diff --git a/.changeset/mean-adults-argue.md b/.changeset/mean-adults-argue.md
new file mode 100644
index 0000000000..22eacab054
--- /dev/null
+++ b/.changeset/mean-adults-argue.md
@@ -0,0 +1,5 @@
+---
+'@backstage/plugin-proxy-backend': patch
+---
+
+The proxy-backend now automatically reloads configuration when app-config.yaml is updated.
diff --git a/plugins/proxy-backend/package.json b/plugins/proxy-backend/package.json
index e21173910e..c937ae1040 100644
--- a/plugins/proxy-backend/package.json
+++ b/plugins/proxy-backend/package.json
@@ -51,6 +51,7 @@
     "@types/supertest": "^2.0.8",
     "@types/uuid": "^8.0.0",
     "@types/yup": "^0.29.13",
+    "msw": "^0.42.0",
     "supertest": "^6.1.3"
   },
   "files": [
diff --git a/plugins/proxy-backend/src/service/router.config.test.ts b/plugins/proxy-backend/src/service/router.config.test.ts
new file mode 100644
index 0000000000..5f90f847e4
--- /dev/null
+++ b/plugins/proxy-backend/src/service/router.config.test.ts
@@ -0,0 +1,115 @@
+/*
+ * Copyright 2022 The Backstage 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.
+ */
+
+import { getVoidLogger, SingleHostDiscovery } from '@backstage/backend-common';
+import { ConfigReader } from '@backstage/config';
+import express from 'express';
+import { rest } from 'msw';
+import { setupServer } from 'msw/node';
+import request from 'supertest';
+import { createRouter } from './router';
+
+// this test is stored in its own file to work around the mocked
+// http-proxy-middleware module used in the rest of the tests
+
+describe('createRouter reloadable configuration', () => {
+  const server = setupServer(
+    rest.get('https://non-existing-example.com/', (req, res, ctx) =>
+      res(
+        ctx.status(200),
+        ctx.json({
+          url: req.url.toString(),
+          headers: req.headers.all(),
+        }),
+      ),
+    ),
+  );
+
+  beforeAll(() =>
+    server.listen({
+      onUnhandledRequest: ({ headers }, print) => {
+        if (headers.get('User-Agent') === 'supertest') {
+          return;
+        }
+        print.error();
+      },
+    }),
+  );
+
+  afterAll(() => server.close());
+  afterEach(() => server.resetHandlers());
+
+  it('should be able to observe the config', async () => {
+    const logger = getVoidLogger();
+
+    // Grab the subscriber function and use mutable config data to mock a config file change
+    let subscriber: () => void;
+    const mutableConfigData: any = {
+      backend: {
+        baseUrl: 'http://localhost:7007',
+        listen: {
+          port: 7007,
+        },
+      },
+      proxy: {
+        '/test': {
+          target: 'https://non-existing-example.com',
+          pathRewrite: {
+            '.*': '/',
+          },
+        },
+      },
+    };
+
+    const mockConfig = Object.assign(new ConfigReader(mutableConfigData), {
+      subscribe: (s: () => void) => {
+        subscriber = s;
+        return { unsubscribe: () => {} };
+      },
+    });
+
+    const discovery = SingleHostDiscovery.fromConfig(mockConfig);
+    const router = await createRouter({
+      config: mockConfig,
+      logger,
+      discovery,
+    });
+    expect(router).toBeDefined();
+
+    const app = express();
+    app.use(router);
+
+    const agent = request.agent(app);
+    // this is set to let msw pass test requests through the mock server
+    agent.set('User-Agent', 'supertest');
+
+    const response1 = await agent.get('/test');
+
+    expect(response1.status).toEqual(200);
+
+    mutableConfigData.proxy['/test2'] = {
+      target: 'https://non-existing-example.com',
+      pathRewrite: {
+        '.*': '/',
+      },
+    };
+    subscriber!();
+
+    const response2 = await agent.get('/test2');
+
+    expect(response2.status).toEqual(200);
+  });
+});
diff --git a/plugins/proxy-backend/src/service/router.ts b/plugins/proxy-backend/src/service/router.ts
index ca2c7870d8..e0910da145 100644
--- a/plugins/proxy-backend/src/service/router.ts
+++ b/plugins/proxy-backend/src/service/router.ts
@@ -181,13 +181,45 @@ export async function createRouter(
   options: RouterOptions,
 ): Promise<express.Router> {
   const router = Router();
+  let currentRouter = Router();
 
   const externalUrl = await options.discovery.getExternalBaseUrl('proxy');
   const { pathname: pathPrefix } = new URL(externalUrl);
 
   const proxyConfig = options.config.getOptional('proxy') ?? {};
+  configureMiddlewares(options, currentRouter, pathPrefix, proxyConfig);
+  router.use((...args) => currentRouter(...args));
 
-  Object.entries(proxyConfig).forEach(([route, proxyRouteConfig]) => {
+  if (options.config.subscribe) {
+    let currentKey = JSON.stringify(proxyConfig);
+
+    options.config.subscribe(() => {
+      const newProxyConfig = options.config.getOptional('proxy') ?? {};
+      const newKey = JSON.stringify(newProxyConfig);
+
+      if (currentKey !== newKey) {
+        currentKey = newKey;
+        currentRouter = Router();
+        configureMiddlewares(
+          options,
+          currentRouter,
+          pathPrefix,
+          newProxyConfig,
+        );
+      }
+    });
+  }
+
+  return router;
+}
+
+function configureMiddlewares(
+  options: RouterOptions,
+  router: express.Router,
+  pathPrefix: string,
+  proxyConfig: any,
+) {
+  Object.entries<any>(proxyConfig).forEach(([route, proxyRouteConfig]) => {
     try {
       router.use(
         route,
@@ -201,6 +233,4 @@ export async function createRouter(
       }
     }
   });
-
-  return router;
 }