Dynamic proxy_pass to $var with nginx 1.0

Stumbled on the same exact issue

proxy_pass wasn't resolving my variables, until we found out our DNS server had a problem

can be checked with this cmd by the way

nslookup your-domain your-dns-ip

I've recently stumbled upon this need myself and have found that in order to use variables in a proxy_pass destination you need to set a resolver as your error.log would most probably contain something like no resolver defined to resolve ...

The solution in my case was to setup the following using a local DNS for DNS resolution:

location ~ /proxy/(.*) {
    resolver 127.0.0.1 [::1];
    proxy_pass http://$1;
}

In your case this should work:

location /proxy {
    resolver 127.0.0.1 [::1];
    set $target http://proxytarget.example.com;
    proxy_pass $target;
}

For resolver 127.0.0.1 to work, you need to install bind9 locally. For Debian/Ubuntu:

sudo apt-get install bind9

More information on nginx and dynamic proxy_passing here: http://www.nginx-discovery.com/2011/05/day-51-proxypass-and-resolver.html

Edit: Replaced the previous public DNS with a local one for security issues.

Even though the answer of @soulseekah is complete and correct I want to post an answer for the folks using Nginx inside a cluster of containers, being those inside Kubernetes or Docker Compose.

Basically you have to configure a resolver for Nginx with the address of your actual DNS resolver. For Docker it is always at 127.0.0.11, for Kubernetes refer to this answer

Inside my docker network I was able to successfully configure a dynamic proxy_pass by doing so:

resolver 127.0.0.11 [::1];
set $bcknd http://$http_XBackend$uri$is_args$args;
proxy_pass        $bcknd;

Note that it was fundamental to add the $uri$is_args$args since otherwise the proxy pass didn't take in consideration the path and the query string.

PS: in my example, I am reading an header using the $http_XBackend variable. The header is passed by the client as XBackend: host, here the host should be the hostname where you want to forward your calls. I tried using headers with dashes in them with no luck, I had to use an header without dashes.

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Edit 16 Jul 2020: Docker doesn't report any more on their webpage the address for the default DNS server. It is still 127.0.0.11:53. If you want to see this value inside your container you need to run cat /etc/resolv.conf.