I have been working on this for the past two weeks not and for some reason I cannot seem to get nginx's try_files to work with my wordpress permalinks. I am hoping someone will be able to tell me where I am going wrong and also hopefully tell me if I made any major errors with my configurations as well (I am an nginx newbie... but learning :) ).

Here are my Configuration files

nginx.conf

user www-data;
worker_processes 4;
pid /var/run/nginx.pid;

events {
    worker_connections 768;
    # multi_accept on;
}

http {

    ##
    # Basic Settings
    ##

    sendfile on;
    tcp_nopush on;
    tcp_nodelay on;
    keepalive_timeout 65;
    types_hash_max_size 2048;
    # server_tokens off;

    # server_names_hash_bucket_size 64;
    # server_name_in_redirect off;

    include /etc/nginx/mime.types;
    default_type application/octet-stream;

    ##
    # Logging Settings
    ##

    # Defines the cache log format, cache log location
    # and the main access log location.
    log_format cache '***$time_local '
            '$upstream_cache_status '
            'Cache-Control: $upstream_http_cache_control '
            'Expires: $upstream_http_expires '
            '$host '
            '"$request" ($status) '
            '"$http_user_agent" '
            ;

    access_log /var/log/nginx/access.log;
        error_log /var/log/nginx/error.log;

    include /etc/nginx/conf.d/*.conf;
    include /etc/nginx/sites-enabled/*;

}

mydomain.com.conf

server {
    listen 123.456.78.901:80; # IP goes here.
    server_name www.mydomain.com mydomain.com;
    #root /var/www/mydomain.com/prod;
    index   index.php;

## mydomain.com -> www.mydomain.com (301 - Permanent)
    if ($host !~* ^(www|dev))
    {
            rewrite ^/(.*)$ $scheme://www.$host/$1 permanent;
    }

# Add trailing slash to */wp-admin requests.
    rewrite /wp-admin$ $scheme://$host$uri/ permanent;

# All media (including uploaded) is under wp-content/ so
    # instead of caching the response from apache, we're just
    # going to use nginx to serve directly from there.
    location ~* ^/(wp-content|wp-includes)/(.*)\.(jpg|png|gif|jpeg|css|js|m$
            root    /var/www/mydomain.com/prod;
    }

# Don't cache these pages.
    location ~* ^/(wp-admin|wp-login.php)
            {
        proxy_pass http://backend;
    }

location / {
    if ($http_cookie ~* "wordpress_logged_in_[^=]*=([^%]+)%7C") {
            set $do_not_cache 1;
    }
    proxy_cache_key "$scheme://$host$request_uri $do_not_cache";
    proxy_cache main;
    proxy_pass http://backend;
    proxy_cache_valid 30m; # 200, 301 and 302 will be cached.
    # Fallback to stale cache on certain errors.
    # 503 is deliberately missing, if we're down for maintenance
    # we want the page to display.
    #try_files $uri $uri/ /index.php?q=$uri$args;
    #try_files $uri =404;
    proxy_cache_use_stale error
            timeout
            invalid_header
            http_500
            http_502
            http_504
            http_404;
    }

# Cache purge URL - works in tandem with WP plugin.
#        location ~ /purge(/.*) {
#           proxy_cache_purge main "$scheme://$host$1";
#        }

# No access to .htaccess files.
    location ~ /\.ht {
            deny  all;
    }

} # End server

gzip.conf

    # Gzip Configuration.
    gzip on;
    gzip_disable msie6;
    gzip_static on;
    gzip_comp_level 4;
    gzip_proxied any;
    gzip_types text/plain
           text/css
           application/x-javascript
           text/xml
           application/xml
           application/xml+rss
           text/javascript;

proxy.conf

# Set proxy headers for the passthrough
    proxy_redirect     off;

    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_max_temp_file_size 0;

    client_max_body_size       10m;
    client_body_buffer_size    128k;

    proxy_connect_timeout      90;
    proxy_send_timeout         90;
    proxy_read_timeout         90;

    proxy_buffer_size          4k;
    proxy_buffers              4 32k;
    proxy_busy_buffers_size    64k;
    proxy_temp_file_write_size 64k;
    add_header X-Cache-Status $upstream_cache_status;

backend.conf

upstream backend {
        # Defines backends.
        # Extracting here makes it easier to load balance
        # in the future. Needs to be specific IP as Plesk
        # doesn't have Apache listening on localhost.
        ip_hash;
        server 127.0.0.1:8001; # IP goes here.
}

cache.conf

# Proxy cache and temp configuration.
proxy_cache_path /var/www/nginx_cache levels=1:2
                 keys_zone=main:10m
                 max_size=1g inactive=30m;
proxy_temp_path /var/www/nginx_temp;

    proxy_cache_key "$scheme://$host$request_uri";
proxy_redirect off;

    # Cache different return codes for different lengths of time
# We cached normal pages for 10 minutes
proxy_cache_valid 200 302  10m;
proxy_cache_valid 404      1m;

The two commented out try_files in location \ of the mydomain config files are the ones I tried. This error I found in the error log can be found below.

 ...rewrite or internal redirection cycle while internally redirecting to "/index.php"

Thanks in advance