diff --git a/agent/agent.go b/agent/agent.go
index 3c0609a98a..765c1ab918 100644
--- a/agent/agent.go
+++ b/agent/agent.go
@@ -4113,6 +4113,8 @@ func (a *Agent) registerCache() {
 
 	a.cache.RegisterType(cachetype.TrustBundleListName, &cachetype.TrustBundles{Client: a.rpcClientPeering})
 
+	a.cache.RegisterType(cachetype.PeeredUpstreamsName, &cachetype.PeeredUpstreams{RPC: a})
+
 	a.registerEntCache()
 }
 
diff --git a/agent/proxycfg/connect_proxy.go b/agent/proxycfg/connect_proxy.go
index ab86560bd5..3221150dba 100644
--- a/agent/proxycfg/connect_proxy.go
+++ b/agent/proxycfg/connect_proxy.go
@@ -6,6 +6,7 @@ import (
 	"strings"
 
 	cachetype "github.com/hashicorp/consul/agent/cache-types"
+	"github.com/hashicorp/consul/agent/proxycfg/internal/watch"
 	"github.com/hashicorp/consul/agent/structs"
 	"github.com/hashicorp/consul/proto/pbpeering"
 )
@@ -22,8 +23,7 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 	snap.ConnectProxy.WatchedDiscoveryChains = make(map[UpstreamID]context.CancelFunc)
 	snap.ConnectProxy.WatchedUpstreams = make(map[UpstreamID]map[string]context.CancelFunc)
 	snap.ConnectProxy.WatchedUpstreamEndpoints = make(map[UpstreamID]map[string]structs.CheckServiceNodes)
-	snap.ConnectProxy.WatchedUpstreamPeerTrustBundles = make(map[string]context.CancelFunc)
-	snap.ConnectProxy.UpstreamPeerTrustBundles = make(map[string]*pbpeering.PeeringTrustBundle)
+	snap.ConnectProxy.UpstreamPeerTrustBundles = watch.NewMap[string, *pbpeering.PeeringTrustBundle]()
 	snap.ConnectProxy.WatchedGateways = make(map[UpstreamID]map[string]context.CancelFunc)
 	snap.ConnectProxy.WatchedGatewayEndpoints = make(map[UpstreamID]map[string]structs.CheckServiceNodes)
 	snap.ConnectProxy.WatchedServiceChecks = make(map[structs.ServiceID][]structs.CheckType)
@@ -31,7 +31,7 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 	snap.ConnectProxy.UpstreamConfig = make(map[UpstreamID]*structs.Upstream)
 	snap.ConnectProxy.PassthroughUpstreams = make(map[UpstreamID]map[string]map[string]struct{})
 	snap.ConnectProxy.PassthroughIndices = make(map[string]indexedTarget)
-	snap.ConnectProxy.PeerUpstreamEndpoints = make(map[UpstreamID]structs.CheckServiceNodes)
+	snap.ConnectProxy.PeerUpstreamEndpoints = watch.NewMap[UpstreamID, structs.CheckServiceNodes]()
 	snap.ConnectProxy.PeerUpstreamEndpointsUseHostnames = make(map[UpstreamID]struct{})
 
 	// Watch for root changes
@@ -108,6 +108,14 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 		if err != nil {
 			return snap, err
 		}
+		err = s.dataSources.PeeredUpstreams.Notify(ctx, &structs.PartitionSpecificRequest{
+			QueryOptions:   structs.QueryOptions{Token: s.token},
+			Datacenter:     s.source.Datacenter,
+			EnterpriseMeta: s.proxyID.EnterpriseMeta,
+		}, peeredUpstreamsID, s.ch)
+		if err != nil {
+			return snap, err
+		}
 	}
 
 	// Watch for updates to service endpoints for all upstreams
@@ -134,7 +142,8 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 			dc = u.Datacenter
 		}
 		if s.proxyCfg.Mode == structs.ProxyModeTransparent && (dc == "" || dc == s.source.Datacenter) {
-			// In transparent proxy mode, watches for upstreams in the local DC are handled by the IntentionUpstreams watch.
+			// In transparent proxy mode, watches for upstreams in the local DC
+			// are handled by the IntentionUpstreams and PeeredUpstreams watch.
 			continue
 		}
 
@@ -183,8 +192,7 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 
 				s.logger.Trace("initializing watch of peered upstream", "upstream", uid)
 
-				// TODO(peering): We'll need to track a CancelFunc for this
-				// once the tproxy support lands.
+				snap.ConnectProxy.PeerUpstreamEndpoints.InitWatch(uid, nil)
 				err := s.dataSources.Health.Notify(ctx, &structs.ServiceSpecificRequest{
 					PeerName:   uid.Peer,
 					Datacenter: dc,
@@ -204,7 +212,7 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 				}
 
 				// Check whether a watch for this peer exists to avoid duplicates.
-				if _, ok := snap.ConnectProxy.WatchedUpstreamPeerTrustBundles[uid.Peer]; !ok {
+				if _, ok := snap.ConnectProxy.UpstreamPeerTrustBundles.Get(uid.Peer); !ok {
 					peerCtx, cancel := context.WithCancel(ctx)
 					if err := s.dataSources.TrustBundle.Notify(peerCtx, &pbpeering.TrustBundleReadRequest{
 						Name:      uid.Peer,
@@ -214,7 +222,7 @@ func (s *handlerConnectProxy) initialize(ctx context.Context) (ConfigSnapshot, e
 						return snap, fmt.Errorf("error while watching trust bundle for peer %q: %w", uid.Peer, err)
 					}
 
