ng build generates "dist/index.html" in current folder and other files in different "dist" folder

[varadero]

Bug Report or Feature Request (mark with an x)

- [x] bug report -> please search issues before submitting
- [ ] feature request

Versions.

@angular/cli: 1.2.6
node: 8.2.0
os: win32 x64
@angular/animations: 4.3.2
@angular/common: 4.3.2
@angular/compiler: 4.3.2
@angular/core: 4.3.2
@angular/forms: 4.3.2
@angular/http: 4.3.2
@angular/platform-browser: 4.3.2
@angular/platform-browser-dynamic: 4.3.2
@angular/router: 4.3.2
@angular/cli: 1.2.6
@angular/compiler-cli: 4.3.2
@angular/language-service: 4.3.2

Repro steps.

1. ng new test01
2. cd test01\src
3. ng build

What happens is that a "dist" folder is created inside "src" and it contains the file index.html. All other files are in another "dist" folder under "test01".
Folder tree looks something like this:

test01
    dist <-- this one contains everything (.js files, font files, favicon.ico etc.) but index.html
        assets
    e2e
    src
        app
        assets
        dist <-- this one is in a wrong place and contains only index.html
        environments

The log given by the failure.

Desired functionality.

Output from ng build should be in "root-folder\dist". Current folder from where "ng buld" is executed should not be polluted with "dist" folder (the one that contains only "index.html" file).

Mention any other details that might be useful.

Might be somehow related to #7135

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