diff --git a/rootfs/etc/nginx/template/nginx.tmpl b/rootfs/etc/nginx/template/nginx.tmpl
index cec76426da..49c1567f54 100644
--- a/rootfs/etc/nginx/template/nginx.tmpl
+++ b/rootfs/etc/nginx/template/nginx.tmpl
@@ -539,9 +539,6 @@ http {
         {{ end }}
         server_name {{ $hostname }};
 
-        {{/* default value of proxy_host is the name and port of a proxied server as specified in the proxy_pass directive */}}
-        set $proxy_host {{ $hostname }};
-
         {{ if gt (len $cfg.BlockUserAgents) 0 }}
         if ($block_ua) {
            return 403;
@@ -1126,7 +1123,8 @@ stream {
 
             port_in_redirect {{ if $location.UsePortInRedirects }}on{{ else }}off{{ end }};
 
-            set $proxy_upstream_name "{{ buildUpstreamName $location }}";
+            set $proxy_upstream_name    "{{ buildUpstreamName $location }}";
+            set $proxy_host             $proxy_upstream_name;
 
             {{/* redirect to HTTPS can be achieved forcing the redirect or having a SSL Certificate configured for the server */}}
             {{ if (or $location.Rewrite.ForceSSLRedirect (and (not (empty $server.SSLCert.PemFileName)) $location.Rewrite.SSLRedirect)) }}
diff --git a/test/e2e/settings/proxy_host.go b/test/e2e/settings/proxy_host.go
new file mode 100644
index 0000000000..2ae17b49e3
--- /dev/null
+++ b/test/e2e/settings/proxy_host.go
@@ -0,0 +1,86 @@
+/*
+Copyright 2018 The Kubernetes Authors.
+
+Licensed under the Apache License, Version 2.0 (the "License");
+you may not use this file except in compliance with the License.
+You may obtain a copy of the License at
+
+    http://www.apache.org/licenses/LICENSE-2.0
+
+Unless required by applicable law or agreed to in writing, software
+distributed under the License is distributed on an "AS IS" BASIS,
+WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+See the License for the specific language governing permissions and
+limitations under the License.
+*/
+
+package settings
+
+import (
+	"fmt"
+	"net/http"
+	"strings"
+
+	. "github.com/onsi/ginkgo"
+	. "github.com/onsi/gomega"
+	"github.com/parnurzeal/gorequest"
+
+	"k8s.io/ingress-nginx/test/e2e/framework"
+)
+
+var _ = framework.IngressNginxDescribe("Proxy host variable", func() {
+	test := "proxy-host"
+	f := framework.NewDefaultFramework(test)
+
+	BeforeEach(func() {
+		f.NewEchoDeploymentWithReplicas(1)
+	})
+
+	It("should exist a proxy_host", func() {
+		upstreamName := fmt.Sprintf("%v-http-svc-80", f.IngressController.Namespace)
+		annotations := map[string]string{
+			"nginx.ingress.kubernetes.io/configuration-snippet": `more_set_headers "Custom-Header: $proxy_host"`,
+		}
+		f.EnsureIngress(framework.NewSingleIngress(test, "/", test, f.IngressController.Namespace, "http-svc", 80, &annotations))
+
+		f.WaitForNginxConfiguration(
+			func(server string) bool {
+				return strings.Contains(server, fmt.Sprintf("server_name %v", test)) &&
+					strings.Contains(server, "set $proxy_host $proxy_upstream_name")
+			})
+
+		resp, _, errs := gorequest.New().
+			Get(f.IngressController.HTTPURL).
+			Set("Host", test).
+			End()
+
+		Expect(len(errs)).Should(Equal(0))
+		Expect(resp.StatusCode).Should(Equal(http.StatusOK))
+		Expect(resp.Header.Get("Custom-Header")).Should(Equal(upstreamName))
+	})
+
+	It("should exist a proxy_host using the upstream-vhost annotation value", func() {
+		upstreamName := fmt.Sprintf("%v-http-svc-80", f.IngressController.Namespace)
+		upstreamVHost := "different.host"
+		annotations := map[string]string{
+			"nginx.ingress.kubernetes.io/upstream-vhost":        upstreamVHost,
+			"nginx.ingress.kubernetes.io/configuration-snippet": `more_set_headers "Custom-Header: $proxy_host"`,
+		}
+		f.EnsureIngress(framework.NewSingleIngress(test, "/", test, f.IngressController.Namespace, "http-svc", 80, &annotations))
+
+		f.WaitForNginxConfiguration(
+			func(server string) bool {
+				return strings.Contains(server, fmt.Sprintf("server_name %v", test)) &&
+					strings.Contains(server, fmt.Sprintf("set $proxy_host $proxy_upstream_name"))
+			})
+
+		resp, _, errs := gorequest.New().
+			Get(f.IngressController.HTTPURL).
+			Set("Host", test).
+			End()
+
+		Expect(len(errs)).Should(Equal(0))
+		Expect(resp.StatusCode).Should(Equal(http.StatusOK))
+		Expect(resp.Header.Get("Custom-Header")).Should(Equal(upstreamName))
+	})
+})