-					snap.ConnectProxy.WatchedUpstreamPeerTrustBundles[uid.Peer] = cancel
+					snap.ConnectProxy.UpstreamPeerTrustBundles.InitWatch(uid.Peer, cancel)
 				}
 				continue
 			}
@@ -262,7 +270,7 @@ func (s *handlerConnectProxy) handleUpdate(ctx context.Context, u UpdateEvent, s
 		}
 		peer := strings.TrimPrefix(u.CorrelationID, peerTrustBundleIDPrefix)
 		if resp.Bundle != nil {
-			snap.ConnectProxy.UpstreamPeerTrustBundles[peer] = resp.Bundle
+			snap.ConnectProxy.UpstreamPeerTrustBundles.Set(peer, resp.Bundle)
 		}
 
 	case u.CorrelationID == peeringTrustBundlesWatchID:
@@ -283,6 +291,90 @@ func (s *handlerConnectProxy) handleUpdate(ctx context.Context, u UpdateEvent, s
 		snap.ConnectProxy.Intentions = resp
 		snap.ConnectProxy.IntentionsSet = true
 
+	case u.CorrelationID == peeredUpstreamsID:
+		resp, ok := u.Result.(*structs.IndexedPeeredServiceList)
+		if !ok {
+			return fmt.Errorf("invalid type for response %T", u.Result)
+		}
+
+		seenUpstreams := make(map[UpstreamID]struct{})
+		for _, psn := range resp.Services {
+			uid := NewUpstreamIDFromPeeredServiceName(psn)
+
+			if _, ok := seenUpstreams[uid]; ok {
+				continue
+			}
+			seenUpstreams[uid] = struct{}{}
+
+			s.logger.Trace("initializing watch of peered upstream", "upstream", uid)
+
+			hctx, hcancel := context.WithCancel(ctx)
+			err := s.dataSources.Health.Notify(hctx, &structs.ServiceSpecificRequest{
+				PeerName:   uid.Peer,
+				Datacenter: s.source.Datacenter,
+				QueryOptions: structs.QueryOptions{
+					Token: s.token,
+				},
+				ServiceName: psn.ServiceName.Name,
+				Connect:     true,
+				// Note that Identifier doesn't type-prefix for service any more as it's
+				// the default and makes metrics and other things much cleaner. It's
+				// simpler for us if we have the type to make things unambiguous.
+				Source:         *s.source,
+				EnterpriseMeta: uid.EnterpriseMeta,
+			}, upstreamPeerWatchIDPrefix+uid.String(), s.ch)
+			if err != nil {
+				hcancel()
+				return fmt.Errorf("failed to watch health for %s: %v", uid, err)
+			}
+			snap.ConnectProxy.PeerUpstreamEndpoints.InitWatch(uid, hcancel)
+
+			// Check whether a watch for this peer exists to avoid duplicates.
+			if _, ok := snap.ConnectProxy.UpstreamPeerTrustBundles.Get(uid.Peer); !ok {
+				peerCtx, cancel := context.WithCancel(ctx)
+				if err := s.dataSources.TrustBundle.Notify(peerCtx, &pbpeering.TrustBundleReadRequest{
+					Name:      uid.Peer,
+					Partition: uid.PartitionOrDefault(),
+				}, peerTrustBundleIDPrefix+uid.Peer, s.ch); err != nil {
+					cancel()
+					return fmt.Errorf("error while watching trust bundle for peer %q: %w", uid.Peer, err)
+				}
+
+				snap.ConnectProxy.UpstreamPeerTrustBundles.InitWatch(uid.Peer, cancel)
+			}
+		}
+		snap.ConnectProxy.PeeredUpstreams = seenUpstreams
+
+		//
+		// Clean up data
+		//
+
+		validPeerNames := make(map[string]struct{})
+
+		// Iterate through all known endpoints and remove references to upstream IDs that weren't in the update
+		snap.ConnectProxy.PeerUpstreamEndpoints.ForEachKey(func(uid UpstreamID) bool {
+			// Peered upstream is explicitly defined in upstream config
+			if _, ok := snap.ConnectProxy.UpstreamConfig[uid]; ok {
+				validPeerNames[uid.Peer] = struct{}{}
+				return true
+			}
+			// Peered upstream came from dynamic source of imported services
+			if _, ok := seenUpstreams[uid]; ok {
+				validPeerNames[uid.Peer] = struct{}{}
+				return true
+			}
+			snap.ConnectProxy.PeerUpstreamEndpoints.CancelWatch(uid)
+			return true
+		})
+
+		// Iterate through all known trust bundles and remove references to any unseen peer names
+		snap.ConnectProxy.UpstreamPeerTrustBundles.ForEachKey(func(peerName PeerName) bool {
+			if _, ok := validPeerNames[peerName]; !ok {
+				snap.ConnectProxy.UpstreamPeerTrustBundles.CancelWatch(peerName)
+			}
+			return true
+		})
+
 	case u.CorrelationID == intentionUpstreamsID:
 		resp, ok := u.Result.(*structs.IndexedServiceList)
 		if !ok {
diff --git a/agent/proxycfg/data_sources.go b/agent/proxycfg/data_sources.go
index 73c8b06375..310a4340ea 100644
--- a/agent/proxycfg/data_sources.go
+++ b/agent/proxycfg/data_sources.go
@@ -69,6 +69,8 @@ type DataSources struct {
 	// notification channel.
 	LeafCertificate LeafCertificate
 
+	// PeeredUpstreams provides imported-service upstream updates on a
+	// notification channel.
 	PeeredUpstreams PeeredUpstreams
 
