1. Palo Alto tech support suggested an article that configures a layer 2 to layer 3 connection utilizing a combinations of L2 interface and Virtual router and VLAN. It was complicated and when I tested it, it did not work. Either I didn't choose the right options or it just doesn't work. I don't think this will work for your configuration. The critical difference is that this setup depends on the layer 3 interface facing the upstream router with the default route. In your scenario the default route needs to face the layer 2 side network. This scenario they are adding the layer 2 to the inside schema, yours is on the outside. 2. If we further divide the WAN subnet so that WAN has 100.100.100.0/25 and DMZ has 100.100.100.128/25, and changing the upstream router route is not an option, does Palo Alto firewall supports Proxy ARP for the new DMZ subnet? or will it only do proxy arp for NAT devices it is responsible for? This would still require changes on the upstream router to change the size of the netmask and convert the second half /25 to a routed subnet instead of a connected one. By definition proxy-arp can only occur within the same subnet of a configured interface. You cannot arp layer 2 for an address that is not on your layer 2 subnet. So there is no way for the PA interface that has been changed to a lower /25 to arp for the upper /25 addresses. This violates basic subnet rules, nothing to do with PA features. 4. If we do NAT translation from WAN to DMZ using the same IP, meaning 100.100.100.100 translates to 100.100.100.100 in DMZ. Would this have worked? This would not be NAT as nothing is being translated. And you cannot have two devices in the same subnet that have the same ip address. This would be a basic ip conflict that would cause traffic issues when both attempt to respond to requests for the address in the subnet. You can do port forwarding where the PA interface address is used to forward certain ports to another address. But this involves then using NAT to change that interface address to the actual address used by the server we are forwarding the traffic to.
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