I've set up nginx as a load balancer (proxy).  When one of the
upstream hosts goes down such that connections to the host fail
immediately, it is taking nginx the full proxy_connect_timeout to fail
each request that is sent to that proxy.  Is there a way to configure
nginx such that when a connection to an upstream server fails, it gets
treated as a failure without waiting for the full
proxy_connect_timeout before treating it as a failed connection?

Here's my config file:

user nginx;
worker_processes  2;
worker_rlimit_nofile 10000;

error_log  /var/log/nginx/error.log;
pid        /var/run/nginx.pid;

events {
    worker_connections  4000;
    use epoll;
}

http {
    include       mime.types;
    keepalive_timeout  65;
    gzip  on;

  upstream backend {
        ip_hash;
        server 10.0.0.30:81  max_fails=2  fail_timeout=120s;
        server 10.0.0.40:81   max_fails=2  fail_timeout=120s;
  }

server {
listen 80 default;
proxy_buffers 64 4k;

proxy_set_header Host $host;
proxy_set_header X-Real_IP $remote_addr;
proxy_set_header X-Forwarded-For $proxy_add_x_forwarded_for;
proxy_set_header X-SSL-Request "";

location / {
proxy_connect_timeout 2;
proxy_read_timeout 10;

proxy_pass http://backend;
}
}

}