diff --git a/compose/config/config.py b/compose/config/config.py
index ea122bc422d..f208776e4b6 100644
--- a/compose/config/config.py
+++ b/compose/config/config.py
@@ -15,6 +15,8 @@
 from .validation import validate_top_level_object
 from compose.cli.utils import find_candidates_in_parent_dirs
 
+from docker.utils import is_remote
+
 
 DOCKER_CONFIG_KEYS = [
     'cap_add',
@@ -428,16 +430,17 @@ def resolve_volume_path(volume, working_dir, service_name):
         return container_path
 
 
-def resolve_build_path(build_path, working_dir=None):
-    if working_dir is None:
-        raise Exception("No working_dir passed to resolve_build_path")
-    return expand_path(working_dir, build_path)
+def resolve_build_path(build_path, working_dir):
+    if is_remote(build_path):
+        return build_path
+    else:
+        return expand_path(working_dir, build_path)
 
 
 def validate_paths(service_dict):
     if 'build' in service_dict:
         build_path = service_dict['build']
-        if not os.path.exists(build_path) or not os.access(build_path, os.R_OK):
+        if not is_remote(build_path) and (not os.path.exists(build_path) or not os.access(build_path, os.R_OK)):
             raise ConfigurationError("build path %s either does not exist or is not accessible." % build_path)
 
 
diff --git a/compose/service.py b/compose/service.py
index a15ee1b9afa..6471b041c95 100644
--- a/compose/service.py
+++ b/compose/service.py
@@ -10,6 +10,8 @@
 
 import six
 from docker.errors import APIError
+from docker.utils import ContextError
+from docker.utils import create_context_from_path
 from docker.utils import create_host_config
 from docker.utils import LogConfig
 from docker.utils.ports import build_port_bindings
@@ -707,7 +709,13 @@ def _get_container_host_config(self, override_options, one_off=False):
         )
 
     def build(self, no_cache=False):
-        log.info('Building %s...' % self.name)
+        build_ctx = None
+        context_path = six.binary_type(self.options['build'])
+        dockerfile = self.options.get('dockerfile', 'Dockerfile')
+        try:
+            build_ctx = create_context_from_path(context_path, dockerfile=dockerfile)
+        except ContextError as ce:
+            raise BuildError(self, ce.message)
 
         path = self.options['build']
         # python2 os.path() doesn't support unicode, so we need to encode it to
@@ -716,13 +724,13 @@ def build(self, no_cache=False):
             path = path.encode('utf8')
 
         build_output = self.client.build(
-            path=path,
+            build_ctx.path,
             tag=self.image_name,
             stream=True,
             rm=True,
             pull=False,
             nocache=no_cache,
-            dockerfile=self.options.get('dockerfile', None),
+            **build_ctx.job_params
         )
 
         try:
diff --git a/docs/yml.md b/docs/yml.md
index 6fb31a7db96..bd047849b3e 100644
--- a/docs/yml.md
+++ b/docs/yml.md
@@ -35,13 +35,48 @@ pull if it doesn't exist locally.
 
 ### build
 
-Path to a directory containing a Dockerfile. When the value supplied is a
-relative path, it is interpreted as relative to the location of the yml file
-itself. This directory is also the build context that is sent to the Docker daemon.
+Path to a Dockerfile or to a context containing a Dockerfile. When the
+value supplied is a relative filesystem path, it is interpreted as relative
+to the location of the config file.
+
+The value supplied to this parameter can have any of the forms accepted by
+the docker remote api `/build` endpoint:
+
+* An http(s) or git URL. The resource at the other end of the URL can be
+either a compressed tarball or raw Dockerfile in the case of http(s) or a
+souce code repository having a Dockerfile at the root in the case of git.
+To be interpreted as a remote URL the value must have one of the following
+prefixes: `http://`, `https://`, `git@`, `git://` or `github.com`.
+
+    + Examples: 
+      + A git repo: `build: https://github.com/<user>/<repo>.git`. The
+docker daemon clones the repo and builds from the resultant git workdir.
+      + A remote tarball: `build: http://remote/context.tar.bz2` The docker
+daemon downloads the context, unpacks it, and builds the image.
+
+* The build context can also be given as a path to a single Dockerfile.
+Compose will create a tar archive with that Dockerfile inside and ship it
+to the docker daemon to build:
+
+    + `build: /path/to/Dockerfile`
+ 
+* You can also build from generated tarball contexts. The tar archive is
+sent 'as is' to the daemon - Compose does not validate its contents, it
+just checks to see if the supplied value points to a readable tar file.
+The docker daemon supports archives compressed in the following formats:
+`identity` (no compression), `gzip`, `xz` and `bzip2`.
+
+   + `build: /path/to/localcontext.tar.gz`
+
+* Finally, `build` can be a path to a local directory containing a Dockerfile
+in it. The contents of the directory are packaged in a uncompressed tar
+archive and sent to the daemon. If there's a `.dockerignore` file inside
+the directory, Compose will filter the directory accordingly.
+
+   + `build: /path/to/localdir`
 
 Compose will build and tag it with a generated name, and use that image thereafter.
 
-    build: /path/to/build/dir
 
 ### dockerfile
 
diff --git a/requirements.txt b/requirements.txt
index e93db7b361d..1cba7715d46 100644
--- a/requirements.txt
+++ b/requirements.txt
@@ -1,7 +1,7 @@
 PyYAML==3.10
-docker-py==1.3.1
 dockerpty==0.3.4
 docopt==0.6.1
+git+https://github.com/moysesb/docker-py.git@distinct_build_calls#egg=docker-py-1.4.0-dev
 jsonschema==2.5.1
 requests==2.6.1
 six==1.7.3
diff --git a/setup.py b/setup.py
index 33335047bca..9439f2b93e0 100644
--- a/setup.py
+++ b/setup.py
@@ -33,7 +33,7 @@ def find_version(*file_paths):
     'requests >= 2.6.1, < 2.7',
     'texttable >= 0.8.1, < 0.9',
     'websocket-client >= 0.32.0, < 1.0',
-    'docker-py >= 1.3.1, < 1.4',
+    'docker-py >= 1.3.1dev0, < 1.4',
     'dockerpty >= 0.3.4, < 0.4',
     'six >= 1.3.0, < 2',
     'jsonschema >= 2.5.1, < 3',
diff --git a/tests/fixtures/build-ctx/ctx.tar.xz b/tests/fixtures/build-ctx/ctx.tar.xz
new file mode 100644
index 00000000000..5bfc52586b2
Binary files /dev/null and b/tests/fixtures/build-ctx/ctx.tar.xz differ
diff --git a/tests/unit/config_test.py b/tests/unit/config_test.py
index ccd5b57bf79..fdd4b73dfb8 100644
--- a/tests/unit/config_test.py
+++ b/tests/unit/config_test.py
@@ -973,6 +973,14 @@ def test_from_file(self):
         service_dict = load_from_filename('tests/fixtures/build-path/docker-compose.yml')
         self.assertEquals(service_dict, [{'name': 'foo', 'build': self.abs_context_path}])
 
+    def test_from_tarball_context(self):
+        service_dict = config.make_service_dict(
+            'tarball',
+            {'build': '../build-ctx/ctx.tar.xz'},
+            working_dir='tests/fixtures/build-path'
+        )
+        self.assertEquals(service_dict['build'], os.path.join(self.abs_context_path, 'ctx.tar.xz'))
+
 
 class GetConfigPathTestCase(unittest.TestCase):