Why is not recommended to have an Eclipse project folder as a Git repository?
When sharing a project as git and trying to make the Eclipse project folder as the git repository, Eclipse says that it is not recommended to do so and that it should be outside the Eclipse workspace.
Why is that?
From Eclipse EGit help pages,
It is probably not a good idea to make a project the root folder of your Repository
The reason is that you will never be able to add another project to this Repository, as the .project file will occupy the root folder; you could still add projects as sub-folders, but this kind of project nesting is known to cause lots of problems all over the place. In order to add another project, you would have to move the project to a sub-folder in the Repository and add the second project as another sub-folder before you could commit this change.
Some more information
It is a good idea to keep your Repository outside of your Eclipse Workspace
There are several reasons for this:
The new Repository will consider the complete folder structure of the Eclipse workspace as (potential) content. This can result in performance issues, for example when calculating the changes before committing (which will scan the complete .metadata folder, for example); more often than not, the workspace will contain dead folders (e.g. deleted projects) which semantically are not relevant for EGit but can not be excluded easily.
The metadata (.git-) folder will be a child of the Eclipse Workspace. It is unclear whether this might cause unwanted folder traversals by Eclipse.
You can easily destroy your Repository by destroying your Eclipse Workspace
While I agree about keeping the repository outside the Eclipse workspace, and I would still make a git repo within an Eclipse project root directory (like in this answer).
Unless your program is composed of lots of little inter-dependent projects, I would limit one git repo to one Eclipse project. A git repo is about recording the content of a tree structure, and if that tree represents one project, it is easier to manage, tag, branch, merge (as a coherent set of files). If it represents multiple project, you are not sure anymore about what a tag like "1.0" represents for each of the projects in that Git repo.
Plus, I like to add the .project, .classpath and .settings to the Git repo (as "Does git exclude eclipse project files from a new repo by default?")