diff --git a/gnu/packages/python.scm b/gnu/packages/python.scm
index 8f65852630..55d23e45e8 100644
--- a/gnu/packages/python.scm
+++ b/gnu/packages/python.scm
@@ -262,25 +262,11 @@ (define-public python-setuptools
         "0hl9sa5xr9bi2ifq51wy1bawsjv5nzvpbac7m9z1ciz778874csf"))))
     (build-system python-build-system)
     (arguments
-     `(#:tests? #f
+     `(#:tests? #f))
          ;;FIXME: test_sdist_with_utf8_encoded_filename fails in
          ;; /tmp/nix-build-python2-setuptools-1.1.4.drv-0/setuptools-1.1.4/setuptools/tests/test_sdist.py"
          ;; line 354
          ;; The tests pass with Python 2.7.5.
-       #:phases
-         (alist-replace
-          'install
-          (lambda* (#:key outputs #:allow-other-keys #:rest args)
-            (let* ((install (assoc-ref %standard-phases 'install))
-                   (out (assoc-ref outputs "out"))
-                   (python (assoc-ref %build-inputs "python"))
-                   (python-version (string-take (string-take-right python 5) 3))
-                   (path (string-append out "/lib/python" python-version
-                                        "/site-packages/")))
-              (mkdir-p path)
-              (setenv "PYTHONPATH" path)
-              (apply install args)))
-          %standard-phases)))
     (home-page "https://pypi.python.org/pypi/setuptools")
     (synopsis
      "Library designed to facilitate packaging Python projects")
diff --git a/guix/build/python-build-system.scm b/guix/build/python-build-system.scm
index f213a97f01..0bb8c4d49d 100644
--- a/guix/build/python-build-system.scm
+++ b/guix/build/python-build-system.scm
@@ -54,12 +54,27 @@ (define* (check #:key tests? test-target #:allow-other-keys)
     (call-setuppy test-target '())
     #t))
 
-(define* (install #:key outputs (configure-flags '())
+(define (get-python-version python)
+  (string-take (string-take-right python 5) 3))
+
+(define* (install #:key outputs inputs (configure-flags '())
                   #:allow-other-keys)
   "Install a given Python package."
   (let* ((out (assoc-ref outputs "out"))
          (params (append (list (string-append "--prefix=" out))
-                         configure-flags)))
+                         configure-flags))
+         (python-version (get-python-version (assoc-ref inputs "python")))
+         (old-path (getenv "PYTHONPATH"))
+         (add-path (string-append out "/lib/python" python-version
+                                  "/site-packages/")))
+        ;; create the module installation directory and add it to PYTHONPATH
+        ;; to make setuptools happy
+        (mkdir-p add-path)
+        (setenv "PYTHONPATH"
+                (string-append (if old-path
+                                   (string-append old-path ":")
+                                   "")
+                               add-path))
         (call-setuppy "install" params)))
 
 (define* (wrap #:key inputs outputs #:allow-other-keys)
@@ -79,10 +94,10 @@ (define bindirs
 
   (let* ((out  (assoc-ref outputs "out"))
          (python (assoc-ref inputs "python"))
-         (python-version (string-take (string-take-right python 5) 3))
          (var `("PYTHONPATH" prefix
                 ,(cons (string-append out "/lib/python"
-                                      python-version "/site-packages")
+                                      (get-python-version python)
+                                      "/site-packages")
                        (search-path-as-string->list
                         (or (getenv "PYTHONPATH") ""))))))
     (for-each (lambda (dir)