 	// PreparedQuery provides updates about the results of a prepared query.
diff --git a/agent/proxycfg/manager_test.go b/agent/proxycfg/manager_test.go
index 12d8c79194..184b62148f 100644
--- a/agent/proxycfg/manager_test.go
+++ b/agent/proxycfg/manager_test.go
@@ -11,6 +11,7 @@ import (
 	cachetype "github.com/hashicorp/consul/agent/cache-types"
 	"github.com/hashicorp/consul/agent/connect"
 	"github.com/hashicorp/consul/agent/consul/discoverychain"
+	"github.com/hashicorp/consul/agent/proxycfg/internal/watch"
 	"github.com/hashicorp/consul/agent/structs"
 	"github.com/hashicorp/consul/api"
 	"github.com/hashicorp/consul/proto/pbpeering"
@@ -230,8 +231,8 @@ func TestManager_BasicLifecycle(t *testing.T) {
 						},
 						PassthroughUpstreams:              map[UpstreamID]map[string]map[string]struct{}{},
 						PassthroughIndices:                map[string]indexedTarget{},
-						UpstreamPeerTrustBundles:          map[string]*pbpeering.PeeringTrustBundle{},
-						PeerUpstreamEndpoints:             map[UpstreamID]structs.CheckServiceNodes{},
+						UpstreamPeerTrustBundles:          watch.NewMap[PeerName, *pbpeering.PeeringTrustBundle](),
+						PeerUpstreamEndpoints:             watch.NewMap[UpstreamID, structs.CheckServiceNodes](),
 						PeerUpstreamEndpointsUseHostnames: map[UpstreamID]struct{}{},
 					},
 					PreparedQueryEndpoints: map[UpstreamID]structs.CheckServiceNodes{},
@@ -291,8 +292,8 @@ func TestManager_BasicLifecycle(t *testing.T) {
 						},
 						PassthroughUpstreams:              map[UpstreamID]map[string]map[string]struct{}{},
 						PassthroughIndices:                map[string]indexedTarget{},
-						UpstreamPeerTrustBundles:          map[string]*pbpeering.PeeringTrustBundle{},
-						PeerUpstreamEndpoints:             map[UpstreamID]structs.CheckServiceNodes{},
+						UpstreamPeerTrustBundles:          watch.NewMap[PeerName, *pbpeering.PeeringTrustBundle](),
+						PeerUpstreamEndpoints:             watch.NewMap[UpstreamID, structs.CheckServiceNodes](),
 						PeerUpstreamEndpointsUseHostnames: map[UpstreamID]struct{}{},
 					},
 					PreparedQueryEndpoints: map[UpstreamID]structs.CheckServiceNodes{},
diff --git a/agent/proxycfg/naming.go b/agent/proxycfg/naming.go
index 7b80d49a9d..3bb0854b04 100644
--- a/agent/proxycfg/naming.go
+++ b/agent/proxycfg/naming.go
@@ -7,6 +7,8 @@ import (
 	"github.com/hashicorp/consul/agent/structs"
 )
 
+type PeerName = string
+
 type UpstreamID struct {
 	Type       string
 	Name       string
@@ -32,7 +34,16 @@ func NewUpstreamID(u *structs.Upstream) UpstreamID {
 	return id
 }
 
-// TODO(peering): confirm we don't need peername here
+func NewUpstreamIDFromPeeredServiceName(psn structs.PeeredServiceName) UpstreamID {
+	id := UpstreamID{
+		Name:           psn.ServiceName.Name,
+		EnterpriseMeta: psn.ServiceName.EnterpriseMeta,
+		Peer:           psn.Peer,
+	}
+	id.normalize()
+	return id
+}
+
 func NewUpstreamIDFromServiceName(sn structs.ServiceName) UpstreamID {
 	id := UpstreamID{
 		Name:           sn.Name,
diff --git a/agent/proxycfg/snapshot.go b/agent/proxycfg/snapshot.go
index c52a99a811..3835c2a01b 100644
--- a/agent/proxycfg/snapshot.go
+++ b/agent/proxycfg/snapshot.go
@@ -9,6 +9,7 @@ import (
 	"github.com/mitchellh/copystructure"
 
 	"github.com/hashicorp/consul/acl"
+	"github.com/hashicorp/consul/agent/proxycfg/internal/watch"
 	"github.com/hashicorp/consul/agent/structs"
 	"github.com/hashicorp/consul/lib"
 	"github.com/hashicorp/consul/proto/pbpeering"
@@ -44,13 +45,9 @@ type ConfigSnapshotUpstreams struct {
 	// endpoints of an upstream.
 	WatchedUpstreamEndpoints map[UpstreamID]map[string]structs.CheckServiceNodes
 
-	// WatchedUpstreamPeerTrustBundles is a map of (PeerName -> CancelFunc) in order to cancel
-	// watches for peer trust bundles any time the list of upstream peers changes.
-	WatchedUpstreamPeerTrustBundles map[string]context.CancelFunc
-
 	// UpstreamPeerTrustBundles is a map of (PeerName -> PeeringTrustBundle).
 	// It is used to store trust bundles for upstream TLS transport sockets.
-	UpstreamPeerTrustBundles map[string]*pbpeering.PeeringTrustBundle
+	UpstreamPeerTrustBundles watch.Map[PeerName, *pbpeering.PeeringTrustBundle]
 
 	// WatchedGateways is a map of UpstreamID -> (map of GatewayKey.String() ->
 	// CancelFunc) in order to cancel watches for mesh gateways
@@ -80,10 +77,16 @@ type ConfigSnapshotUpstreams struct {
 	// This list only applies to proxies registered in 'transparent' mode.
 	IntentionUpstreams map[UpstreamID]struct{}
 
+	// PeeredUpstreams is a set of all upstream targets in a local partition.
+	//
+	// This list only applies to proxies registered in 'transparent' mode.
+	PeeredUpstreams map[UpstreamID]struct{}
+
 	// PeerUpstreamEndpoints is a map of UpstreamID -> (set of IP addresses)
 	// and used to determine the backing endpoints of an upstream in another
 	// peer.
-	PeerUpstreamEndpoints             map[UpstreamID]structs.CheckServiceNodes
+	PeerUpstreamEndpoints watch.Map[UpstreamID, structs.CheckServiceNodes]
+
 	PeerUpstreamEndpointsUseHostnames map[UpstreamID]struct{}
 }
 
