diff --git a/src/test/clitools.rs b/src/test/clitools.rs
index 0cc5f69dc6..92053e4467 100644
--- a/src/test/clitools.rs
+++ b/src/test/clitools.rs
@@ -684,6 +684,7 @@ async fn setup_test_state(test_dist_dir: tempfile::TempDir) -> (tempfile::TempDi
     //   **in this process** when the tests are still running.
     unsafe {
         // Unset env variables that will break our testing
+        env::remove_var("CARGO");
         env::remove_var("RUSTUP_UPDATE_ROOT");
         env::remove_var("RUSTUP_TOOLCHAIN");
         env::remove_var("SHELL");
diff --git a/src/test/mock_bin_src.rs b/src/test/mock_bin_src.rs
index 5e27d1666e..ac90a1e1d2 100644
--- a/src/test/mock_bin_src.rs
+++ b/src/test/mock_bin_src.rs
@@ -94,6 +94,14 @@ fn main() {
             let mut out = io::stderr();
             writeln!(out, "{}", std::env::var("PATH").unwrap()).unwrap();
         }
+        Some("--echo-cargo-env") => {
+            let mut out = io::stderr();
+            if let Ok(cargo) = std::env::var("CARGO") {
+                writeln!(out, "{cargo}").unwrap();
+            } else {
+                panic!("CARGO environment variable not set");
+            }
+        }
         arg => panic!("bad mock proxy commandline: {:?}", arg),
     }
 }
diff --git a/src/toolchain.rs b/src/toolchain.rs
index 9e9006cdf0..b1b635221a 100644
--- a/src/toolchain.rs
+++ b/src/toolchain.rs
@@ -423,6 +423,19 @@ impl<'a> Toolchain<'a> {
         };
         let mut cmd = Command::new(path);
         self.set_env(&mut cmd);
+
+        // If we're running cargo and the `CARGO` environment variable is set
+        // to a rustup proxy then change `CARGO` to be the real cargo binary,
+        // but only if we know the absolute path to cargo.
+        // This works around an issue with old versions of cargo not updating
+        // the environment variable itself.
+        if Path::new(&binary).file_stem() == Some("cargo".as_ref()) && path.is_absolute() {
+            if let Some(cargo) = self.cfg.process.var_os("CARGO") {
+                if fs::read_link(&cargo).is_ok_and(|p| p.file_stem() == Some("rustup".as_ref())) {
+                    cmd.env("CARGO", path);
+                }
+            }
+        }
         Ok(cmd)
     }
 
diff --git a/tests/suite/cli_misc.rs b/tests/suite/cli_misc.rs
index b5b4199087..1ad12c742c 100644
--- a/tests/suite/cli_misc.rs
+++ b/tests/suite/cli_misc.rs
@@ -1233,3 +1233,47 @@ async fn toolchain_install_multi_components_comma() {
             .await;
     }
 }
+
+#[tokio::test]
+async fn rustup_updates_cargo_env_if_proxy() {
+    let mut cx = CliTestContext::new(Scenario::SimpleV2).await;
+    cx.config.expect_ok(&["rustup", "default", "stable"]).await;
+
+    use std::env::consts::EXE_SUFFIX;
+    let proxy_path = cx
+        .config
+        .workdir
+        .borrow()
+        .join("bin")
+        .join(format!("cargo{EXE_SUFFIX}"));
+    let real_path = cx.config.run("rustup", &["which", "cargo"], &[]).await;
+    assert!(real_path.ok);
+    let real_path = real_path.stdout;
+
+    fs::create_dir_all(proxy_path.parent().unwrap()).unwrap();
+    #[cfg(windows)]
+    if std::os::windows::fs::symlink_file("rustup", &proxy_path).is_err() {
+        // skip this test on Windows if symlinking isn't enabled.
+        return;
+    }
+    #[cfg(unix)]
+    std::os::unix::fs::symlink("rustup", &proxy_path).unwrap();
+
+    // If CARGO isn't set then we should not set it.
+    cx.config
+        .expect_err(
+            &["cargo", "--echo-cargo-env"],
+            "CARGO environment variable not set",
+        )
+        .await;
+
+    // If CARGO is set to a proxy then change it to the real CARGO path
+    cx.config
+        .expect_ok_ex_env(
+            &["cargo", "--echo-cargo-env"],
+            &[("CARGO", proxy_path.to_str().unwrap())],
+            "",
+            &real_path,
+        )
+        .await;
+}