diff --git a/configure.ac b/configure.ac
index f6e548729c..11ce58e6d2 100644
--- a/configure.ac
+++ b/configure.ac
@@ -160,22 +160,26 @@ fi
 AC_ARG_WITH(bzip2, AC_HELP_STRING([--with-bzip2=PATH],
   [prefix of bzip2]),
   bzip2=$withval, bzip2=)
+AM_CONDITIONAL(HAVE_BZIP2, test -n "$bzip2")
 if test -z "$bzip2"; then
-   AC_CHECK_LIB(bz2, BZ2_bzWriteOpen,
-     [bzip2_lib="-lbz2"], [AC_MSG_ERROR([cannot find -lbz (bzip2)])])
-   AC_CHECK_HEADER(bzlib.h, 
-     [bzip2_include=""], [AC_MSG_ERROR([cannot find bzlib.h (bzip2)])])
-   AC_PATH_PROG(bzip2_prog, bzip2,
-     [AC_MSG_ERROR([cannot find bzip2])])
-   bzip2_bin=$(dirname $bzip2_prog)
+  # Headers and libraries will be used from the temporary installation
+  # in externals/inst-bzip2.
+  bzip2_lib='-L${top_builddir}/externals/inst-bzip2/lib -lbz2'
+  bzip2_include='-I${top_builddir}/externals/inst-bzip2/include'
+  # The binary will be copied to $libexecdir.
+  bzip2_bin='${libexecdir}'
+  # But for testing, we have to use the temporary copy :-(
+  bzip2_bin_test='${top_builddir}/externals/inst-bzip2/bin'
 else
-   bzip2_lib="-L$bzip2/lib -lbz2"
-   bzip2_include="-I$bzip2/include"
-   bzip2_bin="$bzip2/bin"
+  bzip2_lib="-L$bzip2/lib -lbz2"
+  bzip2_include="-I$bzip2/include"
+  bzip2_bin="$bzip2/bin"
+  bzip2_bin_test="$bzip2/bin"
 fi   
 AC_SUBST(bzip2_lib)
 AC_SUBST(bzip2_include)
 AC_SUBST(bzip2_bin)
+AC_SUBST(bzip2_bin_test)
 
 AC_CHECK_LIB(pthread, pthread_mutex_init)
 
@@ -212,7 +216,7 @@ AC_SUBST(NIX_GROUP)
 AC_DEFINE_UNQUOTED(NIX_GROUP, ["$NIX_GROUP"], [Nix group])
 
                                                                                                             
-# This is needed if either ATerm or Berkeley DB are static libraries,
+# This is needed if ATerm, Berkeley DB or bzip2 are static libraries,
 # and the Nix libraries are dynamic.
 if test "$(uname)" = "Darwin"; then
    LDFLAGS="-all_load $LDFLAGS"
diff --git a/externals/Makefile.am b/externals/Makefile.am
index dcddaa5d13..7fa9e6f642 100644
--- a/externals/Makefile.am
+++ b/externals/Makefile.am
@@ -64,10 +64,43 @@ build-aterm: have-aterm
 endif
 
 
-all: build-db build-aterm
+# bzip2
 
-EXTRA_DIST = $(DB).tar.gz $(ATERM).tar.gz
+BZIP2 = bzip2-1.0.3
+
+$(BZIP2).tar.gz:
+	@echo "Nix requires bzip2 to build."
+	@echo "Please download version 1.0.3 from"
+	@echo "  http://www.bzip.org/1.0.3/bzip2-1.0.3.tar.gz"
+	@echo "and place it in the externals/ directory."
+	false
+
+$(BZIP2): $(BZIP2).tar.gz
+	gunzip < $(BZIP2).tar.gz | tar xvf -
+
+have-bzip2:
+	$(MAKE) $(BZIP2)
+	touch have-bzip2
+
+if HAVE_BZIP2
+build-bzip2:
+else
+build-bzip2: have-bzip2
+	(pfx=`pwd` && \
+	cd $(BZIP2) && \
+	$(MAKE) && \
+	$(MAKE) install PREFIX=$$pfx/inst-bzip2)
+	touch build-bzip2
+
+install:
+	cp $(bzip2_bin_test)/bzip2 $(bzip2_bin_test)/bunzip2 ${bzip2_bin}
+endif
+
+
+all: build-db build-aterm build-bzip2
+
+EXTRA_DIST = $(DB).tar.gz $(ATERM).tar.gz $(BZIp2).tar.gz
 
 ext-clean:
 	$(RM) -f have-db build-db have-aterm build-aterm
-	$(RM) -rf $(DB) $(ATERM)
+	$(RM) -rf $(DB) $(ATERM) $(BZIP2)
diff --git a/substitute.mk b/substitute.mk
index 9e3123a14f..18e4585d75 100644
--- a/substitute.mk
+++ b/substitute.mk
@@ -13,6 +13,7 @@
 	 -e "s^@curl\@^$(curl)^g" \
 	 -e "s^@bzip2\@^$(bzip2_bin)/bzip2^g" \
 	 -e "s^@bunzip2\@^$(bzip2_bin)/bunzip2^g" \
+	 -e "s^@bzip2_bin_test\@^$(bzip2_bin_test)^g" \
 	 -e "s^@perl\@^$(perl)^g" \
 	 -e "s^@coreutils\@^$(coreutils)^g" \
 	 -e "s^@tar\@^$(tar)^g" \
diff --git a/tests/common.sh.in b/tests/common.sh.in
index 0f55d6cf89..07250ad6ed 100644
--- a/tests/common.sh.in
+++ b/tests/common.sh.in
@@ -24,6 +24,10 @@ export NIX_BUILD_HOOK=
 export PERL=perl
 export TOP=$(pwd)/..
 export aterm_bin=@aterm_bin@
+export bzip2_bin_test="@bzip2_bin_test@"
+if test "${bzip2_bin_test:0:1}" != "/"; then
+    bzip2_bin_test=`pwd`/${bzip2_bin_test}
+fi
 export dot=@dot@
 export xmllint="@xmllint@"
 export xmlflags="@xmlflags@"
diff --git a/tests/init.sh b/tests/init.sh
index 11e0632a48..d49d57cede 100644
--- a/tests/init.sh
+++ b/tests/init.sh
@@ -24,6 +24,8 @@ ln -s $nixhash $NIX_BIN_DIR/
 ln -s $TOP/scripts/nix-prefetch-url $NIX_BIN_DIR/
 ln -s $TOP/scripts/nix-collect-garbage $NIX_BIN_DIR/
 ln -s $TOP/scripts/nix-build $NIX_BIN_DIR/
+ln -s $bzip2_bin_test/bzip2 $NIX_BIN_DIR/
+ln -s $bzip2_bin_test/bunzip2 $NIX_BIN_DIR/
 mkdir $NIX_BIN_DIR/nix
 ln -s $TOP/scripts/download-using-manifests.pl $NIX_BIN_DIR/nix/
 ln -s $TOP/scripts/readmanifest.pm $NIX_BIN_DIR/nix/