...can such an "artificial" subdomain be configured properly with permalinks, or is this not a recommended practice?
The only thing I can say for sure, based on the many cases when users were trying to make it work and ended up here in the forum, that WP "hates" any kind of redirects, domain ponting to another domain's subfolder and stuff like that.
All the internal links (permalinks) work on the assumption that the index is where your URIs in the Options > GEneral point to, e.g.
blog.example.com > so it will put together an address like
Now if your real URI is
example.com/blog that will confuse WP: it won't be able to build working links.
I am not a coder, so I have no idea what the technical explanation is - but I have seen enough help requests for blogs in similar situation to dare to put up that warning above.