Can multi-environment configuration be used in 'index.php'?
Should be able to. Use a switch statement to check on the host and then server up the correct environment configuration like so:

public/index.php:

switch (strtolower($_SERVER['SERVER_NAME']))
{
    // Staging
    case 'stage.mydomain.com' :
        define('CRAFT_ENVIRONMENT', 'stage');
        $craftPath = '../../craft';
        break;

    // Local
    default :
        define('CRAFT_ENVIRONMENT', 'local');
        $craftPath = '../craft';
        break;
}