@@ -152,8 +155,7 @@ func (c *configSnapshotConnectProxy) isEmpty() bool {
 		len(c.WatchedDiscoveryChains) == 0 &&
 		len(c.WatchedUpstreams) == 0 &&
 		len(c.WatchedUpstreamEndpoints) == 0 &&
-		len(c.WatchedUpstreamPeerTrustBundles) == 0 &&
-		len(c.UpstreamPeerTrustBundles) == 0 &&
+		c.UpstreamPeerTrustBundles.Len() == 0 &&
 		len(c.WatchedGateways) == 0 &&
 		len(c.WatchedGatewayEndpoints) == 0 &&
 		len(c.WatchedServiceChecks) == 0 &&
@@ -161,9 +163,10 @@ func (c *configSnapshotConnectProxy) isEmpty() bool {
 		len(c.UpstreamConfig) == 0 &&
 		len(c.PassthroughUpstreams) == 0 &&
 		len(c.IntentionUpstreams) == 0 &&
+		len(c.PeeredUpstreams) == 0 &&
 		!c.InboundPeerTrustBundlesSet &&
 		!c.MeshConfigSet &&
-		len(c.PeerUpstreamEndpoints) == 0 &&
+		c.PeerUpstreamEndpoints.Len() == 0 &&
 		len(c.PeerUpstreamEndpointsUseHostnames) == 0
 }
 
@@ -715,7 +718,6 @@ func (s *ConfigSnapshot) Clone() (*ConfigSnapshot, error) {
 		snap.ConnectProxy.WatchedUpstreams = nil
 		snap.ConnectProxy.WatchedGateways = nil
 		snap.ConnectProxy.WatchedDiscoveryChains = nil
-		snap.ConnectProxy.WatchedUpstreamPeerTrustBundles = nil
 	case structs.ServiceKindTerminatingGateway:
 		snap.TerminatingGateway.WatchedServices = nil
 		snap.TerminatingGateway.WatchedIntentions = nil
@@ -730,7 +732,6 @@ func (s *ConfigSnapshot) Clone() (*ConfigSnapshot, error) {
 		snap.IngressGateway.WatchedUpstreams = nil
 		snap.IngressGateway.WatchedGateways = nil
 		snap.IngressGateway.WatchedDiscoveryChains = nil
-		snap.IngressGateway.WatchedUpstreamPeerTrustBundles = nil
 		// only ingress-gateway
 		snap.IngressGateway.LeafCertWatchCancel = nil
 	}
@@ -803,7 +804,7 @@ func (s *ConfigSnapshot) MeshConfigTLSOutgoing() *structs.MeshDirectionalTLSConf
 }
 
 func (u *ConfigSnapshotUpstreams) UpstreamPeerMeta(uid UpstreamID) structs.PeeringServiceMeta {
-	nodes := u.PeerUpstreamEndpoints[uid]
+	nodes, _ := u.PeerUpstreamEndpoints.Get(uid)
 	if len(nodes) == 0 {
 		return structs.PeeringServiceMeta{}
 	}
@@ -833,7 +834,7 @@ func (u *ConfigSnapshotUpstreams) PeeredUpstreamIDs() []UpstreamID {
 			continue
 		}
 
-		if _, ok := u.UpstreamPeerTrustBundles[uid.Peer]; uid.Peer != "" && !ok {
+		if _, ok := u.UpstreamPeerTrustBundles.Get(uid.Peer); !ok {
 			// The trust bundle for this upstream is not available yet, skip for now.
 			continue
 		}
diff --git a/agent/proxycfg/state.go b/agent/proxycfg/state.go
index 9fc5c88f66..f9388cf487 100644
--- a/agent/proxycfg/state.go
+++ b/agent/proxycfg/state.go
@@ -36,6 +36,7 @@ const (
 	serviceResolverIDPrefix            = "service-resolver:"
 	serviceIntentionsIDPrefix          = "service-intentions:"
 	intentionUpstreamsID               = "intention-upstreams"
+	peeredUpstreamsID                  = "peered-upstreams"
 	upstreamPeerWatchIDPrefix          = "upstream-peer:"
 	exportedServiceListWatchID         = "exported-service-list"
 	meshConfigEntryID                  = "mesh"
diff --git a/agent/proxycfg/state_test.go b/agent/proxycfg/state_test.go
index 3a54d0314f..36b641a691 100644
--- a/agent/proxycfg/state_test.go
+++ b/agent/proxycfg/state_test.go
@@ -131,6 +131,7 @@ func recordWatches(sc *stateConfig) *watchRecorder {
 		IntentionUpstreams:              typedWatchRecorder[*structs.ServiceSpecificRequest]{wr},
 		InternalServiceDump:             typedWatchRecorder[*structs.ServiceDumpRequest]{wr},
 		LeafCertificate:                 typedWatchRecorder[*cachetype.ConnectCALeafRequest]{wr},
+		PeeredUpstreams:                 typedWatchRecorder[*structs.PartitionSpecificRequest]{wr},
 		PreparedQuery:                   typedWatchRecorder[*structs.PreparedQueryExecuteRequest]{wr},
 		ResolvedServiceConfig:           typedWatchRecorder[*structs.ServiceConfigRequest]{wr},
 		ServiceList:                     typedWatchRecorder[*structs.DCSpecificRequest]{wr},
@@ -321,6 +322,15 @@ func genVerifyServiceSpecificPeeredRequest(expectedService, expectedFilter, expe
 	}
 }
 
+func genVerifyPartitionSpecificRequest(expectedPartition, expectedDatacenter string) verifyWatchRequest {
+	return func(t testing.TB, request any) {
+		reqReal, ok := request.(*structs.PartitionSpecificRequest)
+		require.True(t, ok)
+		require.Equal(t, expectedDatacenter, reqReal.Datacenter)
+		require.Equal(t, expectedPartition, reqReal.PartitionOrDefault())
+	}
+}
+
 func genVerifyGatewayServiceWatch(expectedService, expectedDatacenter string) verifyWatchRequest {
 	return genVerifyServiceSpecificRequest(expectedService, "", expectedDatacenter, false)
 }
@@ -404,9 +414,11 @@ func TestState_WatchesAndUpdates(t *testing.T) {
 		dbUID     = NewUpstreamIDFromServiceName(db)
 		pqUID     = UpstreamIDFromString("prepared_query:query")
 		extApiUID = NewUpstreamIDFromServiceName(apiA)
+		extDBUID  = NewUpstreamIDFromServiceName(db)
 	)
 	// TODO(peering): NewUpstreamIDFromServiceName should take a PeerName
 	extApiUID.Peer = "peer-a"
+	extDBUID.Peer = "peer-a"
 
 	const peerTrustDomain = "1c053652-8512-4373-90cf-5a7f6263a994.consul"
 
