diff --git a/pkg/webhooks/resource/mutation/mutation.go b/pkg/webhooks/resource/mutation/mutation.go
index c9698fe21a..8fd35cebb6 100644
--- a/pkg/webhooks/resource/mutation/mutation.go
+++ b/pkg/webhooks/resource/mutation/mutation.go
@@ -82,6 +82,7 @@ func (v *mutationHandler) applyMutations(
 
 	var patches []jsonpatch.JsonPatchOperation
 	var engineResponses []engineapi.EngineResponse
+	failurePolicy := kyvernov1.Ignore
 
 	for _, policy := range policies {
 		spec := policy.GetSpec()
@@ -96,7 +97,11 @@ func (v *mutationHandler) applyMutations(
 			func(ctx context.Context, span trace.Span) error {
 				v.log.V(3).Info("applying policy mutate rules", "policy", policy.GetName())
 				currentContext := policyContext.WithPolicy(policy)
-				engineResponse, policyPatches, err := v.applyMutation(ctx, request, currentContext)
+				if policy.GetSpec().GetFailurePolicy(ctx) == kyvernov1.Fail {
+					failurePolicy = kyvernov1.Fail
+				}
+
+				engineResponse, policyPatches, err := v.applyMutation(ctx, request, currentContext, failurePolicy)
 				if err != nil {
 					return fmt.Errorf("mutation policy %s error: %v", policy.GetName(), err)
 				}
@@ -131,7 +136,7 @@ func (v *mutationHandler) applyMutations(
 	return jsonutils.JoinPatches(patch.ConvertPatches(patches...)...), engineResponses, nil
 }
 
-func (h *mutationHandler) applyMutation(ctx context.Context, request admissionv1.AdmissionRequest, policyContext *engine.PolicyContext) (*engineapi.EngineResponse, []jsonpatch.JsonPatchOperation, error) {
+func (h *mutationHandler) applyMutation(ctx context.Context, request admissionv1.AdmissionRequest, policyContext *engine.PolicyContext, failurePolicy kyvernov1.FailurePolicyType) (*engineapi.EngineResponse, []jsonpatch.JsonPatchOperation, error) {
 	if request.Kind.Kind != "Namespace" && request.Namespace != "" {
 		policyContext = policyContext.WithNamespaceLabels(engineutils.GetNamespaceSelectorsFromNamespaceLister(request.Kind.Kind, request.Namespace, h.nsLister, h.log))
 	}
@@ -140,7 +145,13 @@ func (h *mutationHandler) applyMutation(ctx context.Context, request admissionv1
 	policyPatches := engineResponse.GetPatches()
 
 	if !engineResponse.IsSuccessful() {
-		return nil, nil, fmt.Errorf("failed to apply policy %s rules %v", policyContext.Policy().GetName(), engineResponse.GetFailedRulesWithErrors())
+		if webhookutils.BlockRequest([]engineapi.EngineResponse{engineResponse}, failurePolicy, h.log) {
+			h.log.Info("failed to apply policy, blocking request", "policy", policyContext.Policy().GetName(), "rules", engineResponse.GetFailedRulesWithErrors())
+			return nil, nil, fmt.Errorf("failed to apply policy %s rules %v", policyContext.Policy().GetName(), engineResponse.GetFailedRulesWithErrors())
+		} else {
+			h.log.Info("ignoring unsuccessful engine responses", "policy", policyContext.Policy().GetName(), "rules", engineResponse.GetFailedRulesWithErrors())
+			return &engineResponse, nil, nil
+		}
 	}
 
 	return &engineResponse, policyPatches, nil
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/01-manifests.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/01-manifests.yaml
index ec2377eb57..01f9296295 100644
--- a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/01-manifests.yaml
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/01-manifests.yaml
@@ -3,7 +3,7 @@ kind: ClusterPolicy
 metadata:
   name: propagate-cost-labels-from-namespace
 spec:
-  failurePolicy: Ignore
+  failurePolicy: Fail
   rules:
   - name: add-cost-labels
     context:
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/04-manifests.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/04-manifests.yaml
index 80983ca4e3..11013d6d91 100644
--- a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/04-manifests.yaml
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/defaulting-namespace-labels/04-manifests.yaml
@@ -3,7 +3,7 @@ kind: ClusterPolicy
 metadata:
   name: propagate-cost-labels-from-namespace
 spec:
-  failurePolicy: Ignore
+  failurePolicy: Fail
   rules:
   - name: add-cost-labels
     context:
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/01-policy.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/01-policy.yaml
new file mode 100644
index 0000000000..b088ed7601
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/01-policy.yaml
@@ -0,0 +1,6 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- policy.yaml
+assert:
+- policy-assert.yaml
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/02-pod.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/02-pod.yaml
new file mode 100644
index 0000000000..3e1752d840
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/02-pod.yaml
@@ -0,0 +1,6 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- pod.yaml
+assert:
+- pod-assert.yaml
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/README.md b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/README.md
new file mode 100644
index 0000000000..6220bb7e84
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/README.md
@@ -0,0 +1,11 @@
+## Description
+
+This test checks that the mutate policy does not fail because of 404 in API Call when failure policy is set to `Ignore`.
+
+## Expected Behavior
+
+The failure policy in the policy is set to Ignore and the API Call refers to a non existent URL. Mutation should not happen and error should not be thrown. 
+
+## Reference Issue(s)
+
+https://github.com/kyverno/kyverno/issues/8936
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/pod-assert.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/pod-assert.yaml
new file mode 100644
index 0000000000..ccb73f4a08
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/pod-assert.yaml
@@ -0,0 +1,5 @@
+apiVersion: v1
+kind: Pod
+metadata:
+  name: mutate-404-api-call-example
+  namespace: default
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/pod.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/pod.yaml
new file mode 100644
index 0000000000..521fbfaa95
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/pod.yaml
@@ -0,0 +1,10 @@
+apiVersion: v1
+kind: Pod
+metadata:
+  name: mutate-404-api-call-example
+  namespace: default
+spec:
+  containers:
+  - name: example
+    image: busybox
+    args: ["sleep", "infinity"]
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/policy-assert.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/policy-assert.yaml
new file mode 100644
index 0000000000..3a5cb6bb42
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/policy-assert.yaml
@@ -0,0 +1,4 @@
+apiVersion: kyverno.io/v1
+kind: ClusterPolicy
+metadata:
+  name: mutate-404-api-call
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/policy.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/policy.yaml
new file mode 100644
index 0000000000..1d85202026
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-with-404-api-call/policy.yaml
@@ -0,0 +1,23 @@
+apiVersion: kyverno.io/v1
+kind: ClusterPolicy
+metadata:
+  name: mutate-404-api-call
+spec:
+  failurePolicy: Ignore
+  rules:
+  - name: mutate-404-api-call
+    context:
+    - name: val
+      apiCall:
+        service:
+          url: "https://www.google.com/404"
+    match:
+      any:
+      - resources:
+          kinds:
+          - Pod
+    mutate:
+      patchStrategicMerge:
+        metadata:
+          labels:
+            foo: "{{ val }}"