Nested location block for merging config returns 404?

[WheresWardy]

I don't think it's a regex issue, because if I add an additional proxy_pass
inside the nested location block, I then get a valid request. Additionally,
any headers set inside the outer location block don't appear, but then if I
duplicate them inside the nested location block, they then appear (just the
once).

This basically means I'd have to duplicate anything in the outer location
block in the nested one, which kind of defeats the purpose, and it's cleaner
to have the separate same-level config.

Posted at Nginx Forum: http://forum.nginx.org/read.php?2,246655,246657#msg-246657