@@ -2509,6 +2521,253 @@ func TestState_WatchesAndUpdates(t *testing.T) {
 				},
 			},
 		},
+		"transparent-proxy-initial-with-peers": {
+			ns: structs.NodeService{
+				Kind:    structs.ServiceKindConnectProxy,
+				ID:      "api-proxy",
+				Service: "api-proxy",
+				Address: "10.0.1.1",
+				Proxy: structs.ConnectProxyConfig{
+					DestinationServiceName: "api",
+					Mode:                   structs.ProxyModeTransparent,
+					Upstreams: structs.Upstreams{
+						{
+							DestinationName: "api-a",
+							DestinationPeer: "peer-a",
+						},
+					},
+				},
+			},
+			sourceDC: "dc1",
+			stages: []verificationStage{
+				{
+					requiredWatches: map[string]verifyWatchRequest{
+						peeringTrustBundlesWatchID: genVerifyTrustBundleListWatch("api"),
+						peeredUpstreamsID:          genVerifyPartitionSpecificRequest(acl.DefaultEnterpriseMeta().PartitionOrDefault(), "dc1"),
+						meshConfigEntryID:          genVerifyMeshConfigWatch("dc1"),
+						rootsWatchID:               genVerifyDCSpecificWatch("dc1"),
+						leafWatchID:                genVerifyLeafWatch("api", "dc1"),
+					},
+					verifySnapshot: func(t testing.TB, snap *ConfigSnapshot) {
+						require.False(t, snap.Valid(), "proxy without roots/leaf/intentions is not valid")
+						require.True(t, snap.MeshGateway.isEmpty())
+						require.True(t, snap.IngressGateway.isEmpty())
+						require.True(t, snap.TerminatingGateway.isEmpty())
+
+						require.False(t, snap.ConnectProxy.isEmpty())
+
+						// This is explicitly defined from proxy config
+						expectUpstreams := map[UpstreamID]*structs.Upstream{
+							extApiUID: {
+								DestinationName:      "api-a",
+								DestinationNamespace: structs.IntentionDefaultNamespace,
+								DestinationPartition: structs.IntentionDefaultNamespace,
+								DestinationPeer:      "peer-a",
+							},
+						}
+						require.Equal(t, expectUpstreams, snap.ConnectProxy.UpstreamConfig)
+					},
+				},
+				{
+					// Initial events
+					events: []UpdateEvent{
+						rootWatchEvent(),
+						{
+							CorrelationID: leafWatchID,
+							Result:        issuedCert,
+							Err:           nil,
+						},
+						{
+							CorrelationID: intentionsWatchID,
+							Result:        TestIntentions(),
+							Err:           nil,
+						},
+						{
+							CorrelationID: peeringTrustBundlesWatchID,
+							Result:        peerTrustBundles,
+						},
+						{
+							CorrelationID: peeredUpstreamsID,
+							Result: &structs.IndexedPeeredServiceList{
+								Services: []structs.PeeredServiceName{
+									{
+										ServiceName: apiA,
+										Peer:        "peer-a",
+									},
+									{
+										// This service is dynamic (not from static config)
+										ServiceName: db,
+										Peer:        "peer-a",
+									},
+								},
+							},
+						},
+						{
+							CorrelationID: meshConfigEntryID,
+							Result: &structs.ConfigEntryResponse{
+								Entry: nil, // no explicit config
+							},
+							Err: nil,
+						},
+					},
+					verifySnapshot: func(t testing.TB, snap *ConfigSnapshot) {
+						require.True(t, snap.Valid(), "proxy with roots/leaf/intentions is valid")
+						require.Equal(t, indexedRoots, snap.Roots)
+						require.Equal(t, issuedCert, snap.Leaf())
+						require.True(t, snap.MeshGateway.isEmpty())
+						require.True(t, snap.IngressGateway.isEmpty())
+						require.True(t, snap.TerminatingGateway.isEmpty())
+						require.True(t, snap.ConnectProxy.MeshConfigSet)
+						require.Nil(t, snap.ConnectProxy.MeshConfig)
+
+						// Check PeeredUpstream is populated
+						expect := map[UpstreamID]struct{}{
+							extDBUID:  {},
+							extApiUID: {},
+						}
+						require.Equal(t, expect, snap.ConnectProxy.PeeredUpstreams)
+
+						require.True(t, snap.ConnectProxy.PeerUpstreamEndpoints.IsWatched(extApiUID))
+						_, ok := snap.ConnectProxy.PeerUpstreamEndpoints.Get(extApiUID)
+						require.False(t, ok, "expected initialized but empty PeerUpstreamEndpoint")
+
+						require.True(t, snap.ConnectProxy.PeerUpstreamEndpoints.IsWatched(extDBUID))
+						_, ok = snap.ConnectProxy.PeerUpstreamEndpoints.Get(extDBUID)
+						require.False(t, ok, "expected initialized but empty PeerUpstreamEndpoint")
+
+						require.True(t, snap.ConnectProxy.UpstreamPeerTrustBundles.IsWatched("peer-a"))
+						_, ok = snap.ConnectProxy.UpstreamPeerTrustBundles.Get("peer-a")
+						require.False(t, ok, "expected initialized but empty PeerTrustBundle")
+					},
+				},
+				{
+					// Peered upstream will have set up 3 more watches
+					requiredWatches: map[string]verifyWatchRequest{
+						upstreamPeerWatchIDPrefix + extApiUID.String(): genVerifyServiceSpecificPeeredRequest("api-a", "", "dc1", "peer-a", true),
+						upstreamPeerWatchIDPrefix + extDBUID.String():  genVerifyServiceSpecificPeeredRequest("db", "", "dc1", "peer-a", true),
+						peerTrustBundleIDPrefix + "peer-a":             genVerifyTrustBundleReadWatch("peer-a"),
