diff --git a/packages/playwright-core/src/server/chromium/chromium.ts b/packages/playwright-core/src/server/chromium/chromium.ts
index 8dc285c4f2615..16b450430c714 100644
--- a/packages/playwright-core/src/server/chromium/chromium.ts
+++ b/packages/playwright-core/src/server/chromium/chromium.ts
@@ -277,6 +277,8 @@ export class Chromium extends BrowserType {
         proxyBypassRules.push('<-loopback>');
       if (proxy.bypass)
         proxyBypassRules.push(...proxy.bypass.split(',').map(t => t.trim()).map(t => t.startsWith('.') ? '*' + t : t));
+      if (!process.env.PLAYWRIGHT_DISABLE_FORCED_CHROMIUM_PROXIED_LOOPBACK && !proxyBypassRules.includes('<-loopback>'))
+        proxyBypassRules.push('<-loopback>');
       if (proxyBypassRules.length > 0)
         chromeArguments.push(`--proxy-bypass-list=${proxyBypassRules.join(';')}`);
     }
diff --git a/packages/playwright-core/src/server/chromium/crBrowser.ts b/packages/playwright-core/src/server/chromium/crBrowser.ts
index df4ce6bff0094..aca10d61021d7 100644
--- a/packages/playwright-core/src/server/chromium/crBrowser.ts
+++ b/packages/playwright-core/src/server/chromium/crBrowser.ts
@@ -90,10 +90,19 @@ export class CRBrowser extends Browser {
 
   async newContext(options: types.BrowserContextOptions): Promise<BrowserContext> {
     validateBrowserContextOptions(options, this.options);
+
+    let proxyBypassList = undefined;
+    if (options.proxy) {
+      if (process.env.PLAYWRIGHT_DISABLE_FORCED_CHROMIUM_PROXIED_LOOPBACK)
+        proxyBypassList = options.proxy.bypass;
+      else
+        proxyBypassList = '<-loopback>' + (options.proxy.bypass ? `,${options.proxy.bypass}` : '');
+    }
+
     const { browserContextId } = await this._session.send('Target.createBrowserContext', {
       disposeOnDetach: true,
       proxyServer: options.proxy ? options.proxy.server : undefined,
-      proxyBypassList: options.proxy ? options.proxy.bypass : undefined,
+      proxyBypassList,
     });
     const context = new CRBrowserContext(this, browserContextId, options);
     await context._initialize();
diff --git a/tests/browsercontext-proxy.spec.ts b/tests/browsercontext-proxy.spec.ts
index dc06d3eee40d4..7f1aa0c34dfd1 100644
--- a/tests/browsercontext-proxy.spec.ts
+++ b/tests/browsercontext-proxy.spec.ts
@@ -91,6 +91,42 @@ it('should use proxy', async ({ contextFactory, server, proxyServer }) => {
   await context.close();
 });
 
+it('should use proxy for localhost', async ({ contextFactory, server, proxyServer }) => {
+  proxyServer.forwardTo(server.PORT);
+  const context = await contextFactory({
+    proxy: { server: `localhost:${proxyServer.PORT}` }
+  });
+  const page = await context.newPage();
+  await page.goto(`http://localhost:${server.PORT}/target.html`);
+  expect(proxyServer.requestUrls).toContain(`http://localhost:${server.PORT}/target.html`);
+  expect(await page.title()).toBe('Served by the proxy');
+  await context.close();
+});
+
+it('should use proxy for loopback address', async ({ contextFactory, server, proxyServer }) => {
+  proxyServer.forwardTo(server.PORT);
+  const context = await contextFactory({
+    proxy: { server: `localhost:${proxyServer.PORT}` }
+  });
+  const page = await context.newPage();
+  await page.goto(`http://127.0.0.1:${server.PORT}/target.html`);
+  expect(proxyServer.requestUrls).toContain(`http://127.0.0.1:${server.PORT}/target.html`);
+  expect(await page.title()).toBe('Served by the proxy');
+  await context.close();
+});
+
+it('should use proxy for link-local address', async ({ contextFactory, server, proxyServer }) => {
+  proxyServer.forwardTo(server.PORT);
+  const context = await contextFactory({
+    proxy: { server: `localhost:${proxyServer.PORT}` }
+  });
+  const page = await context.newPage();
+  await page.goto(`http://169.254.3.4:4321/target.html`);
+  expect(proxyServer.requestUrls).toContain(`http://169.254.3.4:4321/target.html`);
+  expect(await page.title()).toBe('Served by the proxy');
+  await context.close();
+});
+
 it('should use ipv6 proxy', async ({ contextFactory, server, proxyServer, browserName }) => {
   it.fail(browserName === 'firefox', 'page.goto: NS_ERROR_UNKNOWN_HOST');
   it.fail(!!process.env.INSIDE_DOCKER, 'docker does not support IPv6 by default');
diff --git a/tests/proxy.spec.ts b/tests/proxy.spec.ts
index ccb8690005f7d..dc7185ed597ad 100644
--- a/tests/proxy.spec.ts
+++ b/tests/proxy.spec.ts
@@ -73,6 +73,51 @@ it('should work with IP:PORT notion', async ({ browserType, server }) => {
   await browser.close();
 });
 
+it('should use proxy for localhost', async ({ browserType, server, proxyServer }) => {
+  server.setRoute('/target.html', async (req, res) => {
+    res.end('<html><title>Served by the proxy</title></html>');
+  });
+  proxyServer.forwardTo(server.PORT);
+  const browser = await browserType.launch({
+    proxy: { server: `localhost:${proxyServer.PORT}` }
+  });
+  const page = await browser.newPage();
+  await page.goto(`http://localhost:${server.PORT}/target.html`);
+  expect(proxyServer.requestUrls).toContain(`http://localhost:${server.PORT}/target.html`);
+  expect(await page.title()).toBe('Served by the proxy');
+  await browser.close();
+});
+
+it('should use proxy for loopback address', async ({ browserType, server, proxyServer }) => {
+  server.setRoute('/target.html', async (req, res) => {
+    res.end('<html><title>Served by the proxy</title></html>');
+  });
+  proxyServer.forwardTo(server.PORT);
+  const browser = await browserType.launch({
+    proxy: { server: `localhost:${proxyServer.PORT}` }
+  });
+  const page = await browser.newPage();
+  await page.goto(`http://127.0.0.1:${server.PORT}/target.html`);
+  expect(proxyServer.requestUrls).toContain(`http://127.0.0.1:${server.PORT}/target.html`);
+  expect(await page.title()).toBe('Served by the proxy');
+  await browser.close();
+});
+
+it('should use proxy for link-local address', async ({ browserType, server, proxyServer }) => {
+  server.setRoute('/target.html', async (req, res) => {
+    res.end('<html><title>Served by the proxy</title></html>');
+  });
+  proxyServer.forwardTo(server.PORT);
+  const browser = await browserType.launch({
+    proxy: { server: `localhost:${proxyServer.PORT}` }
+  });
+  const page = await browser.newPage();
+  await page.goto(`http://169.254.3.4:4321/target.html`);
+  expect(proxyServer.requestUrls).toContain(`http://169.254.3.4:4321/target.html`);
+  expect(await page.title()).toBe('Served by the proxy');
+  await browser.close();
+});
+
 it('should authenticate', async ({ browserType, server }) => {
   server.setRoute('/target.html', async (req, res) => {
     const auth = req.headers['proxy-authorization'];