Kong 3.9.0 - Upstream virtual host (Load balancer) DNS resolution failed

[pseralat]

Kong version ($ kong version)
Kong 3.9.0

Current Behavior
I am encountering DNS resolution failure when I create upstream (load balancer) with routes and target after Kong is up. DNS is not resolving the upstream host (virtual).

{
    "ca_certificates": null,
    "created_at": 1738815123,
    "updated_at": 1738815123,
    "id": "58dd5b75-3bdf-406e-a547-912073ec7a20",
    "retries": 5,
    "name": "SampleReadService",
    "enabled": true,
    "path": null,
    "write_timeout": 3600000,
    "client_certificate": null,
    "protocol": "https",
    "connect_timeout": 60000,
    **"host": "sample_read_upstream",**
    "read_timeout": 3600000,
    "tls_verify": null,
    "port": 443,
    "tls_verify_depth": null,
    "tags": null
},

2025/02/06 04:15:54 [error] 1417#0: *2077 [lua] init.lua:381: execute(): DNS resolution failed: dns server error: 3 name error. Tried: ["(short)sample_read_upstream:(na) - cache-miss","sample_read_upstream.dns.podman:33 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream:33 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream.dns.podman:1 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream:1 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream.dns.podman:5 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream:5 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream.dns.podman:28 - cache-miss/querying/dns server error: 3 name error","sample_read_upstream:28 - cache-miss/querying/dns server error: 3 name error"], client: 10.25.130.124, server: kong, request: "GET /ers/sdk HTTP/1.1", host: "172.23.160.98:44331", referrer: "https://172.23.160.98:44331/admin/", request_id: "cb4c634e45bc330f634ece2731f46c2f"

If iI restart the kong, then DNS is reloaded and it works fine. The same config used to work in Kong 2.0.3. I already tried reducing dns_stale_ttl but no help.

Expected Behavior
The upstream should be resolvable and the request should go through

Steps To Reproduce
Start Kong
Create upstream service with loadbalancer in round robin pointing to backend target IP's
Try sending the request and DNS failure happens

Can someone help?