+					},
+					events: []UpdateEvent{
+						{
+							CorrelationID: peerTrustBundleIDPrefix + "peer-a",
+							Result: &pbpeering.TrustBundleReadResponse{
+								Bundle: peerTrustBundles.Bundles[0],
+							},
+						},
+					},
+					verifySnapshot: func(t testing.TB, snap *ConfigSnapshot) {
+						require.True(t, snap.Valid(), "proxy with roots/leaf/intentions is valid")
+						require.Equal(t, indexedRoots, snap.Roots)
+						require.Equal(t, issuedCert, snap.Leaf())
+						require.True(t, snap.MeshGateway.isEmpty())
+						require.True(t, snap.IngressGateway.isEmpty())
+						require.True(t, snap.TerminatingGateway.isEmpty())
+						require.True(t, snap.ConnectProxy.MeshConfigSet)
+						require.Nil(t, snap.ConnectProxy.MeshConfig)
+
+						// Check PeeredUpstream is populated
+						expect := map[UpstreamID]struct{}{
+							extDBUID:  {},
+							extApiUID: {},
+						}
+						require.Equal(t, expect, snap.ConnectProxy.PeeredUpstreams)
+
+						// Expect two entries (DB and api-a)
+						require.Equal(t, 2, snap.ConnectProxy.PeerUpstreamEndpoints.Len())
+
+						// db does not have endpoints yet
+						ep, _ := snap.ConnectProxy.PeerUpstreamEndpoints.Get(extDBUID)
+						require.Nil(t, ep)
+
+						// Expect a trust bundle
+						ptb, ok := snap.ConnectProxy.UpstreamPeerTrustBundles.Get("peer-a")
+						require.True(t, ok)
+						prototest.AssertDeepEqual(t, peerTrustBundles.Bundles[0], ptb)
+
+						// Sanity check that local upstream maps are not populated
+						require.Empty(t, snap.ConnectProxy.WatchedUpstreamEndpoints[extDBUID])
+						require.Empty(t, snap.ConnectProxy.PassthroughUpstreams[extDBUID])
+						require.Empty(t, snap.ConnectProxy.PassthroughIndices)
+					},
+				},
+				{
+					// Add another instance of "api-a" service
+					events: []UpdateEvent{
+						{
+							CorrelationID: upstreamPeerWatchIDPrefix + extDBUID.String(),
+							Result: &structs.IndexedCheckServiceNodes{
+								Nodes: structs.CheckServiceNodes{
+									{
+										Node: &structs.Node{
+											Node:     "node1",
+											Address:  "127.0.0.1",
+											PeerName: "peer-a",
+										},
+										Service: &structs.NodeService{
+											ID:       "db",
+											Service:  "db",
+											PeerName: "peer-a",
+											Connect:  structs.ServiceConnect{},
+										},
+									},
+								},
+							},
+						},
+					},
+					verifySnapshot: func(t testing.TB, snap *ConfigSnapshot) {
+						require.True(t, snap.Valid(), "proxy with roots/leaf/intentions is valid")
+
+						// Check PeeredUpstream is populated
+						expect := map[UpstreamID]struct{}{
+							extApiUID: {},
+							extDBUID:  {},
+						}
+						require.Equal(t, expect, snap.ConnectProxy.PeeredUpstreams)
+
+						// Expect two entries (api-a, db)
+						require.Equal(t, 2, snap.ConnectProxy.PeerUpstreamEndpoints.Len())
+
+						// db has an endpoint now
+						ep, _ := snap.ConnectProxy.PeerUpstreamEndpoints.Get(extDBUID)
+						require.NotNil(t, ep)
+						require.Len(t, ep, 1)
+
+						// Expect a trust bundle
+						ptb, ok := snap.ConnectProxy.UpstreamPeerTrustBundles.Get("peer-a")
+						require.True(t, ok)
+						prototest.AssertDeepEqual(t, peerTrustBundles.Bundles[0], ptb)
+
+						// Sanity check that local upstream maps are not populated
+						require.Empty(t, snap.ConnectProxy.WatchedUpstreamEndpoints[extDBUID])
+						require.Empty(t, snap.ConnectProxy.PassthroughUpstreams[extDBUID])
+						require.Empty(t, snap.ConnectProxy.PassthroughIndices)
+					},
+				},
+				{
+					// Empty list of peered upstreams should clean up map keys
+					events: []UpdateEvent{
+						{
+							CorrelationID: peeredUpstreamsID,
+							Result: &structs.IndexedPeeredServiceList{
+								Services: []structs.PeeredServiceName{},
+							},
+						},
+					},
+					verifySnapshot: func(t testing.TB, snap *ConfigSnapshot) {
+						require.True(t, snap.Valid(), "proxy with roots/leaf/intentions is valid")
+
+						require.Empty(t, snap.ConnectProxy.PeeredUpstreams)
+
+						// db endpoint should have been cleaned up
+						require.False(t, snap.ConnectProxy.PeerUpstreamEndpoints.IsWatched(extDBUID))
+
+						// Expect only api-a endpoint
+						require.Equal(t, 1, snap.ConnectProxy.PeerUpstreamEndpoints.Len())
+						require.Equal(t, 1, snap.ConnectProxy.UpstreamPeerTrustBundles.Len())
+					},
+				},
+			},
+		},
 		"connect-proxy":                    newConnectProxyCase(structs.MeshGatewayModeDefault),
 		"connect-proxy-mesh-gateway-local": newConnectProxyCase(structs.MeshGatewayModeLocal),
 		"connect-proxy-with-peers": {
@@ -2564,10 +2823,15 @@ func TestState_WatchesAndUpdates(t *testing.T) {
 						require.Len(t, snap.ConnectProxy.WatchedGateways, 0, "%+v", snap.ConnectProxy.WatchedGateways)
 						require.Len(t, snap.ConnectProxy.WatchedGatewayEndpoints, 0, "%+v", snap.ConnectProxy.WatchedGatewayEndpoints)
 
