next/image fails for external images

**Describe the bug**

When loading image using the next/image component, and the image URL is an external resource, it fails when running under Static Web Apps. The host is allow-listed in next.config.js. The image loads fine when loaded directly.

When loaded thru the _next/image?url=xxx proxy, the browser fails with an error saying "**Backend call failure**".

I also see problems with prefetching pages, which might or might not be related.

**Expected behavior**
I expect images loaded with next/image component to load.

**Additional context**
I'm using Next 13. The site is deployed to SWA from the default Github Action generated when setting up SWA using Azure Portal.

SWA is using the free tier.