diff --git a/packages/safe-chain/src/registryProxy/tunnelRequestHandler.js b/packages/safe-chain/src/registryProxy/tunnelRequestHandler.js
index 4b756d7..83a9d20 100644
--- a/packages/safe-chain/src/registryProxy/tunnelRequestHandler.js
+++ b/packages/safe-chain/src/registryProxy/tunnelRequestHandler.js
@@ -10,8 +10,9 @@ import { ui } from "../environment/userInteraction.js";
  */
 export function tunnelRequest(req, clientSocket, head) {
   const httpsProxy = process.env.HTTPS_PROXY || process.env.https_proxy;
+  const noProxy = process.env.NO_PROXY || process.env.no_proxy;
 
-  if (httpsProxy) {
+  if (httpsProxy && !shouldBypassProxy(req.url, noProxy)) {
     // If an HTTPS proxy is set, tunnel the request via the proxy
     // This is the system proxy, not the safe-chain proxy
     // The package manager will run via the safe-chain proxy
@@ -85,14 +86,23 @@ function tunnelRequestViaProxy(req, clientSocket, head, proxyUrl) {
 
   proxySocket.on("connect", () => {
     // Send CONNECT request to proxy
-    const connectRequest = [
+    const headers = [
       `CONNECT ${hostname}:${port || 443} HTTP/1.1`,
       `Host: ${hostname}:${port || 443}`,
-      "",
-      "",
-    ].join("\r\n");
+    ];
 
-    proxySocket.write(connectRequest);
+    if (proxy.username || proxy.password) {
+      const auth = Buffer.from(
+        `${decodeURIComponent(proxy.username)}:${decodeURIComponent(
+          proxy.password
+        )}`
+      ).toString("base64");
+      headers.push(`Proxy-Authorization: Basic ${auth}`);
+    }
+
+    headers.push("", "");
+
+    proxySocket.write(headers.join("\r\n"));
   });
 
   let isConnected = false;
@@ -145,3 +155,36 @@ function tunnelRequestViaProxy(req, clientSocket, head, proxyUrl) {
     }
   });
 }
+
+/**
+ * @param {string | undefined} url
+ * @param {string | undefined} noProxy
+ * @returns {boolean}
+ */
+function shouldBypassProxy(url, noProxy) {
+  if (!url || !noProxy) {
+    return false;
+  }
+
+  if (noProxy === "*") {
+    return true;
+  }
+
+  try {
+    const { hostname } = new URL(`http://${url}`);
+    const noProxyList = noProxy.split(",").map((s) => s.trim().toLowerCase());
+
+    return noProxyList.some((noProxyItem) => {
+      if (!noProxyItem) return false;
+      if (noProxyItem === hostname) return true;
+      // Handle domain matching (e.g. .example.com matches sub.example.com)
+      if (noProxyItem.startsWith(".") && hostname.endsWith(noProxyItem))
+        return true;
+      // Handle implicit domain matching (e.g. example.com matches sub.example.com)
+      if (hostname.endsWith(`.${noProxyItem}`)) return true;
+      return false;
+    });
+  } catch {
+    return false;
+  }
+}
diff --git a/test/e2e/proxy-tunneling.e2e.spec.js b/test/e2e/proxy-tunneling.e2e.spec.js
new file mode 100644
index 0000000..c1c1216
--- /dev/null
+++ b/test/e2e/proxy-tunneling.e2e.spec.js
@@ -0,0 +1,85 @@
+import { describe, it, before, beforeEach, afterEach } from "node:test";
+import { DockerTestContainer } from "./DockerTestContainer.js";
+import assert from "node:assert";
+
+describe("E2E: Safe chain proxy tunneling", () => {
+  let container;
+
+  before(async () => {
+    DockerTestContainer.buildImage();
+  });
+
+  beforeEach(async () => {
+    container = new DockerTestContainer();
+    await container.start();
+
+    const installationShell = await container.openShell("zsh");
+    await installationShell.runCommand("safe-chain setup");
+  });
+
+  afterEach(async () => {
+    if (container) {
+      await container.stop();
+      container = null;
+    }
+  });
+
+  it("should tunnel non-registry traffic via upstream proxy with authentication", async () => {
+    // 1. Configure TinyProxy with Basic Auth
+    const proxySetup = await container.openShell("zsh");
+    await proxySetup.runCommand(
+      `echo 'BasicAuth user password' >> /etc/tinyproxy/tinyproxy.conf`
+    );
+    await proxySetup.runCommand("service tinyproxy restart || tinyproxy");
+
+    // 2. Setup a test script that makes a non-registry request (using curl)
+    const setupShell = await container.openShell("zsh");
+    // We use www.example.com as a stable target
+    await setupShell.runCommand('npm pkg set scripts.test-curl="curl -v -I https://www.example.com"');
+
+    // 3. Run the test script with HTTPS_PROXY set to the authenticated upstream proxy
+    const testShell = await container.openShell("zsh");
+    // Set the upstream proxy with credentials
+    await testShell.runCommand('export HTTPS_PROXY="http://user:password@localhost:8888"');
+    
+    // Run the script via npm (which is wrapped by safe-chain)
+    // safe-chain should inject its own proxy, which then tunnels to the upstream proxy
+    const { output, command } = await testShell.runCommand("npm run test-curl");
+
+    // 4. Verify the result
+    // If safe-chain fails to authenticate with upstream, we expect a failure
+    // curl -I returns HTTP 200 OK if successful
+    
+    const success = output.includes("HTTP/2 200") || output.includes("HTTP/1.1 200");
+    
+    if (!success) {
+        console.log("Test failed. Output:", output);
+    }
+
+    assert.ok(success, "curl should successfully connect to example.com via the authenticated proxy");
+  });
+
+  it("should respect NO_PROXY and bypass upstream proxy", async () => {
+    // 1. Setup a test script
+    const setupShell = await container.openShell("zsh");
+    await setupShell.runCommand('npm pkg set scripts.test-curl="curl -v -I https://www.example.com"');
+
+    // 2. Set a BROKEN upstream proxy, but exclude example.com via NO_PROXY
+    const testShell = await container.openShell("zsh");
+    await testShell.runCommand('export HTTPS_PROXY="http://non-existent-proxy:1234"');
+    await testShell.runCommand('export NO_PROXY="www.example.com"');
+
+    // 3. Run the script
+    // If safe-chain ignores NO_PROXY, it will try to use the broken proxy and fail
+    // If it respects NO_PROXY, it will connect directly (which works in the container)
+    const { output } = await testShell.runCommand("npm run test-curl");
+
+    const success = output.includes("HTTP/2 200") || output.includes("HTTP/1.1 200");
+    
+    if (!success) {
+        console.log("NO_PROXY Test failed. Output:", output);
+    }
+
+    assert.ok(success, "curl should bypass the broken proxy for NO_PROXY domains");
+  });
+});