-						require.Contains(t, snap.ConnectProxy.WatchedUpstreamPeerTrustBundles, "peer-a", "%+v", snap.ConnectProxy.WatchedUpstreamPeerTrustBundles)
-						require.Len(t, snap.ConnectProxy.UpstreamPeerTrustBundles, 0, "%+v", snap.ConnectProxy.UpstreamPeerTrustBundles)
+						// watch initialized
+						require.True(t, snap.ConnectProxy.UpstreamPeerTrustBundles.IsWatched("peer-a"))
+						_, ok := snap.ConnectProxy.UpstreamPeerTrustBundles.Get("peer-a")
+						require.False(t, ok) // but no data
 
-						require.Len(t, snap.ConnectProxy.PeerUpstreamEndpoints, 0, "%+v", snap.ConnectProxy.PeerUpstreamEndpoints)
+						// watch initialized
+						require.True(t, snap.ConnectProxy.PeerUpstreamEndpoints.IsWatched(extApiUID))
+						_, ok = snap.ConnectProxy.PeerUpstreamEndpoints.Get(extApiUID)
+						require.False(t, ok) // but no data
 
 						require.Len(t, snap.ConnectProxy.WatchedServiceChecks, 0, "%+v", snap.ConnectProxy.WatchedServiceChecks)
 						require.Len(t, snap.ConnectProxy.PreparedQueryEndpoints, 0, "%+v", snap.ConnectProxy.PreparedQueryEndpoints)
@@ -2655,11 +2919,13 @@ func TestState_WatchesAndUpdates(t *testing.T) {
 						require.Len(t, snap.ConnectProxy.WatchedGateways, 1, "%+v", snap.ConnectProxy.WatchedGateways)
 						require.Len(t, snap.ConnectProxy.WatchedGatewayEndpoints, 1, "%+v", snap.ConnectProxy.WatchedGatewayEndpoints)
 
-						require.Contains(t, snap.ConnectProxy.WatchedUpstreamPeerTrustBundles, "peer-a", "%+v", snap.ConnectProxy.WatchedUpstreamPeerTrustBundles)
-						require.Equal(t, peerTrustBundles.Bundles[0], snap.ConnectProxy.UpstreamPeerTrustBundles["peer-a"], "%+v", snap.ConnectProxy.WatchedUpstreamPeerTrustBundles)
+						tb, ok := snap.ConnectProxy.UpstreamPeerTrustBundles.Get("peer-a")
+						require.True(t, ok)
+						prototest.AssertDeepEqual(t, peerTrustBundles.Bundles[0], tb)
 
-						require.Len(t, snap.ConnectProxy.PeerUpstreamEndpoints, 1, "%+v", snap.ConnectProxy.PeerUpstreamEndpoints)
-						require.NotNil(t, snap.ConnectProxy.PeerUpstreamEndpoints[extApiUID])
+						require.Equal(t, 1, snap.ConnectProxy.PeerUpstreamEndpoints.Len())
+						ep, _ := snap.ConnectProxy.PeerUpstreamEndpoints.Get(extApiUID)
+						require.NotNil(t, ep)
 
 						require.Len(t, snap.ConnectProxy.WatchedServiceChecks, 0, "%+v", snap.ConnectProxy.WatchedServiceChecks)
 						require.Len(t, snap.ConnectProxy.PreparedQueryEndpoints, 0, "%+v", snap.ConnectProxy.PreparedQueryEndpoints)
diff --git a/agent/proxycfg/testing.go b/agent/proxycfg/testing.go
index c30435e374..744c17e182 100644
--- a/agent/proxycfg/testing.go
+++ b/agent/proxycfg/testing.go
@@ -745,6 +745,7 @@ func testConfigSnapshotFixture(
 			IntentionUpstreams:              &noopDataSource[*structs.ServiceSpecificRequest]{},
 			InternalServiceDump:             &noopDataSource[*structs.ServiceDumpRequest]{},
 			LeafCertificate:                 &noopDataSource[*cachetype.ConnectCALeafRequest]{},
+			PeeredUpstreams:                 &noopDataSource[*structs.PartitionSpecificRequest]{},
 			PreparedQuery:                   &noopDataSource[*structs.PreparedQueryExecuteRequest]{},
 			ResolvedServiceConfig:           &noopDataSource[*structs.ServiceConfigRequest]{},
 			ServiceList:                     &noopDataSource[*structs.DCSpecificRequest]{},
@@ -971,6 +972,7 @@ type TestDataSources struct {
 	IntentionUpstreams              *TestDataSource[*structs.ServiceSpecificRequest, *structs.IndexedServiceList]
 	InternalServiceDump             *TestDataSource[*structs.ServiceDumpRequest, *structs.IndexedNodesWithGateways]
 	LeafCertificate                 *TestDataSource[*cachetype.ConnectCALeafRequest, *structs.IssuedCert]
+	PeeredUpstreams                 *TestDataSource[*structs.PartitionSpecificRequest, *structs.IndexedPeeredServiceList]
 	PreparedQuery                   *TestDataSource[*structs.PreparedQueryExecuteRequest, *structs.PreparedQueryExecuteResponse]
 	ResolvedServiceConfig           *TestDataSource[*structs.ServiceConfigRequest, *structs.ServiceConfigResponse]
 	ServiceList                     *TestDataSource[*structs.DCSpecificRequest, *structs.IndexedServiceList]
@@ -994,6 +996,7 @@ func (t *TestDataSources) ToDataSources() DataSources {
 		IntentionUpstreams:     t.IntentionUpstreams,
 		InternalServiceDump:    t.InternalServiceDump,
 		LeafCertificate:        t.LeafCertificate,
+		PeeredUpstreams:        t.PeeredUpstreams,
 		PreparedQuery:          t.PreparedQuery,
 		ResolvedServiceConfig:  t.ResolvedServiceConfig,
 		ServiceList:            t.ServiceList,
diff --git a/agent/proxycfg/upstreams.go b/agent/proxycfg/upstreams.go
index 1f1251c42c..4f41d7908e 100644
--- a/agent/proxycfg/upstreams.go
+++ b/agent/proxycfg/upstreams.go
@@ -103,19 +103,15 @@ func (s *handlerUpstreams) handleUpdateUpstreams(ctx context.Context, u UpdateEv
 			resp.Nodes,
 		)
 		if len(filteredNodes) > 0 {
-			upstreamsSnapshot.PeerUpstreamEndpoints[uid] = filteredNodes
-			upstreamsSnapshot.PeerUpstreamEndpointsUseHostnames[uid] = struct{}{}
+			if set := upstreamsSnapshot.PeerUpstreamEndpoints.Set(uid, filteredNodes); set {
+				upstreamsSnapshot.PeerUpstreamEndpointsUseHostnames[uid] = struct{}{}
+			}
 		} else {
-			upstreamsSnapshot.PeerUpstreamEndpoints[uid] = resp.Nodes
-			delete(upstreamsSnapshot.PeerUpstreamEndpointsUseHostnames, uid)
+			if set := upstreamsSnapshot.PeerUpstreamEndpoints.Set(uid, resp.Nodes); set {
+				delete(upstreamsSnapshot.PeerUpstreamEndpointsUseHostnames, uid)
+			}
 		}
 
