diff --git a/command/init_test.go b/command/init_test.go
index 2db54b047..ebd05e0f2 100644
--- a/command/init_test.go
+++ b/command/init_test.go
@@ -100,3 +100,45 @@ func TestInit_noArgs(t *testing.T) {
 		t.Fatalf("bad: \n%s", ui.OutputWriter.String())
 	}
 }
+
+// https://github.com/hashicorp/terraform/issues/518
+func TestInit_dstInSrc(t *testing.T) {
+	dir := tempDir(t)
+	if err := os.MkdirAll(dir, 0755); err != nil {
+		t.Fatalf("err: %s", err)
+	}
+
+	// Change to the temporary directory
+	cwd, err := os.Getwd()
+	if err != nil {
+		t.Fatalf("err: %s", err)
+	}
+	if err := os.Chdir(dir); err != nil {
+		t.Fatalf("err: %s", err)
+	}
+	defer os.Chdir(cwd)
+
+	if _, err := os.Create("issue518.tf"); err != nil {
+		t.Fatalf("err: %s", err)
+	}
+
+	ui := new(cli.MockUi)
+	c := &InitCommand{
+		Meta: Meta{
+			ContextOpts: testCtxConfig(testProvider()),
+			Ui:          ui,
+		},
+	}
+
+	args := []string{
+		".",
+		"foo",
+	}
+	if code := c.Run(args); code != 0 {
+		t.Fatalf("bad: \n%s", ui.ErrorWriter.String())
+	}
+
+	if _, err := os.Stat(filepath.Join(dir, "foo", "issue518.tf")); err != nil {
+		t.Fatalf("err: %s", err)
+	}
+}
diff --git a/config/module/copy_dir.go b/config/module/copy_dir.go
index a6628d1d7..f2ae63b77 100644
--- a/config/module/copy_dir.go
+++ b/config/module/copy_dir.go
@@ -39,6 +39,11 @@ func copyDir(dst, src string) error {
 		// If we have a directory, make that subdirectory, then continue
 		// the walk.
 		if info.IsDir() {
+			if path == filepath.Join(src, dst) {
+				// dst is in src; don't walk it.
+				return nil
+			}
+
 			if err := os.MkdirAll(dstPath, 0755); err != nil {
 				return err
 			}