.debug("Unable to determine start_dir as none of these paths is set and exists: %s", possible_dirs)
+        ext_start_dir = ''
+
+        if self.start_dir:
+            ext_start_dir = self.start_dir
+
+        if not os.path.isabs(ext_start_dir) and self.ext_dir:
+            # start dir is either empty or a _relative_ path provided by user through self.start_dir
+            # generate absolute path from ext_dir
+            ext_start_dir = os.path.join(self.ext_dir, ext_start_dir)
+
+        if os.path.isdir(ext_start_dir):
+            self.cfg['start_dir'] = ext_start_dir
+            self.log.debug("Using extension start dir: %s", ext_start_dir)
+        else:
+            # non-existing start dir means wrong input from user
+            self.log.debug("Provided start dir for extension does not exist: %s", ext_start_dir)
 
     def run(self, unpack_src=False):
         """Common operations for extensions: unpacking sources, patching, ..."""
diff --git a/test/framework/easyblock.py b/test/framework/easyblock.py
index a8cd59375e..9bda723b41 100644
--- a/test/framework/easyblock.py
+++ b/test/framework/easyblock.py
@@ -2164,6 +2164,50 @@ def check_start_dir(expected_start_dir):
         err_pattern = "Specified start dir .*/toy-0.0/thisstartdirisnotthere does not exist"
         self.assertErrorRegex(EasyBuildError, err_pattern, check_start_dir, 'whatever')
 
+    def test_extension_set_start_dir(self):
+        """Test start dir with extensions."""
+        test_easyconfigs = os.path.join(os.path.abspath(os.path.dirname(__file__)), 'easyconfigs', 'test_ecs')
+        ec = process_easyconfig(os.path.join(test_easyconfigs, 't', 'toy', 'toy-0.0.eb'))[0]
+
+        cwd = os.getcwd()
+        self.assertTrue(os.path.exists(cwd))
+
+        def check_ext_start_dir(expected_start_dir):
+            """Check start dir."""
+            # make sure we're in an existing directory at the start
+            change_dir(cwd)
+            eb = EasyBlock(ec['ec'])
+            eb.extensions_step(fetch=True, install=False)
+            # extract sources of the extension
+            ext = eb.ext_instances[-1]
+            ext.run(unpack_src=True)
+            abs_expected_start_dir = os.path.join(eb.builddir, expected_start_dir)
+            self.assertTrue(os.path.samefile(ext.cfg['start_dir'], abs_expected_start_dir))
+            self.assertTrue(os.path.samefile(os.getcwd(), abs_expected_start_dir))
+
+        ec['ec']['exts_defaultclass'] = 'DummyExtension'
+
+        # default (no start_dir specified): use unpacked dir as start dir
+        ec['ec']['exts_list'] = [
+            ('barbar', '0.0', {}),
+        ]
+        check_ext_start_dir('barbar/barbar-0.0')
+
+        # use start dir defined in extension
+        ec['ec']['exts_list'] = [
+            ('barbar', '0.0', {
+                'start_dir': 'src'}),
+        ]
+        check_ext_start_dir('barbar/barbar-0.0/src')
+
+        # clean error when specified start dir does not exist
+        ec['ec']['exts_list'] = [
+            ('barbar', '0.0', {
+                'start_dir': 'nonexistingdir'}),
+        ]
+        err_pattern = "Failed to change from .*barbar/barbar-0.0 to nonexistingdir.*"
+        self.assertErrorRegex(EasyBuildError, err_pattern, check_ext_start_dir, 'whatever')
+
     def test_prepare_step(self):
         """Test prepare step (setting up build environment)."""
         test_easyconfigs = os.path.join(os.path.abspath(os.path.dirname(__file__)), 'easyconfigs', 'test_ecs')