Permalinks – WordPress parallel to root

I have a site that is built from a repository using a build process. For this reason, we have decided to keep WordPress out of the site root (/html) and place it in a directory at the same level (/blog) — not in a subdirectory. This way, we can destroy the html directory and rebuild, without altering the files in the WordPress install or having to commit all of WordPress (including any uploaded files) to the repository.

We are using an alias to direct any requests to mysite.com/blog to the proper folder.

If I use the default permalinks, everything works well, but if I attempt to use custom permalinks (/blog/%year%/%monthnum%/%day%/%postname%/) the index page for the blog doesn’t list any posts, and none of the archive links mysite.com/blog/2012/06/ resolve (404).

Has anyone done this kind of install in the past and made it work? Should I be putting anything specific in the site or blog .htaccess files?

Thanks!