diff --git a/builtin/grep.c b/builtin/grep.c
index e348e6b..4e91a25 100644
--- a/builtin/grep.c
+++ b/builtin/grep.c
@@ -506,6 +506,10 @@
 
 	for (nr = 0; nr < repo->index->cache_nr; nr++) {
 		const struct cache_entry *ce = repo->index->cache[nr];
+
+		if (!cached && ce_skip_worktree(ce))
+			continue;
+
 		strbuf_setlen(&name, name_base_len);
 		strbuf_addstr(&name, ce->name);
 
@@ -518,8 +522,7 @@
 			 * cache entry are identical, even if worktree file has
 			 * been modified, so use cache version instead
 			 */
-			if (cached || (ce->ce_flags & CE_VALID) ||
-			    ce_skip_worktree(ce)) {
+			if (cached || (ce->ce_flags & CE_VALID)) {
 				if (ce_stage(ce) || ce_intent_to_add(ce))
 					continue;
 				hit |= grep_oid(opt, &ce->oid, name.buf,
diff --git a/t/t7011-skip-worktree-reading.sh b/t/t7011-skip-worktree-reading.sh
index 37525ca..2685258 100755
--- a/t/t7011-skip-worktree-reading.sh
+++ b/t/t7011-skip-worktree-reading.sh
@@ -109,15 +109,6 @@
 	test -z "$(git ls-files -m)"
 '
 
-test_expect_success 'grep with skip-worktree file' '
-	git update-index --no-skip-worktree 1 &&
-	echo test > 1 &&
-	git update-index 1 &&
-	git update-index --skip-worktree 1 &&
-	rm 1 &&
-	test "$(git grep --no-ext-grep test)" = "1:test"
-'
-
 echo ":000000 100644 $ZERO_OID $EMPTY_BLOB A	1" > expected
 test_expect_success 'diff-index does not examine skip-worktree absent entries' '
 	setup_absent &&
diff --git a/t/t7817-grep-sparse-checkout.sh b/t/t7817-grep-sparse-checkout.sh
new file mode 100755
index 0000000..590b99b
--- /dev/null
+++ b/t/t7817-grep-sparse-checkout.sh
@@ -0,0 +1,174 @@
+#!/bin/sh
+
+test_description='grep in sparse checkout
+
+This test creates a repo with the following structure:
+
+.
+|-- a
+|-- b
+|-- dir
+|   `-- c
+|-- sub
+|   |-- A
+|   |   `-- a
+|   `-- B
+|       `-- b
+`-- sub2
+    `-- a
+
+Where the outer repository has non-cone mode sparsity patterns, sub is a
+submodule with cone mode sparsity patterns and sub2 is a submodule that is
+excluded by the superproject sparsity patterns. The resulting sparse checkout
+should leave the following structure in the working tree:
+
+.
+|-- a
+|-- sub
+|   `-- B
+|       `-- b
+`-- sub2
+    `-- a
+
+But note that sub2 should have the SKIP_WORKTREE bit set.
+'
+
+. ./test-lib.sh
+
+test_expect_success 'setup' '
+	echo "text" >a &&
+	echo "text" >b &&
+	mkdir dir &&
+	echo "text" >dir/c &&
+
+	git init sub &&
+	(
+		cd sub &&
+		mkdir A B &&
+		echo "text" >A/a &&
+		echo "text" >B/b &&
+		git add A B &&
+		git commit -m sub &&
+		git sparse-checkout init --cone &&
+		git sparse-checkout set B
+	) &&
+
+	git init sub2 &&
+	(
+		cd sub2 &&
+		echo "text" >a &&
+		git add a &&
+		git commit -m sub2
+	) &&
+
+	git submodule add ./sub &&
+	git submodule add ./sub2 &&
+	git add a b dir &&
+	git commit -m super &&
+	git sparse-checkout init --no-cone &&
+	git sparse-checkout set "/*" "!b" "!/*/" "sub" &&
+
+	git tag -am tag-to-commit tag-to-commit HEAD &&
+	tree=$(git rev-parse HEAD^{tree}) &&
+	git tag -am tag-to-tree tag-to-tree $tree &&
+
+	test_path_is_missing b &&
+	test_path_is_missing dir &&
+	test_path_is_missing sub/A &&
+	test_path_is_file a &&
+	test_path_is_file sub/B/b &&
+	test_path_is_file sub2/a &&
+	git branch -m main
+'
+
+# The test below covers a special case: the sparsity patterns exclude '/b' and
+# sparse checkout is enabled, but the path exists in the working tree (e.g.
+# manually created after `git sparse-checkout init`). git grep should skip it.
+test_expect_success 'working tree grep honors sparse checkout' '
+	cat >expect <<-EOF &&
+	a:text
+	EOF
+	test_when_finished "rm -f b" &&
+	echo "new-text" >b &&
+	git grep "text" >actual &&
+	test_cmp expect actual
+'
+
+test_expect_success 'grep searches unmerged file despite not matching sparsity patterns' '
+	cat >expect <<-EOF &&
+	b:modified-b-in-branchX
+	b:modified-b-in-branchY
+	EOF
+	test_when_finished "test_might_fail git merge --abort && \
+			    git checkout main && git sparse-checkout init" &&
+
+	git sparse-checkout disable &&
+	git checkout -b branchY main &&
+	test_commit modified-b-in-branchY b &&
+	git checkout -b branchX main &&
+	test_commit modified-b-in-branchX b &&
+
+	git sparse-checkout init &&
+	test_path_is_missing b &&
+	test_must_fail git merge branchY &&
+	git grep "modified-b" >actual &&
+	test_cmp expect actual
+'
+
+test_expect_success 'grep --cached searches entries with the SKIP_WORKTREE bit' '
+	cat >expect <<-EOF &&
+	a:text
+	b:text
+	dir/c:text
+	EOF
+	git grep --cached "text" >actual &&
+	test_cmp expect actual
+'
+
+# Note that sub2/ is present in the worktree but it is excluded by the sparsity
+# patterns, so grep should not recurse into it.
+test_expect_success 'grep --recurse-submodules honors sparse checkout in submodule' '
+	cat >expect <<-EOF &&
+	a:text
+	sub/B/b:text
+	EOF
+	git grep --recurse-submodules "text" >actual &&
+	test_cmp expect actual
+'
+
+test_expect_success 'grep --recurse-submodules --cached searches entries with the SKIP_WORKTREE bit' '
+	cat >expect <<-EOF &&
+	a:text
+	b:text
+	dir/c:text
+	sub/A/a:text
+	sub/B/b:text
+	sub2/a:text
+	EOF
+	git grep --recurse-submodules --cached "text" >actual &&
+	test_cmp expect actual
+'
+
+test_expect_success 'working tree grep does not search the index with CE_VALID and SKIP_WORKTREE' '
+	cat >expect <<-EOF &&
+	a:text
+	EOF
+	test_when_finished "git update-index --no-assume-unchanged b" &&
+	git update-index --assume-unchanged b &&
+	git grep text >actual &&
+	test_cmp expect actual
+'
+
+test_expect_success 'grep --cached searches index entries with both CE_VALID and SKIP_WORKTREE' '
+	cat >expect <<-EOF &&
+	a:text
+	b:text
+	dir/c:text
+	EOF
+	test_when_finished "git update-index --no-assume-unchanged b" &&
+	git update-index --assume-unchanged b &&
+	git grep --cached text >actual &&
+	test_cmp expect actual
+'
+
+test_done