-		if s.kind != structs.ServiceKindConnectProxy || s.proxyCfg.Mode != structs.ProxyModeTransparent {
-			return nil
-		}
-
-		s.logger.Warn("skipping transparent proxy update for peered upstream")
-
 	case strings.HasPrefix(u.CorrelationID, "upstream-target:"):
 		resp, ok := u.Result.(*structs.IndexedCheckServiceNodes)
 		if !ok {
@@ -157,6 +153,10 @@ func (s *handlerUpstreams) handleUpdateUpstreams(ctx context.Context, u UpdateEv
 
 			// Make sure to use an external address when crossing partition or DC boundaries.
 			isRemote := !snap.Locality.Matches(node.Node.Datacenter, node.Node.PartitionOrDefault())
+			// If node is peered it must be remote
+			if node.Node.PeerOrEmpty() != "" {
+				isRemote = true
+			}
 			csnIdx, addr, _ := node.BestAddress(isRemote)
 
 			existing := upstreamsSnapshot.PassthroughIndices[addr]
diff --git a/agent/xds/clusters.go b/agent/xds/clusters.go
index b00fcfeeb6..0d5c147762 100644
--- a/agent/xds/clusters.go
+++ b/agent/xds/clusters.go
@@ -729,11 +729,12 @@ func (s *ResourceGenerator) makeUpstreamClusterForPeerService(
 				},
 			}
 		} else {
+			ep, _ := cfgSnap.ConnectProxy.PeerUpstreamEndpoints.Get(uid)
 			configureClusterWithHostnames(
 				s.Logger,
 				c,
 				"", /*TODO:make configurable?*/
-				cfgSnap.ConnectProxy.PeerUpstreamEndpoints[uid],
+				ep,
 				true,  /*isRemote*/
 				false, /*onlyPassing*/
 			)
@@ -743,7 +744,8 @@ func (s *ResourceGenerator) makeUpstreamClusterForPeerService(
 
 	rootPEMs := cfgSnap.RootPEMs()
 	if uid.Peer != "" {
-		rootPEMs = cfgSnap.ConnectProxy.UpstreamPeerTrustBundles[uid.Peer].ConcatenatedRootPEMs()
+		tbs, _ := cfgSnap.ConnectProxy.UpstreamPeerTrustBundles.Get(uid.Peer)
+		rootPEMs = tbs.ConcatenatedRootPEMs()
 	}
 
 	// Enable TLS upstream with the configured client certificate.
@@ -1077,13 +1079,9 @@ func (s *ResourceGenerator) makeUpstreamClustersForDiscoveryChain(
 		}
 
 		if configureTLS {
-			rootPEMs := cfgSnap.RootPEMs()
-			if uid.Peer != "" {
-				rootPEMs = cfgSnap.ConnectProxy.UpstreamPeerTrustBundles[uid.Peer].ConcatenatedRootPEMs()
-			}
 			commonTLSContext := makeCommonTLSContext(
 				cfgSnap.Leaf(),
-				rootPEMs,
+				cfgSnap.RootPEMs(),
 				makeTLSParametersFromProxyTLSConfig(cfgSnap.MeshConfigTLSOutgoing()),
 			)
 
diff --git a/agent/xds/endpoints.go b/agent/xds/endpoints.go
index 53e550132b..d305a85bdf 100644
--- a/agent/xds/endpoints.go
+++ b/agent/xds/endpoints.go
@@ -47,7 +47,7 @@ func (s *ResourceGenerator) endpointsFromSnapshotConnectProxy(cfgSnap *proxycfg.
 	// TODO: this estimate is wrong
 	resources := make([]proto.Message, 0,
 		len(cfgSnap.ConnectProxy.PreparedQueryEndpoints)+
-			len(cfgSnap.ConnectProxy.PeerUpstreamEndpoints)+
+			cfgSnap.ConnectProxy.PeerUpstreamEndpoints.Len()+
 			len(cfgSnap.ConnectProxy.WatchedUpstreamEndpoints))
 
 	// NOTE: Any time we skip a chain below we MUST also skip that discovery chain in clusters.go
@@ -110,7 +110,7 @@ func (s *ResourceGenerator) endpointsFromSnapshotConnectProxy(cfgSnap *proxycfg.
 			continue
 		}
 
-		endpoints, ok := cfgSnap.ConnectProxy.PeerUpstreamEndpoints[uid]
+		endpoints, ok := cfgSnap.ConnectProxy.PeerUpstreamEndpoints.Get(uid)
 		if ok {
 			la := makeLoadAssignment(
 				clusterName,